Cayman Islands: Foundation Companies: The Future Of FinTech?

Last Updated: 5 June 2019
Article by Melissa Lim, Tom Hagger and Jo-Anne Stephens

Most Read Contributor in Cayman Islands, June 2019

Introduction

The Foundation Companies Law 2017 (the "Law") introduced another innovative and flexible vehicle in the Cayman Islands which can be used in a myriad of ways to assist clients with finding solutions to structuring issues. Foundation companies ("FCs") were initially introduced to meet the demands of clients located in civil law jurisdictions who were unaccustomed to traditional common law trust structures. The legislators responsible for drafting the Law certainly did not have the FinTech sector in mind when they were designing the FC. However, we have seen a number of clients in the FinTech space embrace the flexibility and adaptability of the FC and use it in a number of ways.  

Background to Foundation Companies

 FCs take the form of a traditional company limited by shares or guarantee but with characteristics of a civil law foundation. Historically civil law foundations were used for succession planning and philanthropic purposes.  However, foundations were not available in the Cayman Islands. Therefore civil law clients were required to use more traditional common law trust structures.

The concept of a trust, although a flexible and reliable succession planning tool for centuries, was less attractive to many civil law clients.  Two of the main reasons were unfamiliarity with the separation of legal and beneficial interests and uncertainty as to tax treatment. As a result, a number of offshore jurisdictions (such as the Bahamas, Jersey, Guernsey and St. Kitts) used the opportunity to establish common law or offshore foundations by statute. However, the difficulty with this approach is that offshore foundations are statutory constructs with no established body of jurisprudence.  This has resulted in considerable uncertainty in determining how a court of law will interpret, apply or treat these entities. 

Cayman's solution to this issue was to establish a hybrid that looks like a civil law foundation but benefits from long-established jurisprudence which relates to companies.

Forming a Foundation Companies

A FC may be incorporated within 24 hours of submission of the documents to the Registrar of Companies (the "ROC") and the process for incorporation is the same as that for a traditional exempted company. The memorandum and articles of association will be filed with the ROC, however the by-laws which may include details of management and governance, distributions or beneficiary information are not filed with the ROC and are kept confidential. The following additional requirements must be satisfied before incorporation, that is, the FC:

  • must be limited by shares or by guarantee, with or without a share capital;
  • has a memorandum that:
  • states that the company is a FC;
  • generally or specifically describes its objects (which may, but need not be, beneficial to other persons);
  • provides for to whom and how the surplus assets of the FC will be disposed of on its winding-up;
  • prohibits dividends or other distributions of profits to its members or proposed members;
  • has adopted articles; and
  • has a secretary who is a qualified person (i.e. a person licensed or permitted under the Companies Management Law (2003 Revision) to provide company management services) and the secretary should have the same address as the registered office.

The ROC will issue a special certificate of incorporation to a FC declaring that the company is a FC.

Constitution and Roles

One of the most attractive features of FCs is that its constitution can be very bespoke and flexible.  It may give rights, powers and duties to any of its members, directors, officers, supervisors, founders or others concerning the FC. The constitution may be tailored to meet the specific needs of the client.  Typical roles that you will expect to have in a FC are discussed in more detail below.

Founder A FC may have a founder, which may be an individual or a company.  Typically, the powers that would be reserved to the founder would include the power to:

  • designate or remove members, directors, supervisors, beneficiaries;
  • adopt or revoke by-laws;
  • amend the constitution;
  • wind up the company.

However, it is important to note that the FC does not have to have a founder and may be incorporated without one.   

Directors

There must be at least one director of which the founder, member, beneficiary may be one.  Similar to a traditional company the business and affairs of the FC will be managed by or under the control of the directors other than those expressly reserved to other persons related to the FC or those to be exercised in the general meeting.  Directors have a duty to act in the best interest of the FC.

Members

Another attractive feature of the FC is that even though it must have one or more members for the purposes of incorporation of the FC, following incorporation, the FC can be orphaned (whereby the shares of the FC are held off balance sheet) or cease to have members as long as it has one or more supervisors. If a FC ceases to have any members, it cannot subsequently admit members or issue shares unless expressly authorised to do so in its constitution.  

Supervisor

The supervisor is an individual or company, other than a member of the FC, who under the constitution, has voting rights at general meetings or rights of access to some of all of the accounts, records or information of the FC, whether or not that person has supervisory or other duties. The Supervisor may bring an action in the name of or on behalf of the FC for the enforcement of duties of the directors.

Beneficiaries

The articles will usually include a provision for the appointment and removal of beneficiaries.  Details of the designation may be set out in the by-laws or otherwise.  Unless otherwise provided in the constitution, the beneficiary has no power or right relating to the FC its management or its assets and is not an interested person as defined in the Law. Beneficiaries may only attend general meetings if given the specific right to do so in the constitution.

Foundation Companies in the Fintech Space?

One of the most interesting ways in which FCs have been used in the Cayman Islands is in the blockchain world. The vast majority of blockchain protocols, which have their own custom blockchain, are community projects; many of them with community governance at their core. As these protocols mature and seek to attract investment to fund their growth they are required to house the protocol into something tangible which can accept this investment. Traditional corporate structures are at odds with the protocol's "community".  These structures require there to be a shareholder or member; in other words an "owner". FCs provide a solution to this problem.  They can be structured in such a way that they do not require an owner and instead they can be governed by a community elected board acting in accordance with bylaws which have been established to protect and promote the protocol in question. 

FCs are also flexible enough that they can be used as the token issuers to facilitate Initial Coin Offerings ("ICOs"), Security Token Offerings ("STOs") and Initial Exchange Offerings ("IEOs"). An FC can be moulded to fit the specific needs and circumstances of each issuance. FCs are seen as popular vehicles for token issuers in light of ICOs traditionally being Swiss foundations.

In summary, FCs are a new form of Cayman Islands vehicle which is currently being used for succession planning, philanthropic purposes and token issuances. As the use of FCs evolve over time, we look forward to working with our clients on the different ways FCs may be used in light of their flexible nature.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions