One Year Old And Boldly Striding Forward
Arguably the most prominent non-regulatory legal development in the Cayman Islands in recent times has been the introduction of limited liability companies ("LLCs"). LLCs became available after the corresponding enabling legislation, the Limited Liability Companies Law ("LLC Law"), came into effect in July 2016.
In the intervening period, LLCs have been newly formed and otherwise come into existence by way of mergers, conversions and inward migrations. There were in excess of 600 LLCs registered in the Cayman Islands as at the end of August 2017.
The registration statistics, together with a detailed analysis of the purposes for which the over 300 LLCs that we have registered have been employed, support our initial expectations when drafting the LLC Law; namely that LLCs would be a helpful additional structuring option that would complement traditional Cayman vehicles, notably the exempted company and exempted limited partnership. The popularity of exempted companies and exempted limited partnerships has been unaffected with formation levels for both exempted companies and exempted limited partnerships also increasing during the period since LLCs were introduced.
FAMILIARITY AND FLEXIBILITY
A key rationale for introducing LLCs was to provide a hybrid vehicle that was familiar, flexible, easy to administer and able to provide greater symmetry with onshore vehicles, particularly the Delaware limited liability company, from which the LLC Law, in part, takes its inspiration.
Consequently, an LLC is substantially similar to the Delaware equivalent (although not identical).
The primary differences arise from the LLC Law having been drafted to: (i) ensure symmetry and consistency, where appropriate, with existing Cayman limited partnership and company regimes; (ii) leverage off existing Cayman jurisprudence; and (iii) address OECD and other international obligations to which the Cayman Islands Government adheres. This broad approach, coupled with an LLC's key features, has resulted in LLCs being well-suited for a variety of purposes.
In summary, the key features of a Cayman LLC are that it is a legal entity with separate legal personality (like a company) and each member's liability is limited to the amount, if any, that the member has agreed to contribute contractually to the LLC (whether in cash, in kind or by way of other services). An LLC, however, does not have a share capital. Each member has a membership interest representing such member's rights (including economic and voting rights) and obligations that are set out in the LLC agreement. Members are able to agree amongst themselves when and how assets, liabilities, profits and losses are allocated, and distributions are made by the LLC with such arrangements recorded in the LLC agreement in a manner more akin to a limited partnership (with such allocations and any contributions or distributions credited or debited to a member's corresponding capital account). This can permit more efficient internal accounting and record keeping processes than might apply for an exempted company.
There is also great scope to determine the manner in which an LLC is managed. It is possible to appoint one or more managing members or non-member managers to assume responsibility for supervising and managing an LLC. In the absence of such arrangements, an LLC is managed by members acting by a majority in number. A person managing an LLC, in such capacity, has a statutory duty to act in good faith. This standard of care may be expanded or restricted, but not eliminated, by the express provisions of the LLC agreement.
Additionally, any person who is appointed to an LLC committee or other board may act in the best interests of such person's appointing member even though it may not be in the best interests of the LLC or any other member.
The net result is that, subject to minimum statutory safeguards, parties have considerable contractual freedom to legislate their own affairs. The LLC's hybrid nature can also provide some tax related benefits although tax treatment may differ in various onshore jurisdictions. In most jurisdictions, an LLC is likely to be treated in the same manner as other hybrid vehicles, such as Delaware limited liability companies, unless the relevant taxing authorities permit an entity to elect its tax classification.
Against this context, LLCs have been well-suited to a wide range of applications. For funds industry purposes, the ability to provide greater symmetry with onshore vehicles in onshore-offshore fund structures can lead to greater ease and cost efficiency of fund administration and has helped to better align the rights of investors between the different vehicles in the structure. LLCs have been employed quite extensively in private equity and other closed-ended structures. For such structures, LLCs have not impacted the manner in which Cayman primary fund vehicles are organised, which are typically formed as exempted limited partnerships, although in some instances an LLC has been used in lieu of a corporate vehicle.
More typically, the LLC has been an appealing alternative for general partner, manager and co-investment vehicles. The absence of share capital (and the absence of the need to maintain a share register), combined with the ability to intuitively track and record the capitalisation of an LLC and its distributions, has led to LLCs also being attractive for blocker, aggregator and holding vehicle applications.
LLCs have also been used in certain hedge fund structures, albeit generally for 'funds of one' or where there are economic terms or allocations among investors that are more naturally reflected in a capital account mechanic set out in an LLC agreement as opposed to a share capital construct that is supported by various provisions in a company's constitutional and subscription documentation.
The governance arrangements for an LLC that is to be registered as a 'mutual fund' with the Cayman Islands Monetary Authority, however, are likely to closely mirror those for a company with directors given that LLCs are deemed under the LLC Law to be akin to exempted companies for regulatory purposes.
For general corporate and commercial applications, such as joint venture companies, management holding vehicles, carried interest distribution vehicles or general partner entities, the flexibility of the vehicle has been appreciated given that managers may act in the best interests of their appointing member.
Further, as a member is not required to make a contribution but may benefit from profit allocations, the LLC has been adopted for certain employee award and grant schemes. LLCs have also been engaged in the context of certain structured finance / securitisation and financing transactions, where the statutory framework and contractual freedom for parties to legislate their own affairs, including the capacity to make provision for a springing member, has been advantageous.
STABILITY AND PROGRESS THROUGH INNOVATION
The LLC has been a welcome additional structuring solution and highlights the commitment of the Cayman Islands Government and private sector to refine existing, and introduce new, products to ensure the dynamic requirements of financial industry participants are met.
This commitment is further evidenced by the introduction of limited liability partnerships ("LLPs") that are anticipated to be available for registration in early 2018. An LLP will combine the flexible features of a general partnership but have the benefit of separate legal personality and afford limited liability status to all its partners.
As such, LLPs are likely to become the preferred manner by which professional firms operating in the Cayman Islands structure their businesses, although it will also be an option for use in other contexts, such as a general partner, management or holding vehicle or as a fund of funds partnership.
These initiatives, in conjunction with implementing global best standard regulatory developments intended to provide greater investor transparency and inter-governmental and regulator cooperation, further enhance the Cayman Islands' reputation and attractiveness as the pre-eminent offshore financial centre - ensuring that the jurisdiction will continue to stride boldly forward in a rapidly evolving global environment.
ABOUT THE AUTHORS
Jonathan Green is a Partner at Maples and Calder where he is head of the Cayman Islands Investment Funds team. He advises on all aspects of investment funds, specialising in private equity and hedge fund formation. Jonathan has extensive experience of corporate, partnership and trust structures, establishing and operating fund platforms, advising on fund regulatory matters, structuring downstream transactions and advising funds on matters arising throughout their life cycle. Jonathan was the chairman of the legislative sub-committee that helped to draft the Limited Liability Companies Law, 2016.
Julian Ashworth is a Partner at Maples and Calder in the Cayman Islands where he specialises in private equity and hedge fund structures and investments. He has worked with sponsors and institutional investors advising on the structuring and formation of private equity, hedge and hybrid funds, portfolio investments, security arrangements, secondary transactions and fund restructurings. He advises sponsors and management companies on profit sharing and funding arrangements and Cayman Islands regulatory matters. Julian is also involved in corporate finance matters, including leveraged buyouts, joint ventures, co-investments and restructuring matters. He served on the legislative sub-committee that helped to draft the Limited Liability Companies Law, 2016.
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