Fund managers will relish the new limited liability company which will function alongside Cayman Islands exempted companies and exempted limited partnerships, further strengthening Cayman’s position as the leading offshore funds domicile, say Simon Thomas and Richard Spencer of Campbells.
In recent months, we have been working with the Cayman Islands government and industry participants on the introduction of a Cayman Islands limited liability company (LLC), culminating in the publication of the Limited Liability Companies Bill in the Cayman Islands Gazette in December 2015.
After the bill is enacted later this year, fund managers will benefit from the availability of this new fund vehicle alongside Cayman Islands exempted companies and exempted limited partnerships, further strengthening the Cayman Islands’ position as the leading offshore funds domicile.
The purpose of this article is to provide a high level overview of Cayman LLCs by addressing the following questions:
1. What are the key features of a Cayman LLC and why are people referring to it as a ‘hybrid vehicle’?
2. Why use a Cayman LLC in a fund structure or otherwise?
3. What are the key advantages and disadvantages of a Cayman LLC?
A Cayman Islands LLC combines some of the features and characteristics of a Cayman Islands exempted company with those of a Cayman Islands exempted limited partnership. As such, it is considered a ‘hybrid vehicle’.
Part of the rationale for introducing a hybrid vehicle alongside the ever popular Cayman Islands exempted company and Cayman Islands exempted limited partnership, is to offer a vehicle that has a separate legal personality and limited liability of members (like an exempted company) but with no share capital (like an exempted limited partnership). In situations where a closed-ended fund requires a separate legal personality, for example, a Cayman Islands LLC may become the preferred vehicle in place of a Cayman Islands exempted company, by virtue of its hybrid nature providing for a separate legal personality but without the constraints of having share capital (discussed further below).
The key features of a Cayman LLC include the following:
- A body corporate with separate legal personality—like a company (and unlike an exempted limited partnership which acts by its general partner), the LLC will have capacity to enter into legal arrangements and to hold assets in its own name;
- No share capital—members will make contributions to the LLC in a similar way to the exempted limited partnership’s capital contribution model;
- Limited liability of members—the liability of members will be limited to the amount of capital contributions that they agree to make under the LLC agreement;
- No separate board of directors or general partner—the management of the LLC will vest in its members or in managers if so agreed in the LLC agreement;
- It may be formed for any lawful business, purpose or activity and members can agree among themselves the internal workings of the Cayman LLC—matters such as voting, economic rights and other arrangements regarding the members of the LLC may be set out in the LLC agreement; and
- Managers of an LLC owe no fiduciary or other duties to the LLC or any member unless otherwise stated in the LLC agreement other than the duty to act in good faith—unlike in the case of directors of an exempted company or the general partner of an exempted limited partnership, even this duty may be restricted (or, of course, enlarged) in the LLC agreement.
A Cayman LLC is therefore similar in many ways to a Delaware LLC. Indeed, the Limited Liability Companies Bill 2015 was based in part upon the Delaware Limited Liability Companies Act.
The hybrid nature and versatility of the Cayman Islands LLC, together with the familiarity of the Delaware LLC on which it was based, is expected to result in Cayman Islands LLCs being used in a variety of fund and non-fund structures.
By way of example, we expect Cayman Islands LLCs to be used as follows:
- To mirror a Delaware LLC feeder fund in a typical master/feeder fund structure (ie, comprising a Cayman Islands feeder fund, Delaware onshore feeder fund and a Cayman Islands master fund);
- Where a closed-ended fund requires separate legal personality;
- In place of Antiguan and Marshall Islands LLCs in existing and new fund and non-fund structures;
- In lieu of registering a Delaware LLC as a foreign company in Cayman (eg, to act as the sole general partner of a Cayman Islands exempted limited partnership); and
- In lieu of using a Cayman Islands exempted company where a shareholders’ agreement would otherwise be required in order to supplement the Articles (eg, for a joint venture company).
Advantages and disadvantages
Two key advantages of the LLC are likely to be its familiarity and flexibility.
The Cayman Islands has always been an innovative and responsive jurisdiction in terms of providing user-friendly and practical solutions to those looking to structure transactions using Cayman. Given its proximity to the US, the Cayman Islands is the jurisdiction of choice for US managers or their service providers looking to structure their fund vehicles offshore in a tax neutral environment.
Such managers or service providers will be more than familiar with the Delaware LLC upon which the Cayman Islands LLC is based. This additional corporate offering is therefore likely to be a welcome addition to the vehicles already available in Cayman.
"The flexibility offered by the LLC now gives a solution to managers of closed-ended funds where a vehicle with separate legal personality is desired."
Currently the only offshore jurisdictions which offer LLCs are the Marshall Islands and Antigua, neither of which will be familiar jurisdictions for fund managers or their investors. The quality of service providers and the established nature of the industry in the Cayman Islands will make the Cayman LLC offering particularly attractive to those already familiar with the jurisdiction.
The flexibility offered by the LLC now gives a solution to managers of closed-ended funds where a vehicle with separate legal personality is desired. Traditionally, concepts such as capital calls, default provisions and carried interest or indemnification clawbacks, all of which are common terms in a limited partnership agreement have been difficult to achieve within the framework of an exempted company but may now be covered in the LLC agreement in much the same way as has historically been achieved in the context of an exempted limited partnership.
There will also be greater flexibility in relation to the ongoing operation and management of an LLC. In many respects, an exempted company offers a greater degree of flexibility in its operation than companies in many jurisdictions. However, the Articles of Association of an exempted company are still subject to the overarching statutory framework of the Companies Law (as revised), which provides certain rigid requirements such as the requirement to obtain a special resolution in relation to amendments to the Articles.
For anything less than unanimous written consent, a special resolution requires the convening of a meeting of shareholders, a requirement which can be frustrating to those in other jurisdictions used to being able to obtain consents by way of the written consent of the requisite majority. This rigidity is compounded by the concept of share capital whereby personal rights (for example investor-specific rights) may be unenforceable within the Articles, which only set out the rights attaching to shares.
Personal rights are therefore typically documented outside of the Articles, for example in the context of joint venture arrangements, often in a lengthy shareholders’ agreement which duplicates many of the provisions of the Articles.
The flexibility offered by the LLC will allow greater manoeuvrability for joint venture parties to agree rights specific to those parties in the LLC agreement without the need for a separate shareholders’ agreement.
In the context of venture capital companies where series financings require regular amendments to the vehicle’s constitutional documents (which, particularly in the case of a disparate group of shareholders, often leads an exempted company to hold a shareholders’ meeting), amendments will be effected in accordance with the procedures and consent requirements in the LLC agreement and not by reference to a more rigid statutory approval process.
In addition, the ability to restrict the duty of good faith owed by managers of an LLC will allow managers to act with regard to their own interests which may occasionally be in conflict with the interests of the LLC. This will be most beneficial in the context of granting governance rights to investors. Beyond managers of LLCs, a person serving on a board or committee of an LLC (such as an advisory board or investment committee) shall, unless otherwise specified in the LLC agreement, owe no duty to the LLC or any member of the LLC.
One minor disadvantage of the LLC legislation as currently drafted is the lack of a legal framework for the segregation of assets and liabilities as between series or classes of interest within the LLC as there is, for example, in a Cayman Islands segregated portfolio company. However, as with an exempted limited partnership, this can of course be provided by means of a contractual segregation agreed as between the parties (or by means of additional structuring).
In summary, the LLC is set to be a positive addition to the vehicles already offered in the Cayman Islands. The flexibility and familiarity will, no doubt, be welcomed by those structuring their transactions through Cayman, whether investment fund managers, investors or service providers in the financial services industry.
Simon Thomas is an attorney at Campbells. He can be contacted at: firstname.lastname@example.org
Richard Spencer is an attorney at Campbells. He can be contacted at: email@example.com
Limited Liability Company, LLC, Hedge Fund, Richard Spencer, Campbells, Cayman Islands