Cayman’s latest wealth-structuring vehicle – the foundation company
First published in LexisNexis in April 2018
Private Client analysis: Carlos de Serpa Pimentel, partner and group head of private client and trusts, and Esmond Brown, associate, at Appleby take a look at the main features and statutory requirements of foundation companies (FCs) after the Cayman Islands’ Foundation Companies Law 2017 (FCL 2017) came into force.
What are the key features of foundation companies?
FCL 2017 establishes a company with separate legal personality and limited liability to function like a civil-law foundation or common-law trust. FCL 2017 is not a standalone law but is an addition to the Cayman Islands Companies Law and therefore FCs will be able to benefit from substantial Cayman jurisprudence applicable to Cayman companies.
There are some key differentiators of FCs from Cayman companies and these are:
an FC’s constitution must prohibit the FC from paying dividends to its members
an FC may entrench the company’s objects or other provisions of the constitution or impose conditions for amending them, for example to prevent the officer holders from making changes following the founder’s death
an FC may permit dispensing with members entirely provided that there is at least one supervisor in office at that time
How are these companies created?
An existing Cayman exempted company can apply to be an FC by registering with the Registrar of Companies or an entirely new FC can be established by registering (FCL 2017, Pt 2). When the application is successfully completed, the registrar will insert an endorsement on the certificate of incorporation declaring the company to be an FC.
The documents needed to form an FC are a memorandum and articles of association (a model constitution is given at FCL 2017, Sch 2). Additionally, founders may prepare optional bylaws that do not need to be filed and are not public documents . The bylaws are likely to act like letters of wishes for trusts, they are a series of rules set out by a founder to guide the exercise of discretion by directors, supervisors and other office holders.
The statutory requirements are set out in FCL 2017, s 4(1) for a company to be an FC:
it must be limited by shares or by guarantee, with or without share capital it must have a memorandum that:
states that the company is an FC
generally, or specifically describes its objects
provides, generally or by reference to its articles, for the disposal of any surplus assets the company may have on winding-up
prohibits dividends or other distributions of profits or assets to its members or
proposed members
it must have adopted articles
its secretary must be a ‘qualified person’ (licensed or permitted by the Companies Management Law (2003 Revision) and must approve all contributions to the FC for anti money-laundering purposes)
For what are clients using foundation companies?
Anything that clients currently use trusts or companies (for commercial, charitable, non-charitable philanthropic and wealth-structuring purposes) because FCs serve a similar purpose to a foundation, ie an alternative to a trust or company structure. However, the Cayman legislation has the advantage of establishing a company which has legal certainty and worldwide recognition that trusts do not possess.
Possible uses include:
to conduct a business for the benefit of a family
to fund a philanthropic project or carry out a founder’s wishes whose goal is not simply to make money for members
to hold high-risk, less diversified assets
to be part of blockchain structures-these act in the same way that Cayman companies are used for structuring initial coin offerings
FCs may also be useful to hold shares of a private trust company or for use in Cayman trust structures introduced by the Special Trusts (Alternative Regime) Law 1997. The ability to have beneficiaries with different entitlements will also be useful for asset protection purposes.
Are foundation companies popular with a particular type of client? Why?
We expect that clients in the Middle East will favour Cayman FCs because of their willingness to use foundations in other offshore financial centres and their tendency to be unfamiliar with the way trusts work. The fact that an FC is a corporate body, there is no trustee and there is no risk of invalidity or sham once the registrar’s certificate has been issued are likely to be the most attractive factors.
Encouragingly, there has already been a positive take-up of FCs with a good number on the register already.
Have there been any cases involving foundation companies yet?
There are none that we are aware of, yet, and it is still very early since the legislation was brought into force.
Any other thoughts?
A number of provisions contained in Cayman’s Trusts Law (2018 Revision) (TL 2018) are incorporated into FCL 2017. They include the foreign element or ‘firewall’ provisions which operate to deny heirship rights to the property of living persons and equally apply to property contributed to an FC (FCL 2017, s 3(4)), and TL 2018, s 48 also applies to FCs, enabling the FC to apply to the Grand Court for advice, opinion or directions.
The ability to establish an FC in the Cayman Islands has added a long-awaited and extremely useful vehicle to the Cayman Islands’ toolkit of wealth-structuri ng vehicles.
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor .
