An Overview of Companies Law in the Cayman Islands
Cayman Companies Law provides the framework for the operation, management and restructuring of companies incorporated in the Cayman Islands. Cayman’s legal system is based largely on English law. Consequently, the provisions of Cayman Companies Law are modeled closely on sections of various statutes in England prior to the latter’s Companies Act 2006 introduction.
Cayman Companies Law and the Registrar of Companies are overseen by the Ministry of Finance. The Registrar of Companies is charged with responsibility for the management and administration of all Cayman companies, including corporate governance and compliance with Cayman Companies Law. The Cayman Islands Monetary Authority (CIMA) is responsible for regulating financial services businesses within the jurisdiction. The Registrar and CIMA each have invested interest and jurisdictional power over the deregistration process .
The provisions of Cayman Companies Law, which relate to winding up and liquidations are provided under Part V of the Companies Law. Liquidation proceedings of Cayman companies are governed by the Companies Winding Up Rules, which for the most part are modeled on the English Insolvency Rules in effect prior to the introduction of the Insolvency (England) Rules 1986.
The law of the Cayman Islands regulating its companies, has earned a reputation as the "gold standard" for corporate requirements, which many jurisdictions have adopted. Cayman Companies Law is what makes the Cayman Islands such a respected and important jurisdiction for the registries and registration of international business companies, including hedge funds and private equity businesses and many offshore banks. As such companies account for more than half of the economy of the Cayman Islands, it’s appropriate that they should be governed by a company law that is world-class.
Different Types of Companies in the Cayman Islands
In general, Cayman Companies Law, provides three broad categories of companies that can be established in accordance with Cayman Company law. Exempted company: A Cayman exempted company is a company which is not formed for the purpose of carrying on business in the Cayman Islands or owning land therein. The most popular form of company, it is usually limited by shares, although "limited by guarantee" companies may also be formed. Cayman Islands companies seeking to raise capital abroad via private or public offerings of shares and/or debt securities typically take the form of an exempted company. Similarly, the vast majority of hedge funds and private equity funds are formed as exempted companies. Non-resident company: A company which is formed for the purpose of carrying on business outside the Cayman Islands or owning land therein. Registered foreign company: A company incorporated outside of the Cayman Islands but which has established a place of business, held shares or owned land in the Cayman Islands.
Benefits of Setting Up a Company in the Cayman Islands
The Cayman structures offer significant benefits to businesses and investors. Due to its tax neutral regime, including no capital gains, inheritance or income tax, the absence of exchange control and political stability (as an overseas territorial UK jurisdiction), the natural persons and/or corporate shareholders and directors are not required to be Cayman Islands residents, it is not surprising that the Cayman Islands has become home to thousands of offshore companies for a range of purposes.
The following are some of the more common reasons cited for incorporating in the Cayman Islands:
(i) Speed of Incorporation: The length of the registration process varies depending on the jurisdiction. In the Cayman Islands, steps taken by the Registrar to incorporate a company normally take only 48 hours from the time of lodgement. Companies can be incorporated in other jurisdictions in similar timeframes, but in some cases (particularly where regulatory licensing requirements may apply) it is not unusual for the registration process to take weeks (or even months) before being completed.
(ii)Tax Neutrality: Caymans law permits the registration of any type of company, unless specifically reserved for the exclusive use of a category of Cayman company. For example, there are categories of exempted companies, limited or unlimited; conditional or unconditional, etc. This flexibility permits natural and legal persons to choose, to a large degree, how they wish to operate.
(iii)Freedom of Contract: The Cayman Islands gives companies the freedom to choose their shareholders and directors without interference from the Cayman Islands Monetary Authority. Cayman law does not prescribe the need to have local shareholders, or even local directors as all the attendance of the annual general meetings may be held overseas. Also, there is no requirement to have any locally based bank account for the company’s business. This degree of freedom allows companies to control their business and operations with flexibility and discretion, including the ability to appoint closely related family members as shareholders or directors without having to get legal permission from the Government.
(iv)Legal Privileges: The Cayman Islands legislature provides for confidentiality as to the information pertaining to the shareholders of a company registered in the Cayman Islands. Records pertaining to the directors and officers (where such information is different from the personnel listed in the register of shareholders) of a Cayman Islands entity may be filed with the Cayman Islands Registrar of Companies.
(v) Transfer and Continuation: Companies may be transferred from one jurisdiction to another, including the jurisdiction of their origin. Companies and entities permitted to transfer to and from the Cayman Islands include partnerships, limited liability companies, incorporated associations, provident associations, registered societies and unit trusts. Companies incorporated in the Cayman Islands have the right to continue into another jurisdiction, if permitted by the laws of the other jurisdiction.
(vi)Enforcement of Rights: The Cayman Islands Attorney General has the power to enforce a rights of a shareholder in the name of the Cayman company. Thus, any relief or remedy sought by a shareholder to enforce a right that is available to him may be done without the need to join the company as a party to the action. This provides a significant advantage for shareholders who do not want their company to perform certain actions which are prejudicial to their interests. A shareholder may bring any action brought by the company against any other party.
Staying Compliant with Laws and Regulations in the Caymans
Legal compliance and regulatory requirements are the cornerstones of corporate governance for registered businesses. In Cayman, registration of a company before commencing business is of primary concern. On creation, the Registrar of Companies ("ROC") generates a certificate of incorporation which acts as conclusive evidence that the legal requirements as to the incorporation of the company have been complied with. Registration of the structure itself is not dependant upon a prior capitalisation as there is no minimum capital requirement to be capitalised within the first year. As a result of such flexibility, incorporation has grown to be a quick and easy process in Cayman. These factors, combined with the competitive nature of the jurisdiction, have made it very appealing to those looking to set up business in Cayman and with the convenience of online filing, incorporation can be done within a few short hours. That convenience however, can be somewhat offset by the fact that if a company fails to comply with a number of key requirements, the ROC may remove the company from the Register.
Annual reporting is required by Cayman companies law with a prescribed period of sixteen months. This requires the filing of annual audited accounts along with a return containing updated details about the structure such as changes in directors, but there is no requirement for the submission of any details of beneficial owners. This has often been cited as one of the reasons for the recent negative publicity received by the jurisdiction as one of the major issues with a lack of oversight into the activities of companies within the jurisdiction.
In terms of other compliance requirements, Cayman is not alone in imposing direct compliance with anti-money laundering or anti-bribery legislation. The OECD Guidelines and FATF Recommendations specifically require countries to place obligations on banks to monitor their account holders. Cayman banks are obliged to ensure that appropriate procedures, including money-laundering detection systems, are in place to identify and handle unusual activity and transactions.
Responsibilities and Duties of Directors and Shareholders
As with all corporate entities or structures, Cayman-registered companies are governed by their articles (which set out the constitutional framework of a company, to include the powers of the directors, the rights attaching to different classes of shares, etc.) and their memorandum of association (which, among other functions, acts as a "contact card" or "fingerprint" for Cayman companies).
A recent and significant development, which focused on certain compliance requirements, was the passing in November 2016 of the Companies (Amendment) Law, 2016 (AML 2016). While that Law only came into force in January 2017, the AML 2016 was passed in order to comply with FATCA and the OECD’s Common Reporting Standard ("CRS") and will require Cayman-registered companies to identify shareholders who hold shares "through" nominees and record information about such arrangements.
The Articles of Cayman-registered companies generally contain provisions governing general meetings, the appointment and removal of directors, directors’ interests, voting threshold requirements and powers of directors, to name a few.
It is also important to note that Cayman-registered companies are subject to common law principles which have been developed by the Courts, as well as certain pieces of legislation (e.g. the Companies Law or Mutual Funds Law) (together with the regulations thereunder) and "soft laws," such as the Cayman Codes on Corporate Governance (the "Codes") . As a matter of practice, many Cayman-registered companies have adopted the Codes which they would apply when desirable or appropriate. The Codes, however, are not mandatory.
The Companies Law (2016 Revision) (the "Companies Law"), which stated in section 93(1) that the directors of a company are responsible for and must manage the company, provides that directors must act honestly and in good faith; use the care that a reasonably prudent person would use in those circumstances; act in what they consider to be in the company’s best interest; and avoid conflicts between their personal interests and the interests of the company.
The directors of a Cayman-registered company can be individuals or corporations. They may be residents of the Cayman Islands and may be shareholders of the company. Shareholders of a Cayman-registered company can also be residents of the Cayman Islands.
Likely in response to recent changes to tax transparency laws in the Cayman Islands, Cayman-registered companies are required to maintain a register of its shareholders and must file this register with the Registrar of Companies pursuant to the AML 2016. Cayman-registered companies must maintain a Cayman office and a principal representative, unless exempted by the Registrar of Companies from compliance with this requirement.
Recent Changes and Updates to Companies Law in the Cayman Islands
The Companies (Amendment) Law 2019, which came into force on 1 July 2019, has been introduced to implement certain amendments to the OECD Standard for Automatic Exchange of Financial Account Information, as well as provide for certain amendments to the process for obtaining Court sanction for transactions involving an amalgamation with a non-innocent subsidiary or other entity. The amendment to the standard related to a Cayman company going forward now requires the company to indicate to its financial institutions whether it is a "financial institution" or is "not a financial institution". In addition, there was also brought into effect a clarification to provide for the repeal of prior resolutions relating to share premium accounts.
The Companies (Amendment No. 2) Law 2019 was enacted on the 29 November 2019 and introduced the concept of the "lightly regulated investment funds" regime, which applies to those registered funds that choose to opt into an alternative co-regulatory model that generally reduces the regulatory burden.
The Companies Amendment (Transfer and Deregistration) Law 2020 was enacted on 30 April 2020 to update the requirements for the transfer of assets and liabilities to a predecessor company in a cancellation of a company’s registration.
In March 2021, the Cayman Islands Monetary Authority published revised its Guidelines on Risk Management (Effective 1 March 2021).
Also in March 2021, the Cayman Islands Monetary Authority published revised Guidance on Sound Liquidity Risk Management for Regulated Financial Institutions (Effective 31 December 2021) (the "Liquidity Risk Management Guidance").
In October 2021, the Cayman Islands Monetary Authority published updates to its Guidance Note on Application for Class A and Class B Manager Registration (Interpretative Notes) to clarify conditions applicable to Managers when undertaking the management of an investment fund prior to submitting an application for registration.
Effective 22 March 2021, the Cayman Islands Monetary Authority issued a new Rule on Applications for Registration as Approved Liquidator and in May 2021, the Cayman Islands Monetary Authority published Guidance Notes on Applications for Registration as Approved Liquidator to clarify in general that, amongst other things, parents of an approved liquidator are not required to submit evidence of meeting the "fit and proper person" criterion for the purposes of voluntary liquidations. Written consent from the liquidator is, however, required for any changes in such parent company.
Common Issues and Considerations for International Investors and Companies
Cayman companies are increasingly being favoured by foreign investors for a variety of reasons. From tax incentives to strategic geographical location, Cayman has become an attractive jurisdiction for international business. However, despite its many benefits, there are certain areas of Cayman law that can present challenges to foreign investors and/or their interests. Some of these challenges are statutory, while others have more to do with jurisdictional issues and the unpredictability of doing business in unfamiliar territory.
In many cases, for example, a nonCayman investor may not be familiar with the local laws and regulations, particularly where this involves complicated vocabulary. This could potentially lead to problems such that an investor or lender may become exposed when they are not complying with local rules. It is, therefore, essential for foreign investors to familiarise themselves with the laws of the jurisdiction and seek appropriate legal counsel.
One weakness of Caymans corporate law framework is the availability of limited company types. Cayman has only one substantive type of company, the ‘company limited by shares’. While it is absolutely fit for purpose and can essentially be used for almost any kind of investment purpose, it is a monolithic entity type with no variation e.g. private or public companies. This could be problematic to foreign investors who have come to the islands for freedom from regulation (typically, exempted persons) but still want a method of raising capital and shareholder diversity. This could mean that foreign investors will be required to form a Cayman company, even when it does not suit their needs.
In addition, a foreigner who wishes to set up a local, subsidiary company will likely find that they cannot do so alone. A Cayman company must have at least one shareholder that is "local", meaning that a registered Caymanian must have voting rights in the company. A foreign investor may, however, be able to form a simple partnership or joint venture by offering to bring and invest their specific skill and expertise into the deal. From a legal standpoint, a partnership does not require a business license or any other governmental registration requirements, therefore making it less cumbersome than incorporation . Under Cayman company law, the main factors that determine whether or not a company is local (and therefore able to provide the shareholder vote) are residency and nationality. However, the legislative status of a ‘local person’ is currently unclear, putting little restriction on residency and the use of proxies. This causes other potential issues for foreign investors as the law does not address a number of common problems arising from proxy voting. Issues such as whether or not a foreign investor qualifies as a shareholder if they hold their share voting rights through proxies, remain unclear. In the absence of any statutory framework resolving these issues, it is difficult to determine the full extent to which a foreign investor may control a Cayman company and how much, if any, protection the law affords them.
Foreigners, particularly U.S. and EU citizens, may also be at risk from economic sanctions. An industry-wide concern is that foreign shareholders of Cayman companies may, in the future, want to do business with, or in, one or more sanctioned countries, particularly those on the U.S. sanctions list. A foreign shareholder who does business wherever a sanctioned country is involved, without checking the status of that country, risks not only complying with Cayman regulatory obligations, but also the legal risks of operating in a country sanctioned by the United States. The consequences are therefore serious.
It is important to note, however, that all local investors within the Cayman Islands face similar challenges to that of foreign investors. The difference between the two groups is that a foreign investor may not understand the local laws as well as a local investor and, as a consequence, may not receive a sympathetic ear if they try to challenge those laws. This potential lack of recognition by the law makes it imperative for foreign investors, or any other prejudiced shareholder, to ensure that they adequately protect their interests through agreed constitutional arrangements, including restrictive covenants and investor protection agreements. Careful planning now to avoid issues later could save a lot of time and money in the long run.