LEGAL FRAMEWORK, ESTABLISHMENT &ATTRIBUTES OF FOUNDATION COMPANIES
Foundation Companies are a flexible and unique vehicle in the Cayman Islands that were established in 2017 and are governed by the Foundation Companies Act (2017) (FC Act) as the primary legislation. Foundation Companies are also governed by the Cayman Islands Companies Act (2023 Revision) save where inconsistent with the FC Act.
Flexibility is one of the major strengths of a Foundation Company as it is a body corporate with limited liability that retains a separate legal personality from its members, officers and directors. Similarly, to other forms of companies, a Foundation Company may bring legal action or have legal action brought upon itself and hold property in its own name. Generally, asset protection is heightened due to the fact that the entity is a body corporate, meaning that the company is legally responsible for the assets in which it holds, not the individual members.
Foundation Companies, like other Cayman Islands companies, will be incorporated with a memorandum and articles of association which are the constitutional documents of the company that establish the rights and responsibilities of the management of the company and any procedural matters associated with the Foundation Company.
Further, a Foundation Company may choose to adopt a set of by-laws that develop and broaden the details contained in the constitutional documents. Moreover, the by-laws provide for an attractive opportunity to include further provisions over time that relate to any rights that may sit with specific individual beneficiaries. A key benefit of by-laws is that they are a private document and there is no requirement to file them with the Cayman Islands Registrar (Registrar). A copy must be held at the Foundation’s Company registered office.
Further characteristics that are unique to Foundation Companies are that members do not need to be present following incorporation (unlike other corporate vehicles) and that any alterations made to the memorandum and articles of association are only permitted if expressly stated. Additionally, the payment of dividends and other distributions to members is disallowed.
A Foundation Company is free to invest in any assets unless its articles specify restrictions. It is exempt from corporation, income, withholding, and capital gains taxes in the Cayman Islands. Members and beneficiaries are also exempt from such taxes, as well as estate or inheritance taxes in the Cayman Islands. Additionally, a Foundation Company incorporated as an exempted company can apply for an undertaking that protects it from future tax law changes in the Cayman Islands for up to 30 years from the date of approval of such application
INCORPORATION
A company incorporated under the Cayman Islands Companies Act can apply to the Registrar to become a Foundation Company and receive a new certificate of incorporation, provided it meets specific criteria. These criteria include:
- the company must be limited by shares or by guarantee, with or without share capital;
- its memorandum must state that it is a Foundation Company, describe its objectives (which may include benefiting individual beneficiaries), outline (either in the memorandum itself or by reference its articles) the disposal of surplus assets upon winding up, and prohibit dividends or other distributions to members; and
- the company must have adopted articles and appointed a secretary licensed to provide company management services in the Cayman Islands.
PRIVATE CLIENT
Foundation Companies are popular vehicles for private clients who are searching for or are open to an alternative vehicle to a trust. Given that Foundation Companies are “live” companies with separate legal personality and a suite of constitutional documents representing them, many private clients may be more comfortable with dealing with a company over a trust to hold family wealth and businesses. Private clients are often familiar with corporate company structures in their home jurisdictions and in some cases can easily migrate familiar corporate logistics or hierarchies used in their home jurisdiction into the Foundation Company. For example, board members in a separate existing corporate entity may be appointed to have control in the Foundation Company.
Private clients that may want to hold higher risk assets will appreciate that by putting these assets into a Foundation Company, any interested persons will owe their duty to the Foundation Company itself, not to any beneficiaries.
The optional adoption of company by-laws that are separate from the constitutional documents of the Foundation Company is an attractive option for private clients as the by-laws may be kept entirely private. As detailed above, the by-laws are not public documents that must be filed with the memorandum and articles of association with the Registrar. The drafting of the by-laws does not contain any parameters; therefore, the by-laws may contain information about different classes of entitlements and rights for different beneficiaries. Many private clients may think of the optional by-laws as akin to drafting a letter of wishes that may be drafted to sit alongside a trust. Part VII of the Cayman Islands Trusts Act (2021 Revision) is further applicable to Foundation Companies.
Part VII of the Trusts Act is often referred to as the “firewall legislation” and provides for the rejection of foreign courts claiming assets held within Cayman Islands trusts. This same protection extends to the assets of a Foundation Company.
KEY ROLES WITHIN A FOUNDATION COMPANY
Management of a Foundation Company is typically made up by the following individuals:
FOUNDER
As the name suggests, this is the individual who has founded the Foundation Company. This individual is similar to the role of a settlor of a trust (the person who settles the trust). The Founder has no specific rights in relation to the Foundation Company. Rights that are vested in the Founder are only granted if specified in the constitutional documents or in the by-laws. Commonly, the Founder may be granted rights associated with the appointment and removal of directors and beneficiaries. There is no requirement for a Founder.
MEMBER(S)
Foundation Companies may have member(s); however, it is not required. This is unlike many Cayman Islands companies that must have at least one member. If the Foundation Company does have member(s) it is important to note that members in the context of Foundation Companies are not automatically afforded the financial benefits and rights that are typically associated with being a member of other forms of company (i.e. financial success benefits). If a member is to benefit financially this must be set out in the constitutional documents or the by-laws. A Foundation Company can only cease to have members if explicitly permitted by its memorandum and if it has a supervisor appointed – see below. If a Foundation Company ceases to have members, it can only admit new members or issue new shares if permitted by its articles.
DIRECTORS
Foundation Companies are managed by a board of directors who owe fiduciary duties to the Foundation Company. At least one director must be appointed.
SECRETARY
It is a requirement that Foundation Companies must retain a secretary at all times. The individual appointed as secretary is required to be permitted and licensed to provide company management services in the Cayman Islands. The registered office of the Foundation Company must be at the secretary’s registered address.
SUPERVISOR
If a Foundation Company does not have any members from inception or ceases to have members during the life of the Foundation Company, a supervisor must be appointed. The supervisor’s role is to supervise the management of the Foundation Company. It is important to note however that the Supervisor retains no financial rights or ownership control in the Foundation Company. The role of the supervisor is essential when no members are present as the supervisor will need to ensure that the board of directors are held accountable and that the overall business of the Foundation Company is operating in line with the constitutional documents and Cayman Islands law.
BENEFICIARIES
Unique to Foundation Companies, a separate class of beneficiaries may exist. The beneficiaries are able to benefit financially from the Foundation Company (as per the constitutional documents). The Founder can impose participation restriction provisions on the beneficiaries. Moreover, beneficiaries do not have any rights pertaining to the control of the Foundation Company. On the other hand, if beneficiaries are to have any rights, they must be expressly stated within the constitutional documents. Conversely, it is also possible for beneficiaries to only have strict passive financial rights and nothing further.
In the second part of this guide, we will explore the practical applications of Foundation Companies, focusing on their popular use cases for private clients, as vehicles for Private Trust Companies (PTCs), and within the dynamic sectors of Web3 and Decentralised Autonomous Organisations (DAOs).
Stay tuned for our upcoming publication, or feel free to connect with your contacts at Appleby if you’d like to chat further.