In March 2017, the Cayman Islands Legislature passed the Foundation Companies Law, 2017 (the "Law"). The Law came into force on October 18th 2017, and provides yet another addition to the comprehensive and innovative wealth planning vehicles for which the Cayman Islands has come to be known. The Law allows for the creation of a new form of company that allows the founder maximum flexibility to provide for its objects, management and supervision.
While a foundation company is prohibited from paying dividends or other distributions of profits or assets to its members, the Law expressly provides that a member who is a beneficiary of the company and receives benefits as such is not regarded as receiving a dividend or distribution as a member.
A Cayman Islands foundation company would be an ideal structure for one wishing to manage investments or other property, provide financial assistance to family members, fund a philanthropic project or to provide for any lawful object whose goal is not solely to make money for its members.
COMPARING THE "NOT FOR PROFIT" COMPANY
A "not for profit" ("NPC") company may work well from a wealth-structuring perspective in some situations, especially where the objective is solely charitable or can be achieved while the founder is alive. In other cases an NPC company has certain drawbacks which the Law overcomes by modifying provisions of the Companies Law (in relation to foundation companies) that put members in the driving seat of a foundation company.
For example: The constitution of a foundation company may entrench its objects, or impose conditions for amending them. This means that the founder can put in place safeguards to prevent members from derailing his plans in the future. If the memorandum of association of a foundation company does not expressly authorise change then there will be no right to amend.
The founder may also prevent amendment to other provisions of the constitution and provide for powers of amendment or consent to be given to non-members. Once incorporated a foundation company can cease to have members at any time provided it continues to have one or more "supervisors". A supervisor is defined in the Law as a person other than a member who has the unconditional right to attend and vote at general meetings under the foundation company's constitution. The founder may provide for the supervisors to exercise any of the functions normally performed by members.
The founder has complete flexibility to grant rights, powers and duties of any description to the founder, the directors, the officers, the supervisors, the members or whomever else the founder wants.
COMPARING THE TRUST
A foundation company is a separate legal entity, so no trustee is required. This means there are no complications inherent in a change of trustees and any task or power given to a trustee can be given to the foundation company: a potentially attractive proposition to consider as part of the wealth structuring exercise.
If the objects of a foundation company include the giving of benefits to family or others, it is up to the founder to say in the constitution of the foundation company whether the beneficiaries are to have rights. The default rule is that they have none. Section 7 (5) of the Law provides that a company has a duty to carry out the objects set out in its memorandum, only if, the memorandum - (a) expressly so declares; and (b) designates, or provides for the designation of, persons with standing to enforce the duty by action against the foundation company. Subject to any contrary provision in its constitution, a foundation company with enforceable duties under section 7 (5) has a right to apply to the Court for an opinion or advice or directions. Section 48 of the Trusts Law applies for any such application as if a reference in the section - (a) to a trustee were a reference to the foundation company; (b) to trust assets were a reference to the foundation company's assets; and (c) to a person interested in an application were a reference to an interested person for the foundation company.
An "interested person" is defined in the Law as any member or supervisor or anyone who has the right to become a member or supervisor, and someone declared under the company's constitution to be an interested person. Sections 92 and 93 of the Trusts Law (which operate to deny heirship rights to the property of a living person) are also of general application, and apply to property contributed to a foundation company.
The Law requires that a foundation company must have a secretary who is a "qualified person", being someone who is licensed or permitted to conduct company management services in the Cayman Islands.
The secretary's office will be the registered office of the foundation company where its statutory records must be kept. If the objects of a foundation company become wholly or partly impossible, impracticable, unlawful or obsolete and there is no power under the constitution to resolve the difficulty or a power exists but has not been exercised then the company, its secretary (subject to any contrary provision in the constitution), an interested person, a person authorised under the constitution or the company's liquidator may apply to the Court to resolve the difficulty.
The constitution of a foundation company may provide for the resolution of disputes, differences or difficulties with or among its directors, officers, interested persons or beneficiaries (to the extent they have rights) concerning the foundation company and its operations or affairs, or the duties, powers or rights of persons under the constitution, by arbitration or by any other lawful method.
If a foundation company ceases to have enough directors, members or supervisors, or there is difficulty in or they are not performing their roles and there is no power under the constitution to resolve the difficulty, or such a power exists but has not been exercised, then a member, supervisor, director, officer, interested person, the company's secretary (subject to any contrary provision), or anyone else authorised under the constitution may apply to the court to resolve either difficulty.
COMPARING THE COMMON LAW FOUNDATION
Rather than seeking to emulate a civil law foundation as many other common law offshore centres have done, the Cayman Islands modified its well-known and tested company legislation.
This avoids a number of drawbacks which most of the common law offshore foundations legislation seem to suffer from such as restrictions on the activities of the foundation; inflexibility as to whom duties are owed and who has access to the Court; and remaining uncertainty in foreign courts and with tax authorities as to whether it may be classed as a trust.
Clients and their advisers from both civil law and common law jurisdictions will already understand the structure of a company but will appreciate the modifications made to the Companies Law that set a foundation company apart from the existing company regime. The flexibility to provide for the objects and administration of the foundation company and who has access to the Court will serve as major selling points.
The Cayman Islands foundation company will provide a modern, flexible and sound vehicle for wealth structuring and will likely be of great interest to a wide variety of clients.
ABOUT THE AUTHOR
Wendy Stenning is an Associate in the Fiduciary Department of Collas Crill in the Cayman Islands. She specialises in advising in relation to private client work including trusts and estates and on regulatory matters. She is a member of the Society of Trust and Estate Practitioners.
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.