The introduction of the LLC responds to requests made by the US financial services industry for such a vehicle. As a result, the Law in the Cayman Islands reflects many key features of Delaware’s Limited Liability Company Act and those familiar with that Act will recognise features with certain modifications to conform with Cayman Islands law and concepts.
What is a limited liability company?
Essentially, the LLC is a hybrid entity, merging certain characteristics of a Cayman Islands exempted company with those of a Cayman Islands exempted limited partnership.
Within the parameters of the Law and other Cayman Islands laws applicable to LLCs, members of an LLC are free to agree on regulations governing management of the LLC, contributions by members and distributions and conduct between themselves pursuant to an LLC agreement. Express provisions of the Law create priority in respect of security interests granted by members in respect of their LLC interests. Members owe no duty (fiduciary or otherwise) to the LLC or its members (except if a member also acts as a manager of the LLC, in which case the Law imposes a duty of good faith in exercising the rights and authorities and obligations of a manager, subject to any higher duty that may be imposed under the LLC agreement).
Key features of a Cayman Islands limited liability company (LLC)
- An LLC is a body corporate with separate legal personality and limited liability, like a Cayman exempted company, but without having share capital.
- The registration of an LLC is simple, requiring the filing of a registration statement and payment of the appropriate fee (the proposed name of the LLC should be checked in advance with the Registrar of Limited Liability Companies (Registrar)).
- The affairs of an LLC are not governed by memorandum and articles of association, but by its operating agreement (LLC Agreement) which must be governed by Cayman Islands law (and which is not required to be filed with the Registrar). As the Limited Liability Companies Law, 2016 (Law) in many instances defers to the LLC Agreement, members of an LLC have increased flexibility in deciding on their LLC’s structure and the provisions under which it is to be governed.
- Members of an LLC may have capital accounts and make capital contributions, with profits and losses allocated amongst those members as provided in the LLC Agreement.
- Management of an LLC shall either vest in its members acting by a majority in number or, if the LLC Agreement so provides, by one or more managers appointed by the members. The LLC Agreement may provide for classes of managers having such rights, powers and duties for the relevant class as specified in that agreement.
- Subject to the provisions of the LLC Agreement, a manager shall not owe a duty (fiduciary or otherwise) to the LLC or any member or any person except a duty to act in good faith (and such duty of good faith may be expanded or restricted by the express provisions of the LLC Agreement).
- As is the case with an exempted company, an LLC may not carry on business with the public in the Cayman Islands, except in furtherance of its business carried on outside the Cayman Islands and it may not make any invitation to the public in the Cayman Islands to subscribe for any securities of the LLC except if it is listed on the Cayman Stock Exchange.
- An LLC may apply for a 50-year tax undertaking certificate from the Cayman Islands Government.
- An LLC is required to maintain a register of members, a register of security interests (in respect of LLC interests), a register of managers and a register of mortgages and charges. Only the register of managers is required to be filed with the Registrar, but it will not be available for public inspection.
- An exempted company that is not a segregated portfolio company may convert into an LLC.
- An LLC may merge or consolidate with one or more LLCs, exempted companies (provided they are not segregated portfolio companies) and foreign entities having separate legal personality.
- Foreign entities having separate legal personality are permitted to transfer by way of continuation into the Cayman Islands as LLCs (and LLCs are permitted to transfer by way of continuation out of the Cayman Islands as foreign entities).
Uses of a limited liability company
The LLC provides a significant alternative structuring option to complement the existing choice of vehicles in the Cayman Islands. We believe our clients will embrace the LLC as the suitable form of business vehicle in certain circumstances; it can be useful in a variety of areas including the structuring of investment funds (especially where the structure already includes one or more limited liability companies registered elsewhere), general corporate transactions requiring joint venture or special purpose vehicles and venture capital, private wealth and private equity structures.
It should be noted that the Law automatically incorporates the LLC into certain existing legislation to allow for its use as a mutual fund, general partner of an exempted limited partnership and as an investment manager or advisor.
Appleby is already advising on continuations of foreign entities into the Cayman Islands as LLCs and the content of proposed LLC agreements.
The Law is the natural outcome of the Cayman Islands paying attention and responding to the input and needs of global industry and its participants and further consolidates the Cayman Islands’ position as a leading offshore jurisdiction.