British Virgin Islands

On October 25, Loeb Smith Attorneys’ Cayman Islands-based corporate lawyer Ramona Tudorancea will chair and moderate the panel titled “Caribbean Offshore Jurisdictions as Stepping Stones for Cross-Border Investments in the Americas“, scheduled as part of the Miami Fall Meeting of the Section of International Law of the American Bar Association and taking place at the JW Marriot Marquis, Met Ballroom 4, starting 4.30 PM.

Panelists include James H. Barrett from Baker & McKenzie LLP (Miami), Fernanda Bastos from Buhatem, Souza, Cescon, Barrieu & Flesch Advogados (Brazil), Pablo Falabella from Bulló Abogados (Argentina), Fabian A. Pal (Miami), and Kevin P. Scanlan from Kramer Levin Naftalis & Frankel LLP (New York).

The panel is sponsored by the Lawyers Abroad Committee (LAC), where Ms. Tudorancea currently serves as a Vice-Chair of Publications, and co-sponsored by the International M&A and Joint Venture Committee, the Latin America and Caribbean Committee, and the International Tax Committee.

The protection of intellectual property (IP) rights in the Cayman Islands and in the British Virgin Islands (BVI) depends on the type of IP right (e.g. trademarks, patents and designs). The Cayman Islands and the BVI are British Overseas Territories and so the nature of IP protection in each jurisdiction is historically influenced by UK IP protection laws.

Which Agency administers Intellectual Property?

Cayman: Laws relating to IP in the Cayman Islands are administered by the Cayman Islands Intellectual Property Office (CIIPO).

BVI: Laws relating to IP in the BVI are administered by the BVI Office of the Registrar of Trade Marks, Patents & Copyright within the Registry of Corporate Affairs.

Types of Intellectual Property

Trademarks

Cayman Islands: Until 31 July 2017, the Cayman Islands offered trademark protection by way of extension of an existing UK trademark registration and also by the extension of an EU trademark registration; however, direct national filings in the Cayman Islands were not an option. For businesses (both local and foreign) whose interests were principally located in the Americas and the Caribbean, this resulted in increased trademark prosecution costs since they had to first secure protection in a foreign jurisdiction before they could apply in the Cayman Islands. In many cases such businesses would have had no bona fide intention to use the relevant mark in the first filing jurisdictions, thereby falling short of one of the requirements for UK trademark filings and calling into question the validity of the resulting registration of any extensions filed.

BVI: Until 31 August 2015, the BVI offered a dual trademark filing system under which trademark protection could be secured for goods and services on application to extend a UK trade mark registration to the BVI and/or, for goods only, on the filing of a trade mark application directly in the BVI.

Both jurisdictions modernized their trademark laws in 2015 (BVI) and 2017 (Cayman Islands) and as of 1 September 2015 (BVI) and 1 August 2017 (Cayman Islands) it is no longer possible to extend existing foreign trademark registrations to either jurisdiction. All existing trademark registrations were transferred over to the new registers. Since the implementation of the respective changes in law only the direct registration of trademarks in each jurisdiction is permitted.

Each jurisdiction now offers direct registration systems with some key common characteristics, including:

the Nice Classification system as a mode of classifying goods and services under a trademark;
multi-class filings;
similar prosecution processes and formalities: filing, examination, acceptance, publication, registration;
similar criteria for assessing the registrability of a trademark on both absolute and relative grounds;
disclaimer and limitation practices as a condition to registration in certain cases;
similar trademark opposition periods (three (3) months in the BVI and sixty (60) days in the Cayman Islands);
provisions for the registration of certification and collective trademarks;
an initial 10-year duration and renewal term.

Key Differences between Trademark Law and Practice in Cayman Islands and the BVI

Neither the BVI nor the Cayman Islands is party to the Convention for the Protection of Industrial Property signed in Paris on 20 March 1883, as revised or amended from time to time (Paris Convention). But BVI laws allow for the filing of priority-based applications where there is an earlier application in a Paris Convention country and the BVI application is filed within six (6) months of the filing date of the priority application. The BVI also allows for priority-based applications on the basis of an earlier application in a World Trade Organisation member country within the same six-month window.
The BVI allows for cases of trademark infringement to be brought on the basis of a trademark entitled to protection under the Paris Convention as a well-known trademark; the defensive registration of well-known trademarks is also allowed.
Whilst both the Cayman Islands and the BVI follow the Nice Classification when examining specifications of goods and services, office actions based on specification queries are more commonly issued in the Cayman Islands where terms from WIPO’s Nice Classification database and the Harmonised List of the EUIPO TMclass database are not used (terms from these lists are automatically accepted). Class headings are also accepted in the Cayman Islands subject to certain general indications as outlined in Practice Note 02/2017 issued by the CIIPO.
Trademarks which are not put to genuine use in the BVI within three (3) years of the date of registration are subject to revocation where there is no valid reason for non-use. There is no procedure to revoke a trademark registration in the Cayman Islands on grounds of non-use, although revocation actions may be brought on other grounds (for example, where a particular trademark no longer functions as a trade mark on its becoming common in the trade).
Series marks registered under the repealed trademarks law in the Cayman Islands must be divided into individual trade mark registrations on or before the next renewal date. The current trademarks law does not allow for the filing of series marks. However, the BVI legislation does allow for the registration of series marks.
Annual fees fall due every 1 January in the Cayman Islands for the life of a trademark registration. Where annual fees are unpaid by 31 March of each year, the rights protected by the registration are in abeyance until annual fees and late penalty fees are paid up to date. This means that registered rights cannot be enforced against third parties until all annual fees and late fees are paid up to date as registered rights are not considered to be in good standing. The BVI does not have an annual fees regime for trademarks.

Designs

Proprietors of UK-registered designs enjoy the same rights and privileges in the BVI as they do in the UK without any need to re-register. Designs registered in the UK automatically extend to the BVI for the life of the UK registration. Local publication of the design in the BVI is nevertheless advisable to put the public on notice of rights in and to the registered design.

Prior to 1 August 2017 there was no protection for designs in the Cayman Islands. On 1 August 2017, the Cayman Islands introduced an indirect registration process. The Design Rights Registration Act, 2016 enables proprietors of UK and EU Registered Design Rights to extend their Registered Design Rights to the Cayman Islands and renew such rights for so long as they are renewed and valid in the UK or EU respectively. There is no substantive examination, and no opposition or invalidation procedure. However, there is a requirement to pay annual fees every 1 January for the life of the registration and, where unpaid for more than 12 months, registrations are liable to cancellation by the Registrar.

Most recently, the Designs Rights Act, 2019 was passed in the Cayman Islands to allow for the direct registration of designs. Designs are defined therein as “the design of the shape or configuration (whether internal or external) of the whole or part of an article”. This legislation is not yet in practical effect.

Patents

Both the BVI and the Cayman Islands allow for the indirect registration of patents. Once a UK or EP(UK) patent is granted, an application can be made in either jurisdiction to extend the scope of protection. In the Cayman Islands, there is no deadline for the filing of the application to extend rights, whereas in the BVI, rights must be extended within three (3) years from the date of issue of the UK patent. The length of protection in each jurisdiction once rights are extended or re-registered is dependent on that of the underlying UK or EP(UK) patent. If the underlying patent expires or becomes invalidated, so does the corresponding patent in each jurisdiction.

In the Cayman Islands, an annual fee must be paid for the life of the patent in order to keep registered rights in good standing. A default in the payment of the annual fee causes registered rights to be held in abeyance until all annual fees and, including any penalties for late payment, are paid up to date. Furthermore, default in the payment of the annual fees and penalties for more than 12 months may result in registered rights being cancelled by the Registrar. In the BVI, each time an annuity or renewal fee is paid in the UK in respect of a patent that has been extended to the BVI, certified proof of same should be provided to the BVI Registry along with payment of the corresponding local renewal fee.

The Cayman Islands legislation also includes some anti-patent trolling provisions to prevent abuse by patent trolls (otherwise called Patent Assertion Entities). A patent troll is a person or entity which holds and enforces patents in an aggressive and opportunistic manner, often with no intention of marketing or promoting the subject of the patent. In other jurisdictions, particularly in the U.S.A., the activities of patent trolls have imposed considerable economic burdens on the creative pursuits of others involved in development and commercial exploitation of IP. The experience in those jurisdictions is that software patents are particularly prone to such abuse. The anti-patent trolling provisions of the Cayman Islands’ patent legislation are designed to limit persons from making assertions of patent infringement in bad faith. In addition to the general prohibition on such bad-faith assertions, the legislation includes a statutory remedy for those aggrieved by the actions of patent trolls. Furthermore, the Cayman courts will not recognise or enforce a foreign judgment to the extent the claim is based on an assertion of patent infringement made in bad faith.

Notably, the BVI also has a Patents Act (Revised 2020) that allows for the direct registration of patents. However, applications for such patents are not currently accepted by the Registry in practice and this is unlikely to change in the near future.

Copyright

An amended version of the UK’s Copyright Act of 1956 was extended to the BVI under The Copyright (Virgin Islands) Order 1962 and continues to be in effect today. Until 30 June 2016, copyright protection in the Cayman Islands was also by way of extension of the UK’s 1956 Act via the Copyright (Cayman Islands) Order 1965 (the 1965 Order). However, on 30 June 2016, Part 1 of the UK’s Copyright, Designs and Patents Act 1988, subject to certain exclusions and modifications, was extended to the Cayman Islands. This was a significant development for the Cayman Islands, and the first step in the Cayman Islands’ Government’s plans to reform and modernize intellectual property laws generally.

In keeping with the approach taken by the UK and many other countries around the world, no copyright registration procedure is in place in either jurisdiction. Instead, protection arises automatically once the work is recorded, in writing or otherwise.

Conclusion

The recent development of IP laws in the Cayman Islands and the BVI has significantly increased the ability of businesses, entrepreneurs and developers of new technology (for example, with respect to Blockchain technology) to protect, exploit and enforce their IP rights.

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Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Legal Insight, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: ivy.wong@loebsmith.com
E: edmond.fung@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: cesare.bandini@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

Introduction

New listing rules published by the Cayman Islands Stock Exchange (the “CSX”) in April 2017 will enable an easier listing of pre-IPO and early stage growth companies as “Specialist Companies” pursuant to a new Chapter 14 of the CSX listing rules. The ownership and transfer of the securities issued by such companies will be restricted to qualified investors.

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The CSX, which already attracts international issuers with an aggregate market capitalization in excess of USD 200 billion, could become even more successful with this new development, as early-stage investors are provided with an early exit and/or additional liquidity.

The New “Specialist Companies” Listing Regime

1. Start-Up Favourable. Section 14.2 of the CSX listing rules now provides for the possibility for companies without a two-year audited financial statements track record (the equivalent of a start-up company) to be listed if they:

satisfy the CSX that acceptance of a shorter period is in the interest of the company or of the investors and the investors have access to such financial and other information deemed necessary or appropriate in order to make an informed investment decision; or
provide to the CSX a detailed business plan, information on capital expenditure and working capital requirements for a period of at least two years following the listing and a statement explaining how these requirements will be met (existing resources, revenue, proceeds of the offering at the time of listing, etc.).

For start-ups, Section 6.18 of the CSX listing rules specifically requires that the CSX be provided with a detailed business plan which must identify, as appropriate:

strategic objectives;
key products, services and markets;
development milestones;
current and expected market competitors;
risks and assumptions upon which the plan is based; and
details of reliance upon any key individuals;

Other conditions and requirements for start-ups include:

providing an explanation of capital expenditure plans and financial commitments together with the funding requirements of the business for a period of at least two years following the listing and a statement explaining how these requirements will be met (same condition as stated in Section 14.2 (c));
at the discretion of the CSX, providing an independent expert report on the viability of the company’s commercial objectives and business plan;
providing a confirmation that the issuer’s directors, senior managers and substantial shareholders will not dispose of the securities for at least twelve (12) months (the “Lock-Up Period”) following admission to listing, without the prior approval from the CSX; and
where the prospective issuer’s activity relates to the development of innovative technology, demonstrating the company’s ability to attract funds from qualified investors.

2. Restricted to Qualified Investors. The listing under the ‘specialist companies’ regime requires that the ownership and transfer of the equity or debt securities be restricted to qualified investors only, namely those investors that:

are “qualified purchasers”, as defined by the CSX listing rules (i.e. an individual who owns not less than US$1,000,000 in investments or any entity which in the aggregate owns not less than US$5,000,000 in investments); and
represent in writing to the issuer that they are particularly knowledgeable in investment matters or they are a director or manager of the issuer and are particularly knowledgeable in investment.

Also, a declaration must be included on the cover page of the listing document, with the investors representing that:

they have the knowledge and experience in financial and business matters to enable them to evaluate the merits of a proposed transaction and investing in the issuer;
they are aware of the risks inherent in investing in the securities; and
they can afford the loss of their entire investment

This is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Ramona Tudorancea

Corporate / M&A Specialist
E ramona.tudorancea@loebsmith.com
W www.loebsmith.com

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Renewal of Director registration

Directors who are registered with CIMA in accordance with The Directors Registration and Licensing Law, 2014 (“DRLL”) in connection with being a Director of an entity that is registered with CIMA (e.g. registered Mutual Fund or an investment management or investment advisory entity that has “Excluded Person” status under the Securities Investment Business Law (2015 Revision)) (a “Covered Entity”) should by this time of the year have received a reminder from CIMA to renew registration via the CIMA portal https://gateway.cimaconnect.com/. A Director should renew his or her registration with CIMA if he or she will continue to be a Director of one or more Covered Entity that either (1) will carry on business for some or all of 2017, or (2) is in the process of winding down such business but the process will not cease prior to 31 December 2016.

Resignation of from a covered entity

CIMA has stated^[i] that if a Director no longer wishes to be registered or licensed as a Director of a Covered Entity, the Director must liaise with the Covered Entity’s registered office and ensure that CIMA receives written resolutions or an updated register of directors, stamped by the Registrar of Companies, to duly notify CIMA of the Director’s resignation from that Covered Entity.

Resignation of a Director from a Covered Entity will not automatically result in a surrender of the Director’s registration or licence under the DRLL.

Surrender of Director registration

CIMA has also stated^[ii] that if a Director no longer wishes to be registered or licensed as a Director in accordance with the DRLL, he or she must first resign as a Director of all Covered Entities, then log into the CIMA portal, complete the requisite information under “Surrender”, and pay the relevant surrender fee (US$731.71).

Once the Director has paid the surrender fee, CIMA will check its records to confirm that the Director is no longer listed as a Director on any Covered Entity. If he or she remains as a Director on a Covered Entity, CIMA has stated that it will be unable to process the Director’s surrender application.

In addition to submitting the surrender fee, the Director is required to submit a formal letter which MUST contain the following information:

that he or she has resigned as a Director of all Covered Entities
that he or she no longer plans to act as a Director on any Covered Entity; and
that if he or she would like to act on any other Covered Entity or wishes to resume directorship services after he or she has surrendered his or her registration or licence, he or she will re-apply under the DRLL.

The Director is responsible for updating his or her records accordingly and must complete the requirements to surrender his or her registration or licence before the 31st December in order to avoid accruing next year’s annual fees, as well as penalties calculated at 1/12th of the annual fee for every month or part of a month after the 15th of January in each year that the fee is not paid.

As stated above, Directors who will continue to provide directorship services and wish to remain current with their registration or licence status under the DRLL MUST, on or before the 15th of January in each calendar year, renew their registration or licence through the CIMA portal.

For specific advice on renewal or surrender under the DRLL or resignation from a Covered Entity, please contact any of:

E gary.smith@loebsmith.com
E ramona.tudorancea@loebsmith.com
E yun.sheng@loebsmith.com

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[i] CIMA’s Supervisory Issues & Information Circular– Second Edition issued in October 2016
[ii] CIMA’s Supervisory Issues & Information Circular– Second Edition issued in October 2016

In the prevailing economic conditions, investors in offshore companies registered in the Cayman Islands or the British Virgin Islands (“BVI”) are increasingly being forced to consider their rights against directors who may have been responsible for mismanagement of the company’s affairs. Minority shareholders, in particular, are keen to understand the availability of remedies which allow them to overcome “wrongdoer control”. That is to say, the common situation where the composition and direction of the board is controlled by majority shareholders. We have set out below a brief summary of the duties owed by directors and the remedies available to shareholders in each of these jurisdictions.

What is scope of director’s duties?

Cayman Islands

The duties of a director of a Cayman Company are found in the common law and include the duty to act bona fide in the best interests of the company, a duty not to exercise his or her powers for purposes for which they were not conferred and not to make secret profits.

British Virgin Islands

The law governing the “duties of directors and conflicts” is set out in Division 3 of Part VI of the BVI Business Companies Act, 2004 (as amended) (the “Act”). These largely mirror the position at common law and include, for example, (a) the duty to “act honestly and in good faith and in what the director believes to be in the best interests of the company”(s.120); (b) the duty to exercise powers “for a proper purpose” and a requirement that a director “shall not act, or agree to the company acting, in a manner which contravenes this Act or the memorandum or articles of the company (s.121)”; and a requirement that “a director of a company shall forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board of the company (s.124). It is interesting to note that subsections 120 (2)-(4) of the Act provide that a director of a company that is a wholly-owned subsidiary, subsidiary or joint venture company may, subject to certain requirements, act in the best interests of the relevant parent, or in the case of the joint venture company, the relevant shareholders even though such act may not be in the best interests of the company of which he is a director.

What are the standard director’s duties?

Cayman Islands

The common law applies to the Cayman Islands such that a director is under a duty to act with reasonable care, skill and diligence in the performance of his or her duties. In the English authority of Re City Equitable Fire Insurance Co [1925] Ch. 407 it was held that “a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. This highly subjective test, however, has been met with increasing criticism in more recent years and there is further English authority to suggest that directors are nevertheless subject to an objective duty to “take such care as an ordinary man might be expected to take on his own behalf” (Dorchester Finance Co v Stebbing [1989] BCLC 498 (decided in 1977)). As such, a distinction appears to be drawn between the duty of skill on the one hand and the duty to take care on the other. However, in Re City Equitable Fire Insurance Co it was further held that “in respect of all duties that, having regard to the exigencies of business, and the articles of association, may be properly left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting to that official to perform such duties honestly.”

British Virgin Islands

Section 122 of the Act provides that “A director of a company, when exercising powers or performing duties as a director shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation:

(a) the nature of the company;

(b) the nature of the decision; and

This duty is qualified by s. 123 to the extent that the director of a company is entitled to rely upon the books of the company in question and/or employees and professional advisers provided that in doing so he or she acts in good faith, undertakes a proper inquiry where this is warranted and has no knowledge of a reason for not placing reliance on the said books and records.

What are the key remedies available to a member or shareholder?

Cayman Islands

The following remedies are available to a member of a Cayman Company:

(a) A personal action against the company (where the company has breached a duty which is owed to the member personally);

(b) A representative action (similar to a personal action such a claim would lie for breach of a duty owed to a group of shareholders)

A petition to wind up the company on just and equitable grounds. (This is seen as a last resort because it risks placing the company into liquidation although s.95(3) of the Companies Law (2013 Revision) (the “Law”) provides the Court with the option of making an alternative order. See below).

British Virgin Islands

The members of a BVI company may pursue the following remedies:

(a) A personal action pursuant to section 184G of the Act (on the same grounds as at common law in the Cayman Islands)

(b) A representative action pursuant to section 184H which provides that the Court may appoint a member “to represent all or some of the members having the same interest and may, for that purpose, make such order as it thinks fit, including an order (a) as to the control and conduct of the proceedings; (b) as to the costs of the proceedings; and (c) directing the distribution of any amount ordered to be paid by a defendant in the proceedings among the members represented.

(d) An unfair prejudice claim pursuant to section 184I.

What are derivative claims and what is their legal basis?

Cayman Islands

A derivative action is a claim commenced by one or more minority shareholders on behalf of a company of which they are a member in respect of loss or damage which that company has suffered. Such a claim can only be brought in certain circumstances and amounts to an exception to the rule that a company, as a separate legal person, should sue and be sued in its own name (often referred to as the rule in the English authority of Foss v Harbottle (1843) 2 Hare 461; 67 E.R 189). In the Cayman Islands the law governing derivative actions is drawn from the common law rather than statute.

British Virgin Islands

While the English common law applies in the British Virgin Islands “members remedies” have been given a statutory footing in Part XA of the Act (see below).

What is the procedure for commencing a derivative action?

Cayman Islands

As with the majority of actions commenced in the Cayman Islands, derivative claims are normally begun by serving a writ and statement of claim on the relevant defendant or defendants. Grand Court Rules O.15, r. 12A provides that where the defendant gives notice of an intention to defend the claim then the plaintiff must apply to the Court for leave to continue the action. Such an application should be supported by affidavit evidence verifying the facts on which the claim and entitlement to sue on behalf of the company are based. Pursuant to Grand Court Rules O.15 r.12A(8) on the hearing of the application, the Court may grant leave to continue the action for such period and upon such terms as it thinks fit, dismiss the action, or adjourn the application and give such direction as to joinder of parties, the filing of further evidence, discovery, cross-examination of deponents and otherwise as it considers expedient. In Renova Resources Private Equity Limited v Gilbertson and Others [2009] CILR 268, Foster., J affirmed the application in the Cayman Islands of the test to be applied in determining whether to grant leave to continue the action put forward by the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch 257. Foster, J., held that: “(…) there are two elements to this: first the plaintiff [is] required to show prima facie that there [is] a viable cause of action vested in the company and, secondly, that the alleged wrongdoers [have] control of the company (or could block any resolution of the company or the board) and thereby prevent the company bringing an action against themselves.”

British Virgin Islands

Section 184C (1) of the Act provides that subject to certain exceptions “the Court may, on the application of a member of a company, grant leave to that member to (a) bring proceedings in the name and on behalf of that company; or (b) intervene in the proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.” Section 184C(2) provides that “without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account: (a) whether the member is acting in good faith; (b) whether the derivative action is in the interests of the company taking account of the views of the company’s director’s on commercial matters; (c) whether the proceedings are likely to succeed; (d) the costs of the proceedings in relation to the relief likely to be obtained; and (e) whether an alternative remedy to the derivative claim is available.” Pursuant to subsection (3) leave to bring or intervene in proceedings may be granted “only if the Court is satisfied that: (a) the company does not intend to bring, diligently continue or defend or discontinue the proceedings as the case may be; or it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole. Such an application for leave should be made to the Court supported by affidavit evidence.

Is it possible to bring multiple derivative claims (“MDCs”)?

Cayman Islands

In Renova the Grand Court held that in appropriate circumstances MDCs would be permitted. In that case, the plaintiff had brought an action in respect of loss incurred by a wholly-owned subsidiary of the company in which it was a shareholder and therefore loss to the subsidiary caused indirect loss to its parent company and shareholders. However, the rule against the recovery of reflexive loss applied such that a shareholder or parent company would not be permitted to claim for indirect losses which mirrored those losses suffered directly by the relevant subsidiary or indeed sub-subsidiary on who behalf action was being brought.

British Virgin Islands

In Microsoft Corporation v Vandem Ltd BVIHCVAP2013/0007 the Eastern Caribbean Court of Appeal held that BVI law which has been codified in this area “does not permit double derivative actions.” That said, recent English authority such as Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR concerning the interpretation of s.260 the English Companies Act, 2006 may open up arguments that such actions are nevertheless available in the jurisdiction at common law.

What remedies are available for unfair prejudice and what is their legal basis?

Cayman Islands

Pursuant to section 92 of the Companies Law (2013 Revision) the Court may wind up a company if it is of the opinion that it would be just and equitable for it to do so. Section 95(3) provides that where such a petition “is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court shall have jurisdiction to make the following orders, as an alternative to a winding-up order, namely –

(a) an order regulating the conduct of the company’s affairs in the future;

(b) an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do;

(c) an order authorising civil proceedings to be brought in the name of and on behalf of the company by the petitioner on such terms as the Court may direct; or

an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.

British Virgin Islands

Section 184I of the Act provides that “a member of a company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him in that capacity, may apply to the Court for an order under this section.” Section 184I(2) provides that “if on an application under this section, the Court considers it just and equitable to do so, it may make such order as it thinks fit, including, without limiting the generality of this subsection, one or more of the following orders:

(a) in the case of a shareholder, requiring the company or any other person to acquire the shareholder’s shares;

(b) requiring the company or any other person to pay compensation to the member;

(d) amending the memorandum and articles of the company;

(e) appointing a receiver of the company;

(f) appointing a liquidator of the company under section 159(1) of the Insolvency Act on the grounds specified in section 162(1)(b) of that Act;

(g) directing the rectification of the records of the company;

setting aside any decision made or action taken by the company or its directors in breach of this Act or the memorandum or articles of the company.

This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and general guidance only. For more specific advice on the laws in the Cayman Islands, please contact:

E gary.smith@loebsmith.com

E ramona.tudorancea@loebsmith.com

E yun.sheng@loebsmith.com

Introduction

On 9 February 2016, Clifford J., sitting in the Financial Services Division of the Grand Court of the Cayman Islands gave Judgment in In Re Torchlight Fund L.P. (unreported) reaffirming the principles which the Court will take into account in determining whether to grant a validation order. This article seeks to provide a summary of these factors, which will be of particular interest to the directors of a solvent company or the general partner of a solvent exempted limited partnership against whom a petition for winding-up has been made but not yet granted. This typically arises where shareholders or limited partners are in dispute with the management of the entity and have filed a petition on just and equitable grounds. It should be noted that pursuant to section 95(3) of the Companies Law (2013 Revision) (the “Law”), upon the presentation of a petition on such grounds, the Court has a number of alternative remedies available to it other than insolvency and include, for example, an order regulating the conduct of the entity’s affairs in the future (s.95(3)(a)).¹

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What is a “validation order”:

A validation order is one made pursuant to section 99 of the Law which provides as follows:

“When a winding-up order has been made, any disposition of the company’s property and any transfer of shares or alteration of the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.”

By section 100(2) of the Law, the winding-up of a company, and by extension an exempted limited partnership, is deemed to commence at the time of the presentation of the petition to the Court for winding up. As a consequence, directors and general partners need to take care that they do not fall foul of section 99 of the Law in the twilight between the presentation of the petition for winding up to the Court and the granting of the winding-up order by the Court, for which they may become personally liable.

It is therefore common for executives of solvent entities to apply to the Court for a prospective validation order in respect of payments and dispositions which are to be made in the ordinary course of business and in order to enable the entity to continue trading in the interim.

The test following In Re Torchlight Fund L.P.

Clifford, J., reviewed the authorities in the area which have their origin in relation to the interpretation of equivalent statutory provisions at English law.² The learned Judge cited the dicta of Henderson, J., in the Grand Court in In Re Fortuna Development Corporation [2004-2005] CILR 533 in which the Court held that “there are four elements which must be established before an applicant is entitled to a validation order”. These may be summarised as follows:

the proposed disposition must appear to be within the powers of the directors;
the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company;
it must appear that in reaching the decision the directors have acted in good faith (the burden of establishing bad faith is on the party opposing the application); and
the reasons for the disposition must be shown to be ones which an intelligent and honest director could reasonably hold.

Clifford J. held that these elements:

“have to be established by evidence, even if this has the effect in relation to the third element, of shifting the burden of establishing bad faith on the party opposing the application. There has to be a body of evidence relevant to the required elements for the Court to consider in exercising its discretion.”

In In Re Torchlight Fund L.P. the partnership’s evidence was found to be insufficient for these purposes. For example, the partnership failed to produce specific information concerning the inflow of money and details of the proposed payments to be made. In that case, the Petitioners were particularly concerned about payments being made to related parties.

A fifth element – irregularities in the affairs of the entity

Clifford J., went on to note that these four “elements” had been taken a stage further by the Chief Justice of the Grand Court in In Re Cybervest Fund [2006] CILR 80 in which the Court had refused to make a validation order in respect of management fees on the footing that, where there could be shown to be irregularities in the conduct of the company’s affairs, it by no means followed that because the company was solvent and able to pay its debts as they fell due the conduct of the company’s business should be continued, potentially at the expense of its investors. The Chief Justice held:

“There is another consideration to add to this list, in light of the concerns raised in the matter, although arguably it is subsumed within the third and fourth elements. This would be whether irregularities in the conduct of the affairs of the company can be shown, even of the company is clearly solvent, as is alleged here.”

Indeed, in both In Re Cybervest Fund and In Re Torchlight Fund L.P., the Grand Court that those cases concerned irregularities in the conduct of the affairs of the company and exempted limited partnership respectively which went to the very core of the question of what can properly be regarded as being in the ordinary course of business that it would not be proper to make a general validation order in the form sought.

Notes:
1. The provisions relating to the winding-up of companies under Part V of the Law apply (with a few exceptions) to exempted limited partnerships pursuant to s.36(3) of the Exempted Limited Partnership Law, 2014.
2. See, for example, Re Burton & Deakin Ltd [1977] 1 All ER 631 and Re a company (No 005685 of 1988), ex parte Schwarcz and another [1989] BCLC 424 (both cited by Clifford, J., in his learned Judgment).

For more information on shareholder disputes in Cayman Islands’ companies- please contact:

David Harby

Head of Commercial Disputes and Litigation
E david.harby@loebsmith.com
W www.loebsmith.com

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New Enforcement Powers for CIMA to impose Administrative Fines on Cayman Islands’ Regulated Funds and Investment Managers are now in Force.

Introduction

The Monetary Authority (Amendment) Law, 2016 (the “Amendment Law“) which was enacted near the end of 2016 but only came into force on 15th December 2017 gives the Cayman Islands Monetary Authority (“CIMA“) the power to impose administrative fines for non-compliance on entities and individuals who are subject to Cayman Islands regulatory laws (e.g. the Mutual Funds Law, the Securities Investment Business Law, and the Directors Registration and Licensing Law) and/or the Anti-Money Laundering Regulations, 2017 (“AML Regulations“).

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Persons Affected

CIMA’s new powers to impose administrative fines for breach of, or non-compliance with, regulatory laws and/or the AML Regulations will cover, among others:

1. investment funds registered with CIMA;
2. investment management/advisory companies registered with CIMA (including those registered as an “Excluded Person” under the Securities Investment Business Law);
3. individuals who are Directors of entities covered under i. and ii. above (irrespective of whether or not the Director is resident in the Cayman Islands) and are registered with CIMA.

Types of Fines

For a breach prescribed as minor, the fine will be CI$5,000 (approx. US$6,000). For a breach prescribed as minor, CIMA also has the power to impose one or more continuing fines of CI$5,000 each for a fine already imposed for the breach (the “initial fine”) at intervals it decides, until the earliest of the following to happen:

(a) the breach stops or is remedied;

(b) payment of the initial fine and all continuing fines imposed for the breach; or

For a breach prescribed as serious, the fine is a single fine not exceeding: (a) CI$50,000 (approx. US$61,000) for an individual; or (b) $100,000 (approx. US$122,000) for a body corporate. For a breach prescribed as very serious, the fine is a single fine not exceeding: (a) CI$100,000 (approx.US$122,000) for an individual; or (b) CI$1,000,000 (approx. US$1,220,000) for a body
corporate.

CIMA will have six (6) months from becoming aware of a minor breach, or having received information from which the fact of the breach can be reasonably inferred, to impose a fine. There is a two (2) year time limit in respect of the imposition of fines for serious or very serious breaches.

Fines may be imposed even if the relevant breach is not a criminal offence. If a breach is also an offence, the imposition by CIMA of a fine will not preclude separate prosecution for that offence (or be limited by the penalty stipulated for that offence). Equally, any prosecution will not preclude the imposition of administrative fines or penalties.

The Monetary Authority (Administrative Fines) Regulations 2017, which also came into force on 15th December 2017 sets out, among other things, rules and guidance regarding the amount of fines, different categories of breaches, the criteria for exercising fine discretions, including procedures of imposing fines, appeals, payment and enforcement.

For specific advice on the imposition of administrative fines by the Cayman Islands Monetary Authority, please contact any of:

E gary.smith@loebsmith.com

E ramona.tudorancea@loebsmith.com

E yun.sheng@loebsmith.com

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The U.S. Internal Revenue Service (“IRS”) has issued a Notice which postpones by six months, from 1 January, 2014 to 1 July, 2014, the effective date for certain requirements under the Foreign Account Tax Compliance Act (“FATCA”).

Among other things, foreign financial institutions (“FFIs”) will not be required to register with the IRS or, where applicable, enter into an FFI agreement with the IRS until June 30, 2014. The IRS will publish the first list of global intermediary identification numbers (“GIINs”) by June 2, 2014, with monthly updates to follow. In order for an FFI to be on the first published list of GIINs, it now will need to register by April 25, 2014.

A copy of the full text of the Notice can be found here.

http://www.irs.gov/pub/irs-drop/n-13-43.pdf

We will be issuing a full legal update on the implications of FATCA for Cayman Islands financial institutions once the terms of the Cayman Islands Government’s Model 1 Intergovernmental Agreement (“IGA”) have been finalized.

If you have any questions regarding the matters covered in the Alert above, please contact the Attorney below or your usual Loeb Smith & Brady contact:

Daniel Loeb
+44 207 183 7966
daniel.loeb@loebsmith.com

The Cayman Islands Government (CIG) announced on 15 March 2013 its intention to adopt a Model 1 intergovernmental agreement (IGA) in response to the U.S. Foreign Account Tax Compliance Act (FATCA).

It was also confirmed by the CIG that a similar arrangement will apply for the automatic exchange of certain information with the United Kingdom.

The Model 1 IGA is an agreement between governments for automatic exchange of tax related information. For the Model 1 IGA, relevant financial institutions domiciled in the Cayman Islands will not be required to sign an agreement with the United States Internal Revenue Service (IRS) but instead these financial institutions will be required to report FATCA Information to the CIG, which will then be responsible for communicating this information to the IRS. The alternative Model 2 IGA requires relevant financial institutions to sign up to individual agreements with the IRS and to relay the tax related information directly to the IRS.

The decision to adopt a Model 1 IGA is good news for financial institutions, investment funds, structured finance and securitisation vehicles domiciled in the Cayman Islands as it will simplify their FATCA compliance requirements and provided they comply with Cayman Islands law and regulations enacted to implement the Model 1 IGA, they will:

be treated as being compliant with FATCA;
not be subject to withholding tax (unless they are opted into the U.S. qualified intermediary regime); and
be considered “registered deemed-compliant” foreign financial institutions.

If you have any questions regarding the matters covered in this publication, please contact the Attorney below or your usual Loeb Smith & Brady contact:

Daniel Loeb
+44 207 183 7966
daniel.loeb@loebsmith.com

As 22 July 2013 looms ever closer, as part of our continuing legal update series on this topic, this Guidance Note seeks to consider the impact of the Alternative Investment Fund Managers Directive (the “Directive”) for non-EU Managers who manage Cayman Islands domiciled funds.

The Directive entered into force on July 21, 2011 with European Union Member States (“Member States”) having until July 22, 2013 to implement it into their domestic laws. The Directive broadly aims to create a single harmonized European Union (“EU”) regulatory framework for EU-domiciled investment managers (“Managers”) of alternative investment funds (“AIFs”). It also sets out a regime for the marketing in the EU of both EU AIFs and non-EU AIFs by non-EU Managers.

What is an AIF?

AIFs are defined as collective investment undertakings (including any related investment compartments) which “raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors.” EU AIFs are AIFs which are either (i) authorized or registered in a Member State or (ii) have their registered office and/or head office in a Member State. Any AIF that is not an EU AIF is a non-EU AIF. Family office vehicles would fall outside of the definition of an AIF. There is also a specific carve out for Undertakings for Collective Investment in Transferable Securities (UCITS).

Key Points

At this stage in the process, the main points for non-EU Managers seeking to market non-EU AIFs to EU investors are that:

From July 22, 2013, non-EU Managers may continue to make use of Member States’ existing private placement regimes provided that:
- they comply with certain disclosure and transparency requirements;
- appropriate information sharing agreements are in place between the relevant Member State and the jurisdictions of establishment of both the non-EU AIF and the non-EU Manager; and
- neither the non-EU AIF nor the non-EU Manager are established in a jurisdiction that is designated as non-cooperative by the Financial Action Task Force (“FATF”) (the “Three Conditions”).
Between 2013 and 2015, non-EU Managers can market non-EU AIFs to professional investors in each EU Member State under the relevant Member State’s private placement regime.
In 2015 (two years after the implementation of the Directive into the domestic laws of each EU Member State) non-EU Managers may, subject to advice from ESMA on the extension of the regime to non-EU Managers, take advantage of a pan-EU passport in respect of their marketing and management activities. They will be required to be authorised by the relevant EU competent authority (i.e. the supervising authority in the relevant EU Member State) and they will be required to comply with all the provisions in the Directive and certain other requirements as the AIF is established in a non-EU jurisdiction (e.g. the Cayman Islands) including: (i) cooperation arrangements, (ii) tax information sharing, and (iii) the non-EU AIF must not be established in a jurisdiction that is designated as non-cooperative by FATF.
Member State private placement regimes may continue at the discretion of Member States but, following a review and the issue of technical advice by ESMA (anticipated to be in 2015), private placement regimes in Members States may be gradually phased out (anticipated in 2018).

The Three Conditions

Disclosure and transparency condition

In order to be able to continue marketing Cayman Islands funds throughout the EU, non-EU Managers will have to be in compliance with the following disclosure and transparency provisions of the Directive:

Annual report: non-EU Managers must make available to investors and to the appropriate securities regulatory authority in the relevant Member State, an annual report for each financial year. The annual report must contain, among other things, a balance sheet or a statement of assets and liabilities, an income and expenditure account for the financial year, the total remuneration for the financial year paid by the non-EU Manager to its staff members, the number of beneficiaries and, where relevant, carried interest paid by the non-EU AIF, and (i) the aggregate remuneration for senior management and (ii) the aggregate remuneration of staff whose actions have a material impact on the risk profile of the AIF.

Disclosure to investors: in respect of each AIF that it markets to investors in the EU, non-EU Managers must make available certain information to potential investors including details of the investment strategy, objectives of the AIF and techniques the non-EU Manager may employ and all associated risks, any applicable investment restrictions, the AIF’s valuation procedure and pricing methodology, the AIF’s liquidity risk management (including redemption rights), a description of all fees, charges and expenses (and the maximum amounts borne directly or indirectly by investors), and a description of any preferential treatment afforded to an investor (e.g. by way of a side letter). Investors must also be notified of any material changes to the information provided.

Reporting obligations to competent authorities: in respect of each non-EU AIF that they market to potential investors in the EU, non-EU Managers are required to make a number of disclosures to the relevant Member State’s competent authority, including disclosure of the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature, the risk profile of the AIF and risk management systems employed, and disclosure of the main categories of assets in which the AIF is invested. Non-EU Managers are also required, where they employ substantial leverage, to make available to the relevant competent authorities information about the overall level of leverage used by the relevant AIF.

Information sharing agreements condition

The European Securities and Markets Authority (“ESMA”), the pan-EU securities regulator, announced approval on 22 May 2013 of the necessary cooperation agreements under the Directive with 34 securities regulators outside of the EU. The Cayman Islands Monetary Authority (“CIMA”), being the securities regulator in the Cayman Islands, was included.

On 11 July 2013, CIMA confirmed in a press release that 25 EU securities regulators have now signed the required cooperation agreements with CIMA. A copy of the full text of the press release from CIMA can be found here:

http://www.cimoney.com.ky/about_cima/about_feed.aspx?id=2147484023

The signature of these cooperation agreements was a condition under the Directive to permit the continued marketing of AIFs domiciled in the Cayman Islands (and generally outside the EU) under the relevant EU Member State private placement regimes. The Cayman Islands have therefore satisfied the second condition in respect of the EU Member States specified in the CIMA press release. This will enable the continued marketing of Cayman Islands funds throughout the EU.

FATF Compliance condition

This condition has been satisfied by the Cayman Islands which, by virtue of being, among other things, on the Organization for Economic Co-operation and Development (OECD) “white list” of jurisdictions that have substantially implemented the internationally agreed tax standard for effective exchange of information and transparency, is not listed as a Non-Cooperative Country and Territory by the FATF.

We will continue to provide legal updates on the Directive and its for non-EU Managers who manage Cayman Islands domiciled funds.

If you have any questions regarding the matters covered in this publication, please contact the Attorney below or your usual Loeb Smith & Brady contact:

Daniel Loeb
+44 207 183 7966
daniel.loeb@loebsmith.com