The Cayman Islands Government, in response to requests from the financial services industry, recently published a bill (“LLC Bill”) that provides for a new Cayman Islands vehicle: the limited liability company (“LLC”). It is anticipated that the LLC Bill will be enacted and come into effect during the first half of 2016.
We believe that the LLC, once implemented, will be a welcome additional product that further enhances the Cayman Islands' reputation and attractiveness as a financial services jurisdiction. The LLC's flexibility will satisfy a range of legal and regulatory structuring issues and an LLC will be able to efficiently mirror many onshore products. Most notably, the LLC Bill further harmonizes Cayman products with Delaware equivalent products. One principal benefit is that the LLC Bill, in conjunction with revisions to the exempted limited partnership regime in 2014, will enable a Cayman Islands private equity structure to replicate any Delaware parallel structure. Below we discuss the new LLC in detail.
Cayman LLC Overview and Potential Uses
The Cayman LLC will have many of the same features as a Delaware limited liability company and will be familiar to onshore sponsors, institutional investors and practitioners.
In summary, the key features of a Cayman LLC are that it will be a legal entity with separate legal personality (like a company), and limited liability of its members, while also providing flexible governance arrangements and capital account mechanics in a manner similar to a limited partnership. Members will be able to agree how assets, liabilities, profits and losses are allocated amongst themselves and distributions made by the LLC.
It is not expected that LLCs will impact the manner in which Cayman primary private equity fund vehicles are structured, which are typically formed as exempted limited partnerships.
The LLC's flexibility, however, is likely to make it an attractive structuring option for other purposes within a private equity structure, in addition to exempted limited partnerships and exempted companies which regularly feature. By way of example, subject to onshore tax, legal and regulatory considerations, an LLC could be employed as a general partner, manager, blocker or downstream transactional vehicle. It may also prove popular as a joint venture vehicle, given that managers of an LLC will be able to act in the interests of their appointing members, unlike a director of an exempted company who must always act in that company's best interests.
We understand that an LLC will be able to obtain pass-through tax treatment in the United States. Tax treatment may differ in other key onshore jurisdictions. In most instances, it is likely to be treated in the same manner as other hybrid vehicles such as Delaware limited liability companies.
Cayman LLCs v Delaware LLCs
The Cayman LLC regime will be substantially similar, although not identical, to the Delaware LLC regime.
An LLC will be formed by one or more persons who will be required to file a registration statement, pay a registration fee and adopt an LLC agreement.
The LLC Bill provides a standard regime of rules as to how an LLC is managed and operated that will apply unless varied by the LLC agreement. This regime is similar to Delaware although, as with a Delaware limited liability company, parties will have contractual freedom to legislate their own arrangements. Cayman legislation will defer to the express or implied provisions of an LLC agreement that override or disapply the standard rules, subject to certain statutory safeguards.
Some requirements differ from those of Delaware law. This is because the LLC Bill has been drafted to provide symmetry and consistency, where appropriate, with existing Cayman limited partnership and company regimes, leverage off existing Cayman jurisprudence, and address OECD and other international obligations to which the Cayman Islands Government adheres.
There are also some Delaware concepts not replicated in the LLC Bill, namely series LLCs and conversions of an exempted limited partnership to an LLC (although a conversion could be achieved by other indirect means).
Cayman LLC's Principal Features
The principal features of an LLC are as follows:
Legal Status and Capacity. An LLC is a body corporate with separate legal personality. An LLC may undertake any lawful activity (whether for profit or otherwise).
Governance. There is great flexibility in how LLCs are governed. It is possible to appoint one or more managing members or managers to assume responsibility for managing an LLC. In the absence of such arrangements, an LLC will be managed by members acting by a majority in number.
Management Duty of Care. A person managing an LLC 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.
Members. Generally, an LLC must have at least one member. No member need have a Cayman nexus. An LLC may admit additional members from time to time.
Members do not owe any duties to an LLC, or any other member, subject to the express provisions of an LLC agreement.
Members' Limited Liability. Members are not liable for the debts of an LLC. A member's liability to an LLC is limited to the amount a member has contractually agreed to contribute to an LLC (whether in cash, in kind or by way of other services). There is a statutory clawback where a member receives a distribution when the LLC is insolvent (i.e. it is unable to pay its debts as they fall due in the ordinary course of business), but only to the extent the member has actual knowledge of the LLC's insolvency at the time such distribution is made.
Membership Interests. Each member's interest represents rights (including economic and voting rights) and obligations as set out in the LLC agreement, and has a corresponding capital account to reflect allocations of profits and losses, contributions and distributions.
An LLC may authorise the assignment of the whole or any portion of a member's interest or approve the granting of a security interest over the whole or any portion of a member's interest.
LLC Agreement. An an LLC agreement must be in writing and governed by Cayman law. The registration statement may serve as an LLC agreement. In such instances, an LLC will be managed and operated in accordance with the statutory default rules.
A member is deemed bound from the date of such member's admission. An LLC is bound by the terms of its LLC agreement. We expect it to be reasonably easy to adapt and mirror operating agreements used for Delaware limited liability companies to comply with Cayman Islands law.
Inward and Outward Migrations. Non-Cayman LLCs, and other foreign entities, may be re-registered and continue as an LLC in the Cayman Islands. An LLC may migrate out and continue as a foreign entity in another jurisdiction.
Statutory Registers. Consistent with the Cayman Islands' OECD commitments, an LLC will be required to maintain certain statutory registers, notably a register of members, "managers" and mortgages and charges. The register of managers will be filed with the Registrar of LLCs in the Cayman Islands although the register's contents will not be publicly available. The statutory definition of "manager" under the LLC Bill encompasses any member or manager who is responsible for management of an LLC.
Cayman Islands Tax Status. There are no direct corporate taxes in the Cayman Islands. An LLC will also be able to obtain a tax undertaking from the Cayman Islands Government that will provide a 50-year exemption from any such direct corporate taxes if subsequently introduced. Such tax undertaking is identical to those currently available for exempted limited partnerships and exempted companies.