Cayman Islands: 100 Days Of Cayman Islands Limited Liability Companies

The First 100 Days and Beyond

21 October marks 100 days since the introduction of the Cayman Islands Limited Liability Companies Law. Over 100 Cayman Islands LLCs have been registered within this first 100 days and we expect that this number will increase exponentially, as the market becomes more aware of their availability. Underpinning this demand is the concept that Cayman Islands LLCs operate in an almost identical way to their Delaware counterparts.

How are Cayman Islands LLCs being used?

We are seeing Cayman Islands LLCs used across our Investment Funds, Corporate, Finance and Restructuring practices. Cayman Islands LLCs have been used as joint venture vehicles, general partner entities and carried interest vehicles, holding companies or special purpose vehicles, investment management entities, for group restructuring purposes and even occasionally as fund vehicles.

Familiarity of LLCs to Industry Participants

Although a new form of entity under Cayman Islands law, one of the key attributes of the Cayman Islands LLC is the familiarity of its constitution to US lawyers and industry participants; Cayman Islands LLCs operate in an almost identical way to Delaware LLCs, and we have already seen many examples of how this similarity has expedited and facilitated transactions. Similar to Cayman Islands Exempted Limited Partnerships, the ability to use an equivalent offshore entity that can substantially replicate the constitution of a corresponding onshore entity, with which industry participants are familiar, is a key advantage.

In a joint venture context, we have seen Cayman Islands LLCs prove to be a welcome addition to the existing forms of entity that may be used. While financial investors may be experienced in investing into other types of offshore entities, participants such as management teams, business operators or strategic partners may not be. Having the ability to invest in a structure with which they are familiar can significantly expedite a transaction, reduce risk and ultimately provide the parties with a structure which they are most comfortable to operate their joint venture. In joint venture arrangements, we have also seen that the ability to replicate onshore management incentive programs on the offshore side through a Cayman Islands LLC has proved particularly attractive for some clients.

In a restructuring context, where there is likely to be a diverse group of interested parties, particularly in Chapter 11 and/or Chapter 15 circumstances, using an entity whose constitution and governance concepts are well understood and accepted by such parties can greatly assist in settling negotiations centering on corporate governance, conversion of debt into equity and on-going control.

A Valuable Addition

Cayman Islands Exempted Companies and Cayman Islands Exempted Limited Partnerships have developed over the years to serve the industries and purposes for which they are most commonly used. Cayman Islands law firms and the Government have been proactive in developing and updating the Companies Law and the Exempted Limited Partnership Law to react to the expectations and requirements of the financial services industry. For example, in the case of Exempted Partnerships, the Exempted Limited Partnership Law has been amended to provide for parties to agree to contractually vary the fiduciary duties of the general partner, should they wish to do so, while maintaining the obligation of the general partner to act in good faith. This change was adopted in order to recognise that, as the Private Equity industry (which commonly uses partnership structures) has evolved and matured with larger private equity institutions in particular having an increasingly diverse spectrum of funds, the management of conflicts of interest required greater contractual flexibility. Likewise, in the case of the Companies Law, Cayman Islands law has drawn on Delaware legislation in adopting merger provisions, providing a more straightforward and cost effective means for companies to merge or consolidate than was previously available.

The ability to form Cayman Islands LLCs, which combine features of both Cayman Islands Exempted Companies and the Cayman Islands Exempted Limited Partnerships, more fully aligns the offshore options with those available onshore. For example, as is the case with Cayman Islands Exempted Companies, on registration, a Cayman Islands LLC becomes a body corporate with legal personality separate from its members. In common with Cayman Islands Exempted Limited Partnerships, the constitution of an LLC is very flexible and allows members to agree as they wish mechanisms such as capital accounts and capital commitments, allocations of profits and losses, allocations of distributions and voting methods (including negative consents).

Cayman Islands LLCs also offer flexibility in terms of fiduciary duties. Subject to what is agreed in the LLC Agreement, the managers of an LLC (if appointed) do not owe any duty (fiduciary or otherwise) to the LLC or any member, other than a duty to act in good faith, and even such duty of good faith may be expanded or restricted by the express provisions of the LLC Agreement.

Prior to the introduction LLCs, we commonly saw carried interest, joint venture and management incentive vehicles formed as Exempted Companies. The constitutional requirements as well as the practical administration (particularly obligations relating to the issue, transfer, redemption and/or repurchase of shares) in structures where a Cayman Islands Exempted Company was used were less familiar to many industry participants, and Cayman Islands LLCs are therefore an attractive alternative. As with holding companies or special purpose vehicles, it can often be the case that interests in these entities are actually treated on the basis of capital accounts, and in such situations a Cayman Islands LLC provides increased flexibility and administrative ease than would otherwise be the case with an Exempted Company.

We have also seen a number of migrations of foreign LLCs into the Cayman Islands. While there may be a wide range of reasons for this, our expectation is that in some cases, vehicles which would previously have established in other offshore jurisdictions which offer LLCs, such as Anguilla, Antigua or the Marshall Islands, are now likely to be established in the Cayman Islands.

Continuing to Innovate

Working in close partnership, the Cayman Islands financial services industry and Government recognise that even the most established and sophisticated offshore jurisdictions must continue to react to the demands of the market place and seek new opportunities for growth.

Continuing to listen to the demands of clients, regulators and industry participants and provide constructive and effective solutions over the coming years will be key to maintaining the Cayman Islands leading position in the offshore financial services industry. The Cayman Islands has long been an innovator and early adopter in the offshore financial services industry and Cayman Islands LLCs are a successful addition to the solutions that the Cayman Islands legal system is able to provide.

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