One of the most significant pieces of legislation introduced in the Cayman Islands last year was the Limited Liability Companies Law, 2016 (LLC Law). The LLC Law was enacted in June 2016 and came into force on 8 July 2016. The LLC Law introduces a new type of legal entity in the Cayman Islands, the limited liability company (LLC). The LLC will be familiar to practitioners of Delaware law as the LLC shares many characteristics of the Delaware limited liability company, though there are some important differences as well.
Th enactment of the LLC Law was primarily driven by the lobbying of US institutions in the asset management space who wanted the flexibility of being able to set up an offshore fund vehicle which mirrors, to the greatest extent possible, the characteristics of the onshore fund vehicle. As such, there should be closer alignment in respect of the rights of investors in onshore and offshore feeder funds, and the legal framework applicable to each feeder fund should be similar. The introduction of the LLC Law demonstrates the continued ability of the Cayman Islands to be flexible and responsive to market needs and the LLC is expected to further reinforce the Cayman Islands' position as the domicile of choice for offshore investment funds. In addition, we anticipate that the LLC will be an appropriate vehicle for joint ventures, private equity transactions, securitisations and other corporate transactions and international structures.
Establishing an LLC
An LLC is formed through the filing of a registration statement with the Registrar of Limited Liability Companies (the Registrar). Although there is a requirement for LLCs to have a written LLC agreement of the members of the LLC, this is not required to be filed with the Registrar. The name of the LLC may include "LLC" or "Limited Liability Company" but there is no requirement in this regard. On receipt of the initial registration fee and the registration statement, the Registrar will register the LLC and issue a certificate of registration, usually within three to five working days (or 24 hours, if expedited for an additional fee).
Characteristics of an LLC
The LLC is a hybrid entity which combines features of the Cayman Islands exempted company, such as separate legal personality, limited liability for all members and the ability to be managed internally rather than by another individual or entity, and the Cayman Islands exempted limited partnership (ELP), such as having no share capital, flexible governance arrangements and flexible capital account mechanics.
Taking each of these points in turn, the first defining characteristic of the LLC is that it possesses separate legal personality. This can be contrasted with an ELP where the limited partnership does not have separate legal personality and where the assets of the limited partnership need to be held, and contracts entered into, by the general partner of the limited partnership on trust for the limited partners. As such, in the case of an LLC, only one vehicle needs to be set up and maintained. In addition, there are no Cayman Islands residency requirements in relation to the members of an LLC, which can be contrasted with the requirement that, in the case of an ELP, the general partner must be a Cayman Islands entity or registered in the Cayman Islands as a foreign entity.
Generally, the liability of the members of the LLC is limited to the amount that each member has undertaken to contribute to the assets of the LLC pursuant to the LLC agreement. Given that there are no minimum capital contribution requirements for LLCs, this means that members will possess substantial downside protection. By contrast, in the case of ELPs, the general partner has unlimited liability in the event that the assets of the ELP are inadequate. To be sure, one notable exception to limited liability in the LLC Law is the statutory clawback of distributions, pursuant to which there may be a clawback of distributions where a member receives a distribution or is released from an obligation where (i) the LLC is insolvent on a cashflow basis; and (ii) the member has actual knowledge of such insolvency at the time of the distribution. There is no time limitation on the clawback, which can be contrasted with the six month limitation in respect of the equivalent clawback provision for ELPs.
Unlike an exempted company where there is a requirement to appoint at least one director (two in the case of a fund vehicle that is registered with the Cayman Islands Monetary Authority; Cima), the default position for an LLC is that management may be carried on by the members and there is no requirement to appoint directors (or managers, as they are known under the LLC Law). The duties of managers or managing members of LLCs are significantly less onerous than the duties owed by directors of exempted companies. Whereas directors of exempted companies are subject to equitable fiduciary duties and the common law duty to act with appropriate care, skill and diligence, a manager of an LLC does not owe any duty (fiduciary or otherwise) to the LLC other than a duty to act in good faith, provided that such duty of good faith may be expanded or restricted by the LLC Agreement. These less onerous duties will no doubt be attractive for prospective investment managers and may also mean that D&O insurance costs will be lower when using an LLC as compared to an exempted company given the reduced risk of liability for managers of LLCs.
Unlike an exempted company, an LLC does not have a share capital. Instead, members are issued interests or classes of interests. This allows for flexible internal accounting and record keeping whereby a member may have a capital account and make capital contributions in accordance with the LLC Agreement. Such capital contributions may be in cash, property or other assets including services rendered or any other obligation. The members may agree among themselves how the profits and losses of the LLC are to be allocated and how and when distributions are to be made, which may be on a non-pro rata basis. This might be useful where for example the LLC agreement provides for tax distributions which would be on a non-pro rata basis. This is difficult to mirror in a corporate structure where distributions on shares of the same class would need to be made on a pro rata basis. If the LLC is silent, the LLC Law requires distributions of profits and losses to be allocated on the basis of contributions made. The ability to contractually vary the capital accounting and distributions provides the internal accounting and record keeping of an ELP or a Delaware LLC and provides synergy with the Delaware LLC where it is being used as the onshore vehicle in a master/feeder structure. We will look at distributions and returns on capital in more detail in a moment.
In terms of LLC distributions, there are no capital maintenance requirements to limit the ability to make distributions. Provided it is permitted under the LLC agreement, an LLC can return cash or assets to its members in a number of ways including distributions, release from obligations and return of contributions. The LLC Law imposes a cash-based solvency test whereby any distribution may be made as provided for in the LLC subject to the LLC being able to pay its debts as they become due in the ordinary course of business.
Ogier and LLCs
Ogier's Hong Kong office has recently advised on an innovative and high profile Asian fund launch, one of the first hedge funds established under the new Cayman Islands Limited Liability Companies Law. Ogier acted as Cayman Islands legal adviser to Vanhau Asset Management Limited, a Hong Kong based investment manager founded by Vishweshwar Anantharam and William Hau, on the recent launch of Vanhau Fund and Vanhau Master Fund, both being section 4(3), Cima-regulated mutual funds. This was a one-legged masterfeeder fund structure with the feeder fund and master fund entities both being Cayman Islands limited liability companies.
The fund launch will be one of the higher profile launches in Asia this year due to the background and pedigree of the founders. Mr Hau and Mr Anantharam previously worked at Goldman Sachs in Hong Kong where they had long and distinguished careers.
This article first appeared in a HFM Special Report - Hong Kong 2017.
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