The Cayman Islands has a well-established legal framework for companies carrying on local business. This article outlines the key practical steps for transferring shares in a so-called local company, focusing on legal requirements, licensing and ownership considerations, and share transfer tax applicable to land holding companies.
Transferring Shares (Generally)
Transferring shares in a local company is governed by the Companies Act (as revised) (the Act) and the company's articles of association.
The process requires a signed instrument of transfer, executed by or on behalf of the transferor and the transferee. Under Cayman Islands law, a register of members is prima facie evidence of the matters required to be recorded in it. Accordingly, a transferor remains the legal owner of the shares until the transfer is recorded in the register.
Director approval is often required under a local company's articles of association before the register can be updated, and directors usually have discretion to refuse a transfer. This gives directors a gatekeeping role in ensuring share transfers comply with the company's governance framework.
Once approved, the original share certificate (if any) is surrendered for cancellation and a new share certificate is issued to the transferee. The Act does not prescribe the issuance of share certificates and, in practice, they are rare as the register of members serves as primary evidence of share ownership.
It is essential to review the company's articles of association, shareholders agreement, financing agreements and any other binding arrangements for additional restrictions or approval requirements that may apply to a share transfer.
Trade and Business Licensing Considerations
Subject to certain exemptions, every company carrying on business in the Cayman Islands must hold a valid Trade and Business Licence (TBL).
While a share transfer does not automatically void a TBL, material changes in ownership or control of a TBL holder must be notified to the Department of Commerce and Investment. Any share transfer that results in a person acquiring a significant interest in a TBL holder (defined as 10% or more of the voting rights, dividend rights, or rights to surplus assets) requires prior written approval from the Trade and Business Licensing Board (the Board).
Failure to obtain prior written approval may lead to penalties or the suspension or revocation of the TBL.
Local Companies (Control) Act Considerations
Under the Local Companies (Control) Act (as revised), a local company carrying on business in the Cayman Islands must:
- be Caymanian controlled;
- be at least 60% beneficially owned by Caymanians; and
- have at least 60% Caymanian directors.
A company that does not satisfy the above requirements must apply to the Board for a Local Companies (Control) Licence (LCCL). The grant of an LCCL is discretionary and assessed with reference to, among other things, (i) public interest, (ii) Caymanian participation, and (iii) sector sensitivities.
Any share transfer that affects Caymanian ownership or control must be carefully reviewed to avoid breaching the statutory thresholds and potentially triggering the need for an LCCL. Directors are required to decline any share transfer that would breach these thresholds without prior Board consent.
All share transfers in a local company carrying on business in the Cayman Islands must be notified to the Board within 21 days.
If a local company already holds an LCCL, the licence terms must be checked carefully as these typically require prior written approval from the Board for any share transfer or change in beneficial ownership.
Land Holding Companies and Share Transfer Tax
If a company qualifies as a land holding corporation under the Land Holding Companies Share Transfer Tax Act (as revised), a transfer (broadly defined to include share transfers and other transactions affecting ownership) may trigger share transfer tax at a fixed rate of 7.5%.
The share transfer tax is calculated with reference to the greater of:
- the consideration paid for the transferred shares; and
- the taxable value, which is calculated as: market value of the company's landed property × (nominal value of the transferred shares ÷ total nominal value of all issued shares).
The company must file a return, in the prescribed form, with the Ministry of Finance within 31 days of the transfer occurring and pay the share transfer tax at that time.
Summary
Share transfers in local companies must be carefully structured and reviewed to ensure compliance with Cayman Islands laws, licensing requirements, and ownership thresholds. A proactive, well-informed approach helps ensure compliance and safeguards a local company's continued right to carry on business in the Cayman Islands.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
