Other than offering a tax neutral jurisdiction for international investors, the Cayman Islands benefit from financial and political stability, a business-friendly regulatory environment, a sophisticated legal regime based on English common law with a respected court system and a pool of highly skilled professional service providers; all of these factors combine to make it a jurisdiction of distinction for equity financing.

The flexibility of Cayman Islands exempted companies is certainly one of their main appeal. For example, Cayman Islands’ corporate law does not require any director or officer of the exempted company to be resident in the Cayman Islands. An exempted company which is not regulated is not required by statutory law to hold an annual general meeting of its shareholders. Equally, there is no statutory requirement for a non-regulated exempted company to undertake an annual audit. More on the advantages of using Cayman Islands exempted companies for investment purposes here: Advantages of Using Cayman Islands Exempted Companies for Investment Purposes and to… – Loeb Smith.

Whilst investors in PE and VC investment companies would ordinarily look to realise their investment within 3-6 years, these exit strategies have been severely impacted in recent years by macro-economic factors and geopolitical developments, which have made it increasingly difficult for investors to exit their investment. In this economic landscape, investors may have to explore less traditional routes to exiting their investment. In this article, we seek to provide some insight on how investors can navigate the not-so-unconventional waters of exit enforcement when issued with preference shares in a Cayman Islands exempted company.

In usual circumstances, the memorandum and articles of association of the exempted company as well as the subscription and shareholders’ agreements are drafted to include various investor protection provisions such as preference dividend rights, liquidity preference rights, exit rights on the occurrence of certain events, and rights to redeem preference shares in the event that anticipated trigger events for an exit do not materialize.

Investors in Cayman Islands exempted companies ought to be aware that under Cayman Islands law, dividends can only be paid out of available profits or from the company’s share premium account, however, in the latter case, such payment can only be made if immediately following the date on which the distribution or dividend is proposed to be paid, the company is able to pay its debts as they fall due in the ordinary course of business. More on dividends and on what constitutes profits here: Payment of dividends by a Cayman Islands company and what constitutes “profits” – Loeb Smith.

Similarly, it should be noted that the Cayman Islands’ Companies Act (As Revised) prescribes that share redemptions and share buybacks can generally only be funded out of profits, out of a company’s share premium account or out of the proceeds of a fresh issue of shares. However, in limited circumstances, a company can make a payment out of capital provided that immediately following the date on which the payment out of capital is proposed to be made, the company is able to pay its debts as they fall due in the ordinary course of business.

Interestingly, in what is a leading authority on the matter, the Cayman Islands Court of Appeal has held that the cash flow test of solvency mentioned above is not confined to consideration of debts that are immediately due and payable but also permits consideration of debts that will become due and payable in the reasonably near future.

The provisions on distribution of the company’s assets on a winding up or a liquidation under Cayman Islands law are also drafted so as to prioritise creditors over shareholders, and within this group, in particular, preferential and secured creditors. The law of voidable preference which is written into the Companies Act may also be invoked in the event the directors of the exempted company had paid a particular shareholder or a redeemed shareholder ahead of other creditors at a time when the company was unable to pay its debts with a view to giving such redeemed shareholder a preference over the creditors. In such circumstances, such transactions would be voidable upon the application of the company’s liquidator if made within six (6) months of the commencement of the company’s liquidation.

Against this backdrop of limitations on dividends, redemptions and distributions are directors’ fiduciary duties. The duties of directors of a Cayman Islands exempted company are found in the common law and include, amongst others, the duty to act in good faith in the best interest of the company. It is important to note that whilst in many circumstances the best interest of the company align with the best interest of its shareholders, this is not always the case, particularly when a company is nearing insolvency. In those circumstances, the directors, as part of their duties, will likely put the company’s creditors’ interests ahead of the interests of its shareholders and may find themselves unable to satisfy redemption requests from shareholders. This is in spite of the investor protection provisions which may have been negotiated into the preference share financing documents.

Notwithstanding the above, there may be benefits in submitting early redemption requests in situations where the company is in financial difficulty. As a first step, however, any shareholder looking to submit a redemption request should familiarize themselves with the procedure and, if necessary, consult with their legal counsel as procedural compliance can often be the difference between a simple shareholder and a creditor. The company’s articles of association and/or shareholders’ agreement usually set out a detailed procedure where certain steps must occur within a strict timeframe for the redemption request to be valid.

Where there has been a valid redemption request which has been accepted but the company has failed to satisfy, such failure has the important effect of raising the investor’s status to that of an unsecured creditor as opposed to a mere shareholder. At this point, the investor/unsecured creditor has the option to either (i) commence legal proceedings, or (ii) issue a statutory demand to the company requiring it to pay the sums owed under the accepted redemption request within twenty-one (21) days of the date of service.

Option (i) (i.e. the commencement of formal legal proceedings), will be subject to whatever terms regarding dispute resolution were contractually agreed between the investor and the company in the preference share financing documents. Arbitration is often found in these types of agreements. Whilst commencing legal proceedings against the company may cause the company to pay the sums owed, these proceedings are often time-consuming and expensive and, in the event such proceedings are successful and the investor comes out with a judgment or an arbitral award in its favour, even then it may be difficult for the investor to enforce judgment that against the company if the company is insolvent as preferential and secured creditors would take priority under Cayman Islands insolvency law.

Option (ii), on the other hand, only requires the investor to issue the company with a formal letter in a prescribed form called a “statutory demand” requiring it to pay the debt owed within a prescribed period or dispute the debt. Should the company fail to engage, this provides rebuttable evidence that the company is unable to pay its debts as they fall due and such evidence can be used as the basis for winding up proceedings against the company. The next step would then be to petition the Cayman Islands court to wind up the company. It should be noted, however, that a public notice will be advertised which will give other interested parties the opportunity to join the proceedings. The scheduled hearing may result in the company being placed into liquidation unless it can raise a substantive defence as to why the debt has not been paid. Once the company is in liquidation, the appointed liquidator will look into its accounts, realise the company’s assets and pay the creditors in ranking order.

One of the defences that companies often raise in winding up proceedings is that of lack of “legally available funds”. This is due to the fact that when it comes to negotiating the initial set of documents for the preference share financing, provisions restricting the payment of redemptions to situations when the company has “legally available funds” will often be drafted into the articles of association and/or the shareholders’ agreement. It then becomes a question of interpretation as to what “legally available funds” actually means in that particular context. Cayman Islands courts have held such term to mean funds owned by the company or funds that the company could obtain by exercising its legal rights, however, such funds would not include any monies which are required for the company’s ordinary course of business. Generally speaking, to the extent that wording has been drafted into the documents and the company does not have sufficient legally available funds to satisfy the redemption requests, Cayman Islands courts are inclined to hold such a defence as a genuine and substantive dispute of the debt and have set aside winding up proceedings on that basis.

As mentioned at option (i) above, arbitration clauses are often drafted into preference share finance documents and Cayman Islands courts would ordinarily grant a stay of a winding up petition based on a disputed debt where the underlying dispute falls within the scope of an arbitration clause. Importantly, however, the stay of winding up proceedings in favour of arbitration is not automatic and the Cayman Islands courts will first need to be satisfied as to the existence of a bona fide dispute on substantial grounds prior to being able to exercise their discretion to stay the petition in favour of arbitration. In other words, the Cayman Islands courts will not stand for any delaying tactics where there does not appear to be a genuine dispute of the debt.

If a company has run into financial difficulties, there may be scope for the company and the investors to come together and agree to a voluntary restructuring. Where a consensual solution cannot be reached with all interested parties, the agreement may take the form of a court-supervised process such as a scheme of arrangement which may have the potential for a better return to investors than a liquidation of the company.

The corporate team at Loeb Smith has extensive experience in advising companies and investors on the negotiation of these finance documents, the enforcement of redemption requests and the implementation of suitable strategies and solutions for financially-stricken companies.

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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 Insight, please contact us.  We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

In Abraaj General Partner VIII Ltd v Abraaj ABOF IV SPV Ltd [2025] CICA (Civ) 8, the Cayman Islands Court of Appeal (“CICA”) clarified the scope of a limited partner’s statutory right to receive “true and full information” under section 22 of the ELP Act. The CICA provided guidance by stating that the section provides a fundamental safeguard for limited partners who are otherwise not entitled to interfere with the business of the ELP, with its purpose being to enable the limited partners to have a “comprehensive understanding” of the business decisions being made on their behalf and the financial consequences of those decisions. What is meant by “full information” in section 22 is to be determined in this context.

How does Section 22 impact on Section 21 of the ELP Act?

Section 21 of the ELP Act requires the general partner (“GP”) of an ELP to keep or cause to be kept proper books of account including, where applicable, material underlying documentation including contracts and invoices, with respect to:

1. all sums of money received and expended by the ELP and matters in respect of which the receipt of expenditure takes place;
2. all sales and purchases of goods by the ELP; and
3. the assets and liabilities of the ELP.

Section 21(2) of the ELP Act states that the proper books of account required to be maintained under section 21 will not be deemed to be properly kept if there are not kept in such a manner as are necessary to give a “true and fair view of the business and financial condition of the exempted limited partnership and to explain its transactions”.

In terms of the connection between the two sections, it is clear that section 22 is very wide in scope and will include all of the books and records maintained by the GP pursuant to its statutory obligation under section 21 of the ELP Act. However, it is also clear that section 22 is wider in scope than section 21 as it requires “information” to be provided, not just documents (books of accounts and underlying documentation), and it requires the information to be “true and full”, not merely “true and fair” as is the case with section 21. The CICA re-confirmed the previous Grand Court decision in Dorsey Ventures Limited v. XIO GP Limited (FSD 38 of 2018, unreported 22 October 2018) that section 22 is much wider in scope than section 21.

In most cases, where proper accounts of the ELP have been maintained with the material underlying documentation, these will provide a substantial part of the information needed by the limited partners to understand “the state of the business and financial condition” of the ELP in response to the section information request.

Interaction with the Limited Partnership Agreement (“LPA”) – can the LPA restrict or exclude the Section 22 right?

Section 22 expressly states that a limited partner’s right to information is subject to the express or implied terms of the LPA.  Accordingly, the statutory right to information may be restricted by the terms of the LPA.

In the Dorsey Ventures case, the GP argued that by expressly conferring a right to audited and unaudited quarterly accounts in the LPA, the parties had impliedly excluded any broader right under section 22. The Grand Court rejected this, holding that there was nothing in the LPA inconsistent with an overriding general right to information under section 22, and that the reasonable man could not have understood the parties to have meant that the limited partner’s right to demand information would be excluded. Accordingly, it would seem that for an ELP to effectively restrict or exclude the right to receive true and full information, it would be prudent to expressly do so in the LPA and use clear and unambiguous language in doing so.

A significant issue is whether GP can refuse a section 22 request from a limited partner by challenging the limited partner’s motive or intentions.

The Court in In the Matter of Gulf Investment Corporation et al v The Port Fund LP et al – FSD 235 of 2019 and FSD 13 of 2020 (RPJ) concluded that the intentions or motives for a limited partner’s request for information are irrelevant. This was supported by the principle that because the statutory right of inspection is expressed in unqualified terms, the motives and bona fides of the partner seeking to exercise it, will be irrelevant.  There is no duty of good faith on the limited partner with respect to such requests. Section 19(2) of the ELP Act states that (subject to any express provisions of the LPA to the contrary) a limited partner does not owe any fiduciary duty in exercising any of its rights or authorities or otherwise in performing any of its obligations under the LPA to the ELP or any other partner.

There is no requirement for a limited partner to provide reasons for the initial information request. It is only if there is a proper basis for contending that categories of information demanded fall outside the operation of section 22 that a limited partner’s right would fail. For example, this would be where the information sought clearly did not relate to the business and financial affairs of the ELP. However, the CICA in the Abraaj case was of the view that once a GP provides information about what documents exist in response to a section 22 request, the onus shifts to the LP to explain why those documents are insufficient, or to identify other documents that exist and would be just as material as those identified by the GP. The LP cannot simply identify a particular document and demand all other documents falling within the same category. A fact-specific investigation is required as to what else is necessary to comply with the statutory obligation. Relevant factors to consider in this investigation will be (i) the nature of the ELP’s business, (ii) its mode of conduct, and (iii) the terms of the governing documents read in the light of current business practice.

1. Ongoing Nature of the Obligation. Once a limited partner makes a relevant demand under section 22, the GP has an ongoing obligation to provide the material, provided it falls within the section. This means the duty does not lapse once a response is given; it continues as new relevant information becomes available.
2. Initial breadth of requests. In ordinary circumstances, the GP may be required to accept a limited partner’s request for information, however widely expressed and this will most likely be the case because of the conceptual difficulty of applying section 22 without knowing what documentation actually exists.
3. Shifting of the evidential burden. The CICA in the Abraaj case was of the view that if the GP provides information about what documents exist, the onus will shift to the limited partner to indicate in what respects the available documentation is insufficient and the existence of other documents which would be just as material as those provided. It will not be sufficient for the limited partner simply to identify the existence of a particular document and demand all documents falling within that category.
4. The “functional test.” The CICA held in the Abraaj case that the test is a functional one, with the focus being on the function of the documents that actually exist, and more broadly, whether the information sought is properly required to allow the limited partner a “comprehensive understanding” of the state of the business and of its investment in it, and of the risks attaching to that investment.
5. Relief must address “real and substantial” issues. Once it is established in principle that relief should be granted, the Court should also be satisfied that any disclosure order made is appropriate to address “real and substantial” issues (and not merely theoretical issues).
6. Third-party information subject to reasonableness. In an appropriate case, the Court does have power to require the GP to obtain information within its power from third parties (e.g. service providers), provided this can be done without incurring unreasonable expense.
7. Rejection of the Grand Court’s “Level Playing Field” Approach. The CICA held that the Judge’s observations in the Grand Court hearing of the Abraaj case – to the effect that section 22 is a “very wide target to aim at” and entitles a limited partner to be put on a “level playing field” – was an overly broad interpretation of the scope of section 22. The CICA decision confirms that there are limitations to the statutory entitlement under section 22. The entitlement does not extend to the limited partner being entitled to “everything” that the GP and/or Manager can obtain, or require them to provide “everything they had or could get”.
8. Summary Judgment is not appropriate. The CICA also indicated that disputes relating to section 22 information requests are not appropriate for disposal by summary judgment where the GP has arguable defences which will have to be tested. The factual disputes over whether documents had already been provided, existed at all, or were necessary need to be resolved at trial.

The CICA’s decision could represent a shift towards balancing the interests of GPs, following a previous run of decisions which tended to be pro-investor. Going forward:

• GPs should maintain proper accounts with supporting documentation, as providing these will go a long way toward discharging their section 22 obligations;
• LPs cannot simply identify that a document exists and demand everything in that category. They must demonstrate the insufficiency of what has already been provided and
• Courts will apply a purposive, functional, fact-sensitive approach, with no one-size-fits-all answer.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific legal advice on the matters covered above, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com

A series financing transaction is a type of equity investment deal where an investor injects cash into a business in exchange for preferred shares. Irrespective of whether the investor is a venture capitalist, an angel investor or a private equity house, the issuance of preferred shares to the investor by the relevant company is typically documented by a share subscription agreement between the investor and the company. A shareholders’ agreement (“SHA”) is also entered into among the investor(s) and the relevant company to govern the rights and responsibilities of the parties, and the memorandum of association and articles of association of that company (collectively, the “M&AA”) are typically amended and restated to incorporate relevant provisions of the SHA to ensure that there are no inconsistencies between the contractual provisions of the SHA and the constitution of the company.

A distinction is often drawn between different rounds of series financing transactions. For example, series A financing refers to the first round of venture capital funding for a startup which typically follows a company’s seed round. A series B financing usually follows thereafter if the company is successful. In general terms, while a series A investment usually provides a startup with sufficient capital to develop its products and team and to commence the execution of a go-to-market-strategy, a series B investment is designed to accelerate a company’s growth. Series C financing transactions and other “late-stage” investments generally occur at a subsequent stage to support an initial public offering (IPO) or in anticipation of an acquisition.

Although investors’ key commercial drivers will vary depending on circumstances and between different rounds of series financings, many of the local law issues that arise from a BVI and a Cayman Islands law perspective are materially the same with some nuances, however. For example, there may be differences, such as in relation to board and observer appointment rights, the payment of dividends and the rights in a winding-up, that BVI or Cayman Islands legal counsel (as appropriate) will be able to advise upon.

There are various features of BVI and Cayman Islands law which make these jurisdictions attractive to startups and other early-stage companies, such as:

1. 1. Cost-effective and quick to incorporate. BVI and Cayman Islands companies are inexpensive to incorporate and to maintain in comparison with companies in other premium offshore jurisdictions. BVI companies are typically incorporated within 1-2 business days of submitting an incorporation application and Cayman Islands companies may be incorporated within 3-5 business days or on a same day express basis for an additional fee.
   2. Corporate governance is efficient. Non-regulated entities may have a sole shareholder and a sole director (which may be the same person) and there are no nationality and/or residency requirements with respect to those roles. Corporate director(s) and/or corporate shareholder(s) may also be appointed. There is no requirement to appoint a company secretary and/or to prepare audited financial statements.
   3. Flexibility. There is significant flexibility in tailoring the M&AA of the relevant company to accommodate the issuance of different classes of shares and the rights and restrictions attaching to them, board and shareholder reserved matters and other provisions pertaining to corporate governance issues.
   4. Tax neutrality. There is no corporation tax, capital gains tax, income tax, profits tax and/or share transfer tax as a matter of BVI and Cayman Islands law. Additionally, there is no withholding tax from a local law perspective.
   5. Investor familiarity. Private equity houses and venture capital investors are familiar with the BVI and the Cayman Islands as jurisdictions which are helpful in facilitating investment decisions.
   6. Secured creditor friendly. The BVI and the Cayman Islands are widely recognized as creditor friendly jurisdictions, which are helpful in the context of facilitating any debt financing that an early-stage company may require. The BVI also has a straightforward system of publicly registering security interests which is attractive to secured creditors.

In our experience, most key investors opt to undertake local legal due diligence on a company into which an investment is proposed to be made or which otherwise forms part of the corporate structure.

From a BVI and a Cayman Islands law perspective, the due diligence exercise typically encompasses the following matters.

i.   Basic corporate information, M&AA, directors and shareholders

Whilst certain basic corporate information such as date of incorporation, company name and registered address, and the names of the current directors of a Cayman Islands company are a matter of public record, its constitutional documents and statutory registers are a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered office service provider to disclose them. This consent will invariably be provided as it is market practice for an investor’s Cayman Islands legal counsel to review these documents.

In contrast, a broader range of corporate information is publicly available in relation to a BVI company. Its certificate of incorporation and M&AA may be obtained from a company search, its register of members is only publicly searchable if the company has opted to make it public and it has therefore filed it with the BVI Registrar of Corporate Affairs (the “BVI Registrar”). All of the other statutory registers of a BVI company (such as its register of directors, register of members (to the extent the company opted to keep it private) and private register of charges) are a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered agent to disclose it. Similar to the Cayman Islands, this consent will invariably be provided as it is market practice for an investor’s BVI legal counsel to review these documents.

The M&AA of a BVI company and a Cayman Islands company may reveal important information in the context of a series financing transaction. For example, it could assist in determining whether:

1. 1. any third-party consents are required to implement a series financing, or whether certain conditions need to be complied with prior to its consummation;
   2. there is an existing SHA in relation to the company (which could impose certain consent requirements on the parties with respect to the series financing);
   3. a series financing falls within the scope of any existing board and/or shareholder reserved matters;
   4. there are any most-favored nation provisions in favour of an existing investor;
   5. there are certain procedures which ought to be followed before the issuance of preferred shares, such as with respect to pre-emption rights; and/or
   6. the directors of the company may resolve to refuse or delay the registration of an issuance of shares in the company at their discretion.

ii.   Outstanding charges

Although the register of charges (if maintained) of a BVI company and the register of mortgages and charges of a Cayman Islands company are matters of private record, the register of registered charges of a BVI company is publicly searchable. The primary purpose of filing particulars of a charge in a BVI company’s register of registered charges is to protect the priority of the underlying security interests and to put third parties on constructive notice of them. An investor’s offshore legal counsel will invariably review the register of registered charges of a BVI company and request a copy of the register of charges or register of mortgages and charges (as applicable) to be provided to ascertain whether a company’s assets are subject to existing security interests.

iii.   Good standing

In the BVI, “good standing” means that the relevant company is on the Register of Companies, has paid all fees, annual fees and penalties due and payable, has filed with the BVI Registrar a copy of its register of directors which is complete, and has filed its annual return in accordance with the BVI Business Companies Act (As Revised). Any BVI law firm can order a certificate of good standing from the BVI Registrar with respect to a BVI company which confirms that the relevant company is in good standing as a matter of BVI law.

A Cayman Islands company is deemed to be in good standing if all fees and penalties under the Cayman Companies Act (As Revised) (the “Cayman Act”) have been paid and the Registrar of Companies of the Cayman Islands has no knowledge that the company is in default under the Cayman Act. Only the registered office service provider of a Cayman Islands company can order a certificate of good standing from the Cayman Registrar which confirms that the relevant company is in good standing as a matter of Cayman Islands law.

An offshore law firm that is conducting due diligence on a BVI company or a Cayman Islands company will order or request to be provided (as applicable) a certificate of good standing to ascertain whether the relevant company is in good standing.

iv.   Litigation

In the BVI, a search may be conducted to verify whether there are or have been in the past any actions or petitions against a company in the Eastern Caribbean Supreme Court, the Court of Appeal (Virgin Islands) and the High Court (Civil and Commercial Divisions) at the time of the search.

In the Cayman Islands, a search may be conducted to verify whether there are or have been in the past any actions or petitions against a company in the Grand Court of the Cayman Islands at the time of the search.

These searches will invariably be completed by an investor’s offshore legal counsel.

v.  Certificate of incumbency

An investor’s offshore legal counsel will usually review an up-to-date certificate of incumbency issued by the registered office service provider or registered agent (as applicable) of the relevant company. Most certificates of incumbency typically confirm that the applicable company is in good standing, as well as its name and company number, registered office address, the identities of the director(s) and shareholder(s) and share capital (if applicable). It is usually also possible to request a confirmation from the registered office service provider or the registered agent (as applicable) that it is not aware of any proceedings which are pending or which have been threatened against the relevant company, and that, to its knowledge, no receiver has been appointed over the assets of the company.

vi.  Books and records

Every Cayman Islands company must maintain, or cause to be maintained, proper books of account including information (including contracts and invoices with respect to, assets and liabilities) as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.

Every BVI company must maintain, or cause to be maintained, records and underlying documentation of the company in such form as (i) are sufficient to show and explain the company’s transactions; and (ii) will, at any time, enable the financial position of the company to be determined with reasonable accuracy. This includes keeping copies of invoices, contracts and similar documents. A BVI and a Cayman Islands company must also keep copies of all resolutions of its directors and shareholders and minutes of any meetings.

Whether a review of a BVI or a Cayman Islands company’s books and records is necessary will depend on a variety of factors, including the risk appetite of the investor and the activities of the relevant BVI or the Cayman Islands company. To the extent that any commercial agreements have been entered into by the company, an investor may request these to be reviewed to identify any consent requirements in relation to a proposed series financing and any change of control and/or termination provisions which could be triggered by an issuance of preferred shares. We have generally seen an increase in these types of requests which is reflective of a more cautious approach that is currently being adopted by many investors.

The following is an indicative list of local law issues that we frequently encounter in series financing transactions.

i.  Inconsistencies between the SHA and the M&AA

As noted above, it is important to ensure that there are no inconsistencies between the contractual provisions of the SHA and the M&AA of a BVI or a Cayman Islands company. Although there is no prescriptive approach as to the incorporation process as a matter of BVI and Cayman Islands law, certain types of provisions in the SHA will invariably be included in the M&AA for legal, commercial and other reasons. Examples of such provisions include rights and restrictions with respect to the shares (such as provisions with respect to pre-emption, drag-along and tag-along rights), matters which are reserved to the board of directors and/or the shareholders, distribution rights, share transfer restrictions and other matters that impact the corporate governance of the company (such as provisions with respect to board and shareholder meetings). While the approach that is taken will vary as between BVI and Cayman Islands companies because, as noted above, the M&AA of a BVI company is a matter of public record, whereas the M&AA of a Cayman Islands company is a matter of private record, there may be advantages of incorporating commercially important provisions into the M&AA for the following reasons:

1. 1. new shareholders are automatically bound by the M&AA, whereas only shareholders that execute the SHA or a deed of adherence to it are bound by the SHA;
   2. there are statutory remedies available for a breach of the M&AA, whereas only contractual remedies will be available for a breach of the SHA; and
   3. an amendment to the SHA typically requires the consent of all of the parties, whereas the M&AA of a BVI company may usually be amended by a majority of the directors or shareholders (depending on the nature of the amendment) and the M&AA of a Cayman Islands company may be amended by a special resolution (which ordinarily requires at least two thirds of the votes cast by shareholders).

To address any potential conflict between the provisions of the SHA and the M&AA of a company, the SHA typically provides that its provisions will prevail in the event there is any conflict with the M&AA. This provision is potentially unenforceable against a BVI or a Cayman Islands company which, in the first hand, is bound by its constitutional document, the M&AA. For that reason, the conflicts provision in the SHA should be amended to limit its application to the shareholders and to impose a covenant upon them to amend the M&AA to resolve any such conflict(s). In practice, the circumstances of the conflict and the interpretation of the documents may determine which document takes precedence over the other. For example, in Dear and another v Jackson¹ , where an SHA obliged the parties to ensure that a shareholder would be periodically re-appointed as a director but the M&AA permitted the other directors to remove him, the Court of Appeal of England and Wales ruled that there was no conflict: the SHA was to be read as if it did not purport to affect the removal provisions in the M&AA, especially because some of the directors had no knowledge of the terms of the SHA and were entitled to take the M&AA at face value and to assume that the removal article would work. This underscores the importance of appointing local law counsel in a series financing transaction to ensure that any agreed commercial terms are duly incorporated into each of the SHA and the M&AA.

ii.   Covenants with respect to group companies

Given that BVI and Cayman Islands companies typically serve as holding vehicles, it is relatively usual to see covenants imposed upon them in the SHA with respect to the activities and conduct of their operating subsidiaries. Such covenants usually prescribe that the relevant BVI or Cayman Islands company must procure that its subsidiaries do not take specified corporate actions without meeting the same consent requirements that are applicable to the company. Whether the relevant company is in a position to comply with such procurement obligations is ultimately a matter of fact that will depend on case-specific circumstances, but in practice the company may be unable to do so with respect to any indirect subsidiaries over which it does not exercise direct control. There are different approaches to drafting which may be taken in the SHA to address this issue that local law counsel can advise upon.

iii  Directors that are appointed by key investors

It is relatively common for key investors to be given the right to appoint directors to the board of the relevant company. An SHA typically states that such directors need to comply with the instructions that are given by the appointing shareholder(s).

Under BVI and Cayman Islands law, the directors of a company generally owe their common law and fiduciary duties to the company and not to other parties, such as any individual appointing shareholder(s).² There are certain exceptions to this. For example, where a company is insolvent or potentially insolvent, the duties of a company’s directors may extend to the company’s creditors.³ A BVI company that is carrying out a joint venture may also act in a manner which is in the best interests of a shareholder or shareholders, even if it is not in the best interests of the company, so long as this is expressly permitted by that company’s M&AA.⁴

Absent any exceptions of the above nature, any provisions which seek to curtail the discretion of the directors should be carefully reviewed as they may render the directors unable to comply with their fiduciary duties and may therefore be unenforceable as a matter of local law. Depending on the circumstances, it may be possible to include drafting in the relevant M&AA and SHA to clarify that the directors shall only comply with instructions provided by the appointing shareholder(s) to the extent that they are compatible with BVI or Cayman Islands law (as applicable), including the fiduciary duties of the directors.

iv.   Statutory fetters

A statutory fetter is a restriction that is imposed on the ability of a company or its shareholder(s) to exercise certain rights or powers granted under statute. This is relevant in the context of a series financing transaction because it is relatively common for an SHA and, in turn, the M&AA, to prescribe a list of matters in relation to the company that are reserved to the directors and/or the shareholders. Typical examples of such matters include the alteration of a company’s share capital, the issuance of shares, a change to the name of the company, and amendments to the M&AA. While shareholders may enter into such contractual agreements in the SHA among themselves as they please, any provisions which constitute a statutory fetter that purport to bind the company will be potentially invalid and unenforceable. Offshore legal advice should be sought to identify the most effective solutions with respect to these types of issues.

v.  Definitions and concepts that are incompatible with BVI and Cayman Islands law

As most SHAs are based on precedents that are governed by English or Hong Kong law, it is important to remain alert to any drafting that is incompatible with BVI and Cayman Islands law. Common examples include:

1. 1. share issuance and transfer provisions which purport to pass title to the shares upon delivery of share certificates, as opposed to when the register of members of the relevant company is updated;
   2. conditions precedent and/or conditions subsequent to closing that include items which are not necessary from a local law perspective (such as bought and sold notes) and/or which have no particular meaning from a BVI or Cayman Islands point of view (such as endorsing share certificates);
   3. references to “share capital” with respect to BVI companies, despite the fact that this concept is no longer applicable to most BVI companies; and
   4. definitions that do not meet the minimum requirements of BVI or Cayman Islands law (such as in relation to the thresholds for passing resolutions at a meeting or in writing, or the declaration of a dividend).

These types of issues highlight the importance of seeking local law advice in series financing transactions.

The following items are typically provided to a key investor at closing from a BVI and a Cayman Islands law perspective in connection with a series financing transaction:

1. 1. a copy of the constitutional documents and statutory registers of the relevant company;
   2. an up-to-date certificate of good standing of the relevant company;
   3. an up-to-date certificate of incumbency of the relevant company;
   4. duly executed resolutions of the board of directors and shareholders of the relevant company approving, as applicable and among other customary matters, the issuance of the preferred shares, the updates to the company’s register of members, the issuance of share certificates (to the extent that share certificates are to be issued), the appointment of any new director(s), any updates to the company’s register of directors or register of directors and officers (as applicable), and the amendments to the company’s M&AA;
   5. a certified, updated copy of the relevant company’s register of members showing the investor as the holder of the applicable preferred shares;
   6. a certified, updated copy of the relevant company’s register of directors or register of directors and officers (as applicable) showing the appointment of any new director(s) by the investor;
   7. new share certificates (to the extent that share certificates are to be issued); and
   8. a stamped copy of the amended and restated M&AA in relation to a BVI company (noting that delivery of a stamped copy of the amended and restated M&AA in relation to a Cayman Islands company is usually a post-closing obligation).

Additional documentation may also be necessary if the parties undertake to complete other key actions as part of the closing process, such as changing the registered office service provider or registered agent (as applicable) of the relevant company. Furthermore, to the extent that the relevant company’s M&AA (or any agreements to which the relevant company is a party) impose additional requirements in relation to an issuance of shares, additional deliverables may need to be provided to the relevant investor.

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¹    [2013] EWCA Civ 89
²   Percival v Wright [1902] 2 Ch421
³   Walker v Wimborne (1976) 50 ALJR 446 (High Court of Australia)
⁴   Section 120(4) of the BVI Business Companies Act, 2004 (As Amended)

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 Briefing, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

1. Additional definitions – The definition of “debt” and “equity interests” have been expanded to include LLC interests. New definitions have been included respectively for “digital equity token” in respect of a tokenised mutual fund and “digital investment token” in respect of a tokenised private fund. In each respective case, meaning for “digital equity token” – a digital representation of the whole of an equity interest held by an investor, and meaning for “digital investment token” – a digital representation of the whole of an investment interest held by an investor. A new definition has also been included for “tokenised mutual fund” and “tokenised private fund”, being respectively a fund that has any of its equity interests/ investment interests represented by digital equity tokens/ digital investment tokens.
2. No custodian required – There is no requirement for a custodian to be appointed to hold the digital equity tokens or digital investment tokens in secure custody. However, disclosure as to who holds the underlying assets of the fund is material information for the fund’s offering document (particularly where such assets are not held by an independent custodian which is subject to regulatory standards for maintaining custody).
3. No requirement for a CIMA licensed Administrator/ principal office – There is no requirement for a tokenised fund to have a CIMA licensed administrator who also acts as the principal office. However, where a tokenised mutual fund does appoint a CIMA licensed administrator, they will need to comply with additional obligations. For example, a CIMA licensed administrator must be satisfied that all records relating to the ownership of tokens are securely maintained by the tokenised fund and readily available and that the tokenised fund has complied with the applicable statute.
4. Maintenance of records – If a Cayman Islands licensed mutual fund administrator is appointed, it must ensure secure maintenance of records related to token issuance, creation, sale, transfer, and ownership.
5. Transfer Restrictions – Tokens are only transferable with the approval of the operator of the tokenised fund and in accordance with the terms of the offering document.

8. Risk Disclosures – Offering documents for tokenized funds must explicitly disclose risks related to digital tokens including cybersecurity risks, custody risks, and transferability risks, together with how such risks are addressed or mitigated for investors.
9. Annual confirmation – An annual confirmation will be required by CIMA from the operators of the tokenised fund that all records relating to the issuance, creation, sale, transfer and ownership of an equity interest/. investment interest that is represented by a digital equity token/ digital investment token have been properly kept and maintained in compliance with the requirements set out in the legislation.
10. CIMA supervisory powers – CIMA is granted supervisory powers over tokenised funds to ensure compliance with statute and the protection of investors interests, including inspections of the underlying technology and token transactions.

The Virtual Asset (Service Providers) (Amendment) Act, 2026 which is also now in force clarifies that tokenised funds registered with CIMA are not subject to the VASP Act unless they engage in separate virtual asset services.

These changes clearly demonstrate that the Cayman Islands remains committed to fostering innovation, helping the jurisdiction stay at the leading edge, where traditional fund structures meet blockchain technology.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific legal advice on the subject matter of this Briefing, please contact your usual Loeb Smith attorney or Liz Kenny. 

Partner: Elizabeth Kenny

E: elizabeth.kenny@loebsmith.com

Liz is a Partner in the Corporate and Funds Group and is also Head of Regulatory and Risk in which capacity she is key thought leader on regulatory licence applications, virtual assets, crypto and fintech regulation, corporate governance reviews,  anti-money laundering compliance frameworks, regulatory audits, Corporate Governance, CIMA inspections and remediations, sanction reporting and licencing, data protection laws, regulatory enforcement notices, administrative fines and on mandatory information exchange requirements.

Copyright protection in the BVI (for “qualified persons”) and in the Cayman Islands (for “qualifying persons”) is automatic when such person creates an original work (once the work is recorded, in writing or otherwise) such as sound and music recordings; films; when you write a book or poem; or when you develop new software. By virtue of the Copyright (Cayman Islands) Order 2015 and Order 2016 (as amended), Part 1 of the U.K.’s Copyright, Designs and Patents Act 1988, subject to certain exclusions and modifications, was extended to the Cayman Islands. The BVI has implemented its own legislation in the form of the Copyright Act (Revised 2020) which is very similar.

Patent protection in the two jurisdictions is quite similar. As it is in other jurisdictions, in order to get patent protection, the invention must be: (i) new – i.e. the first in the world, (ii) useful – i.e. the invention must serve a purpose or provide a solution, and (iii) inventive – i.e. the invention must not be obvious to persons in the industry in which the invention is intended to be used.

Both the BVI and the Cayman Islands allow for the indirect registration of patents. Once a U.K. patent is granted, an application can be made in either of the Cayman Islands or the BVI 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 years from the date of issue of the UK patent.

IP laws are designed to protect human creations. Generative AI (AI which generates text, images, speech, video or technical inventions based on user-inputted instructions) continues to increase in capability and grow in adoption. However, most copyright and patent laws, for example, do not yet explicitly address AI’s role in authorship or inventorship, leaving a legal void requiring attention.  Traditionally, the author or inventor is the person or organisation that creates the works. If now AI is responsible for content creation autonomously without any human input, the question is who owns the copyright protecting such content.

• For countries, such as the UK, this may be answered by the fact that computer-generated works will be owned by the person who made the necessary arrangements for the creation of the work.
• An overwhelming view in the E.U. is that AI cannot be a legitimate author. However, specific ways of using AI may result in a work that is protected for the user.

We expect to see governments across the world grappling with balancing strategies aimed at encouraging the development of AI and innovation while, at the same time, attempting to modernize IP and AI legal frameworks to account for AI.

Training generative AI involves using large bodies of IP-protected works/ data in ways that may be infringing under current laws. Governments seeking to “unlock” the potential of generative AI are now more often looking to legislate to permit text and data mining (TDM) of IP-protected data in order to train AI. The intellectual property in the data used to train AI models is growing as a subject of legislative discourse and is now a key issue in matters that have flooded courts across the world, whether use of copyright-protected materials to train AI models infringes copyright.

Training AI using personal data or protected IP also provides challenges to legislators worldwide. Over the next 2-3 years we expect to see increased regulatory scrutiny of companies that create or use AI technologies which have been trained using (i) personal data and/or (ii) information/data protected by IP rights. Regulators worldwide are now paying greater attention to balancing the benefits of AI against concerns about personal data and the protection of IP, and we expect that this will continue in the next few years.

AI programs usually qualify as IP with software or computer programs being literary works. In some countries however, copyright protection will not apply for functional aspects of AI such as algorithms or system designs. AI systems function however by processing human-provided instructions to generate problem-solving outcomes. This capability makes AI-based programs highly valuable from an IP perspective, as their innovative nature and diverse utility underline their significance of IP protection.

Who owns the copyright?

Copyright laws often require that there must be a natural person to whom copyright can be attributed and many jurisdictions including the Cayman Islands and the BVI, do not provide for “computer generated” works where no human author is involved. This creates a gap in the protection of AI-generated works, which are typically produced autonomously with little or no human intervention. Many copyright laws also require that “sufficient effort” must be expended to make any literary, musical, or artistic work original in character – which involves time, human labour, and skill. What constitutes sufficient effort for AI-generated content remains largely untested, raising debates about whether crafting prompts or editing AI output meets the thresholds. Additionally, if non-human entities are recognized as “authors” then copyright duration may become complex. Generally, copyright protection is granted for an author’s lifetime plus a period of time following, potentially leading to indefinite protection for AI-generated works.

The duration of copyright protection in the Cayman Islands varies depending on the nature of the work at issue. For example:

1. For Literary, Dramatic, Musical or Artistic Works: copyright expires at the end of 70 years from the end of the calendar year in which the author dies. However, if the author is unknown, copyright expires at the end of 70 years from the end of the calendar year in which the work was made or first made public
2. For Computer Generated Literary, Dramatic, Musical or Artistic Works: copyright expires at the end of 50 years from the end of the calendar year in which the work was made.
3. For Sound Recordings: copyright expires at the end of 50 years from the end of the calendar year in which the sound recording was made or first made public.
4. For Films: copyright expires at the end of 70 years from the end of the calendar year in which the film/movie was made or first made public.
5. For Broadcasts: copyright expires at the end of 50 years from the end of the calendar year in which the broadcast was made.

Copyright Protection and Deepfakes

Most IP laws are ill-equipped to address the challenges posed by digital replicas or deepfake technology. Copyright law generally is not fit for purpose in respect of deepfakes as the source material for many deepfakes either falls outside the scope of copyright protection or the copyright owner is not the individual who is harmed by the infringement. Possible causes of action presented by deepfakes include (1) copyright infringement (if a deepfake involves unauthorized use of copyrighted material), (2) trademark infringement (if it uses a registered trademark without permission), (3) the tort of passing off (if it misrepresents a product or service as endorsed by a well-known individual), (4) personal data privacy violations or (5) defamation (if the content defames an individual).  The issue of whether the outputs of AI models – particularly where they substantially reproduce source materials – may infringe copyright and who may be responsible for such infringement, is also unresolved.

Is the person who infringed: the user of the AI generated work without the rights holder’s consent or the AI developer or AI system owner? This ambiguity poses risks for businesses. If there is no clear proprietary right in AI-generated works, businesses may be exposed to unnecessary risk.

AI programs usually qualify as IP with software or computer programs being literary works. In some countries however, copyright protection will not apply for functional aspects of AI such as algorithms or system designs. AI systems function however by processing human-provided instructions to generate problem-solving outcomes. This capability makes AI-based programs highly valuable from an IP perspective, as their innovative nature and diverse utility underline their significance of IP protection.

Fair dealing exceptions

With respect copyright infringement, some jurisdictions such as the Cayman Islands, BVI, U.S., U.K., Australia, Hong Kong and Singapore provide fair dealing exceptions for particular activities, despite the fact that many other jurisdictions do not.

Under Cayman Islands law and BVI law, some of the fair dealing exceptions permitted are:

1. Personal copying for private use
2. Non-commercial research and private study
3. Text and data mining for non-commercial research
4. Criticising, reviewing and reporting current events
5. Use for parody, caricature and pastiche
6. Making backup copies, de-compilation, observing, testing and studying, and correcting computer programme errors.

Who is the inventor? Will the requirement for “novelty” remain?

Many patent laws require the inventor to be a natural person. This requirement could exclude AI from being independently recognized as an inventor. AI-driven innovations, such as those involving algorithms and machine learning processes, face challenges in meeting the criteria for protection as an invention. Under US patent law, for example, absent at least one human inventor, an invention is not patentable. Also, the criteria for patentability in many jurisdictions (including the Cayman Islands and the BVI) usually involves requirements for novelty, an inventive step and industrial applicability. These criteria raise questions about whether AI-generated inventions can ever meet the inventive step requirement, traditionally linked to human ingenuity. AI relies on algorithms and datasets to mimic human cognitive functions, enabling it to generate patentable inventions.

We expect to see a continuing updating of guidance as to the level and type of human contributions that are necessary to support patentability as new cases make their way through courts in various jurisdictions. A vital question that arises is whether AI can be regarded as a legitimate author of content that it generates or an inventor in case of patents, given the want of legal personality of the AI itself.

A particularly effective legal structure for an AI-driven entity is the Cayman Islands foundation company. Such foundation companies do not require shareholders, allowing them to function with a governance model that can be tailored to an AI’s decision-making models. Key advantages of using such foundation companies include the following.

• Legal recognition: foundation companies can provide a defined legal entity that can interact with traditional financial institutions, sign contracts and meet compliance obligations.
• Decentralised governance: the ability to structure the foundation company without shareholders allows for governance mechanisms that can adopt smart contract-based decision-making or AI-driven decision-making.
• Asset protection and Tax mitigation: foundation company can be tax resident in the Cayman Islands, hold and manage assets and ensure legal clarity in asset ownership.
• Regulatory compliance: foundation companies can be designed to comply with regulations, including AML and CFT requirements, making them suitable for global transactions.
• Economic substance rules: foundation companies limited by guarantee are specifically exempted from the economic substance rules and can therefore hold and even make profits from intellectual property without coming under the relevant economic substance compliance regime.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered above, please contact your usual Loeb Smith attorney or any of the following: 

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com