Page 52

Cayman Funds 2016

“The flexibility offered by the LLC now gives a solution to managers of closed-ended funds where a vehicle with separate legal personality is desired.” • To mirror a Delaware LLC feeder fund in a typical master/feeder fund structure (ie, comprising a Cayman Islands feeder fund, Delaware onshore feeder fund and a Cayman Islands master fund); • Where a closed-ended fund requires separate legal personality; • In place of Antiguan and Marshall Islands LLCs in existing and new fund and non-fund structures; • In lieu of registering a Delaware LLC as a foreign company in Cayman (eg, to act as the sole general partner of a Cayman Islands exempted limited partnership); and • In lieu of using a Cayman Islands exempted company where a shareholders’ agreement would otherwise be required in order to supplement the Articles (eg, for a joint venture company). Advantages and disadvantages Two key advantages of the LLC are likely to be its familiarity and flexibility. The Cayman Islands has always been an innovative and responsive jurisdiction in terms of providing user-friendly and practical solutions to those looking to structure transactions using Cayman. Given its proximity to the US, the Cayman Islands is the jurisdiction of choice for US managers or their service providers looking to structure their fund vehicles offshore in a tax neutral environment. Such managers or service providers will be more than familiar with the Delaware LLC upon which the Cayman Islands LLC is based. This additional corporate offering is therefore likely to be a welcome addition to the vehicles already available in Cayman. Currently the only offshore jurisdictions which offer LLCs are the Marshall Islands and Antigua, neither of which will be familiar jurisdictions for fund managers or their investors. The quality of service providers and the established nature of the industry in the Cayman Islands will make the Cayman LLC offering particularly attractive to those already familiar with the jurisdiction. The flexibility offered by the LLC now gives a solution to managers of closed-ended funds where a vehicle with separate legal personality is desired. Traditionally, concepts such as capital calls, default provisions and carried interest or indemnification clawbacks, all of which are common terms in a limited partnership agreement have been difficult to achieve within the framework of an exempted company but may now be covered in the LLC agreement in much the same way as has historically been achieved in the context of an exempted limited partnership. There will also be greater flexibility in relation to the ongoing operation and management of an LLC. In many respects, an exempted company offers a greater degree of flexibility in its operation than companies in many jurisdictions. However, the Articles of Association of an exempted company are still subject to the overarching statutory framework of the Companies Law (as revised), which provides certain rigid requirements such as the requirement to obtain a special resolution in relation to amendments to the Articles. For anything less than unanimous written consent, a special resolution requires the convening of a meeting of shareholders, a requirement which can be frustrating to those in other jurisdictions used to being able to obtain consents by way of the written consent of the requisite majority. This rigidity is compounded by the concept 52 CAYMAN FUNDS | 2016 of share capital whereby personal rights (for example investorspecific rights) may be unenforceable within the Articles, which only set out the rights attaching to shares. Personal rights are therefore typically documented outside of the Articles, for example in the context of joint venture arrangements, often in a lengthy shareholders’ agreement which duplicates many of the provisions of the Articles. The flexibility offered by the LLC will allow greater manoeuvrability for joint venture parties to agree rights specific to those parties in the LLC agreement without the need for a separate shareholders’ agreement. In the context of venture capital companies where series financings require regular amendments to the vehicle’s constitutional documents (which, particularly in the case of a disparate group of shareholders, often leads an exempted company to hold a shareholders’ meeting), amendments will be effected in accordance with the procedures and consent requirements in the LLC agreement and not by reference to a more rigid statutory approval process. In addition, the ability to restrict the duty of good faith owed by managers of an LLC will allow managers to act with regard to their own interests which may occasionally be in conflict with the interests of the LLC. This will be most beneficial in the context of granting governance rights to investors. Beyond managers of LLCs, a person serving on a board or committee of an LLC (such as an advisory board or investment committee) shall, unless otherwise specified in the LLC agreement, owe no duty to the LLC or any member of the LLC. One minor disadvantage of the LLC legislation as currently drafted is the lack of a legal framework for the segregation of assets and liabilities as between series or classes of interest within the LLC as there is, for example, in a Cayman Islands segregated portfolio company. However, as with an exempted limited partnership, this can of course be provided by means of a contractual segregation agreed as between the parties (or by means of additional structuring). In summary, the LLC is set to be a positive addition to the vehicles already offered in the Cayman Islands. The flexibility and familiarity will, no doubt, be welcomed by those structuring their transactions through Cayman, whether investment fund managers, investors or service providers in the financial services industry. Simon Thomas is an attorney at Campbells. He can be contacted at: sthomas@campbellslegal.com Richard Spencer is an attorney at Campbells. He can be contacted at: rspencer@campbellslegal.com


Cayman Funds 2016
To see the actual publication please follow the link above