The Foundation Companies Act 2017 (the “Act”) introduced a novel corporate vehicle to the Cayman Islands – the “Foundation Company”. This company structure has a number of applications and continues to grow in popularity. This article provides an overview of the Foundation Company structure in the Cayman Islands.

Foundation Companies are governed primarily by the Act together with certain provisions of the Companies Act (as revised) of the Cayman Islands (the “Companies Act”) which apply to all types of company. For example, the provisions on voluntary liquidation as set out in the Companies Act apply equally to Foundation Companies as they do to other types of company in the Cayman Islands, albeit with some minor technical differences.

A Foundation Company is a legal person that is entirely distinct from that of its directors, members (where relevant), beneficiaries and founders. In practical terms, this means that a Foundation Company can own assets in its own name and can sue and be sued in its own name.

Like other types of Cayman Islands company, a Foundation Company will be incorporated with a memorandum of association and articles of association (the “Constitutional Documents”), which will set out the rights and responsibilities of the various parties who are involved in the management of and who benefit from, the Foundation Company as well as setting out various procedural matters such as the co-ordination of meetings of directors and the votes of members, supervisors and founders etc.

In addition, a Foundation Company may also adopt by-laws which expand upon the matters dealt with in the Constitutional Documents and can even be used to confer specific rights on individual or groups of beneficiaries. The reason for not dealing with these matters in the Constitutional Documents is because, unlike the Constitutional Documents, the by-laws of a Foundation Company may be kept entirely private as they are not required to be filed with the Registrar of Companies in the Cayman Islands. This means that in some cases, separate classes of beneficiary may be unaware of the rights and entitlements of other beneficiaries. There is complete freedom as to the contents of any by-laws, provided they do not conflict with the Constitutional Documents (which themselves can be amended) or applicable laws.

Foundation Companies therefore provide the functionality and flexibility of a trust but without any of the complexities associated with trust administration. The fact that, as noted above, Foundation Companies have separate legal personality also effectively guarantees their recognition in civil law jurisdictions where more traditional trusts often are not recognized and encounter difficulties on various matters, including taxation.

The following are the key classes of person who will be involved in the management of a Foundation Company:

• • Directors: as with most other types of company structures available in the Cayman Islands, a Foundation Company will typically be managed by its Board of Directors who owe fiduciary duties to the Foundation Company.
  • Secretary: a Foundation Company is required to retain the services of a secretary at all times. Unlike other types of company, not just anyone can be appointed to this position. In order to be appointed as the secretary of a Foundation Company, the person in question is required to be licensed or permitted to provide company management services in the Cayman Islands. The Foundation Company’s registered office is required to be at the secretary’s business address.
  • Supervisor: if a Foundation Company either chooses not to have any members or at any time ceases to have any members, it is required to appoint a ‘supervisor’. The role of the supervisor is, as the name implies, to supervise the management of the Foundation Company but crucially they have no ownership rights or financial entitlement in the Foundation Company. In the absence of any members, this is an important role as it provides the necessary checks and balances to hold the Board of Directors to account in order to ensure that the Foundation Company is being properly managed and conducting its business in accordance with the objects in its Constitutional Documents, the requirements of any by-laws and applicable law.
  • Founder: the founder of a Foundation Company is not dissimilar to a settlor in the context of a trust. Founders have no specific rights or powers in respect of the Foundation Company to which they relate, unless such rights and powers are specified in the Constitutional Documents and/or in the by-laws. It is common for the Constitutional Documents to grant the founder the power to appoint or remove directors and beneficiaries (whether subject to conditions or otherwise) of the Foundation Company.

In addition to the above, the following classes of person can also be associated with Foundation Companies:

• Members: Unlike many other types of Company in the Cayman Islands, Foundation Companies may, but are not required to have members (subject, as referred to above, the requirement to appoint a supervisor where there are no members). However, even where Foundation Companies do have members, membership of a Foundation Company is very different to being a member of a typical company incorporated with limited liability. Members of Foundation Companies are not automatically entitled to participate financially in the success of the Foundation Company unless the Constitutional Documents or by-laws provide otherwise.
• Beneficiaries: Unlike other types of Cayman Islands company, Foundation Companies can have a separate class of interested persons known as ‘beneficiaries’. It is the beneficiaries who, subject to the Constitutional Documents and any by-laws, are able to participate financially in the success of the Foundation Company. The founder(s) of the Foundation Company may impose such conditions on the terms of participation of beneficiaries as they see fit. Further, whereas members in more conventional companies have some ability to control the affairs of a company (e.g. by appointing or removing Directors or by passing (or refusing to pass) shareholder resolutions) and they have the right to access certain company records, the beneficiaries of a Foundation Company have no such rights automatically. Beneficiaries’ rights, if any (including in relation to their right to distributions and/or financial information) must be expressly provided for in the Foundation Company’s constitution. Alternatively, a Foundation Company can be set up such that beneficiaries are entirely passive and have no rights beyond their financial interest.

If one word could describe the Foundation Company structure, it would be “flexible”. As will be apparent from the above, the roles and entitlements of members and beneficiaries are, generally speaking, neither prescribed nor proscribed. It is therefore entirely within the discretion of the founders of the Foundation Company without any need to artificially circumvent any statutory rights of a particular class of person.

It is perhaps for this reason that two of the most common applications for Foundation Companies are to use them in the context of family offices / family trusts (whether as part of succession planning or otherwise) and also in the establishment of decentralised autonomous organisations (“DAO”):

• Family office: the benefits of using a Foundation Company to operate a family office / family trust may be apparent already from the foregoing. The flexibility available to founders to determine the basis and extent of any entitlement of beneficiaries has proven to be extremely attractive as they are able to set the specific terms of any entitlement and the extent of any direct involvement / rights to information in the underlying business. The fact that the Foundation Company has separate legal personality also overcomes many issues of recognition and taxation in jurisdictions that don’t otherwise recognise common law trusts. In the context of family offices with interests and assets across the globe, this advantage should not be underestimated both in terms of sheer convenience and the potential for time and cost savings in what would otherwise be ‘difficult’ jurisdictions.
• DAOs: as the name perhaps implies, DAOs often do not themselves have legal personality and it is therefore necessary for projects that involve DAOs to incorporate an entity which will act as the counterparty to any contractual relationships outside of the DAO (e.g. service providers). The ability for Foundation Companies to not have members is particularly attractive as this feature is entirely consistent with the de-centralised and ‘ownerless’ nature of a DAO. Also, the ability to provide for entirely bespoke arrangements and rights within the by-laws only adds to the attractiveness of Foundation Companies in this context.

If you think that a Foundation Company might be useful in connection with one of your projects or to find out more, please contact a member of the Loeb Smith Team for more information.

E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E: wendy.au@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

Video-conferencing is considered to be an e-KYC mechanism, so additional checks have to be conducted in the same way as other non-face-to-face measures.

FSPs shall implement appropriate controls during the video-conferencing process to verify the identity and authenticity of the ID documents presented.

If an eligible introducer or suitable certifier has met the client, they must confirm to the FSP that they have met the client via video-conferencing, including a photograph of the client or scanned copy of the certified documents.

When onboarding clients who are corporate legal persons or legal arrangements (trusts, foundations), video-conferencing may be used to identify natural persons relevant to such persons or arrangements, such as their directors and officers, ultimate beneficial owners, settlors or grantors, trustees, protectors, enforcers or those appointed to act on behalf of the client.

“Selfie” photographs may be used as a documentation for evidence of identity, provided that such photographs are in colour and clearly show the person’s face, with that person holding the identity document in the same photograph to demonstrate it actually belongs to that person. A clear scanned copy in colour or photograph of the identity document shall also be provided.

The amendments in the Amended GN are much welcomed because it has the potential to significantly reduce uncertainties surrounding the use of e-KYC processes / digital ID systems when onboarding clients and monitoring business relationships. The changes also show CIMA’s willingness to keep up with FATF’s guidance and recommendations.

The ability to (i) verify clients/customers that are corporate legal persons, by using publicly available sources, including company registries, and (ii) use Government-issued identification in electronic form as acceptable CDD document (provided the FSP takes a RBA and has suitable documented policies and procedures to ensure the authenticity of such electronic document(s)) should facilitate client onboarding and assist with existing challenges in some jurisdictions in finding public notaries or appropriate certifiers of documents.

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: wendy.au@loebsmith.com

E: cesare.bandini@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com

There are two principal routes to voluntarily dissolving a Cayman Islands company after the conclusion of its operations. Dissolution can be achieved either through (i) voluntary liquidation or (ii) a strike-off. The dissolution will mean that the company is removed from the Register maintained by the Registrar of Companies in the Cayman Islands and cease to exist ultimately. Please see our previous Briefing on this topic. Briefing – Voluntary liquidation or Strike-off?

For entities that are to be struck off before year end 2023, the Registrar of Companies has published the following Strike Off dates. Companies which seek to be struck off by 29 December 2023 will need to file the strike off application by 8 November 2023.

For an entity not regulated by the Cayman Islands Monetary Authority (CIMA) the final general meeting of the shareholders of that entity must be held before 31 January 2024 in order to avoid the 2024 annual fees payable to the Registrar of Companies. However, as the dissolution of entities is only completed some time after the final general meeting closes, leaving matters till January 2024 might even prove to be too late. We advise that the voluntary liquidation process starts as soon as possible.

For entities which are Reporting Financial Institutions under FATCA/CRS, there will be filing obligations for both 2023 and 2024 if the liquidation is not completed by 31 December 2023.

Where the entity is a regulated mutual or private fund, it is essential to complete and file the final audit or apply for and obtain an audit waiver before submitting the de-registration documents to CIMA. Also, submission of an application to CIMA is usually not sufficient as CIMA may take a while to process the application and if the application is not processed in time for the waiver to be granted in 2023, the 2024 annual fees to CIMA will be incurred.

To prevent incurring the annual CIMA license fees for 2024, one must ensure that (i) the entity’s final audit is completed and filed with CIMA by 31 December 2023, or even earlier if possible and (ii) the de-registration application has been submitted to CIMA and has been processed and approved by CIMA before 31 December 2023. It is important to leave sufficient time to submit the deregistration documents well in advance of 31 December 2023 to give CIMA sufficient time to process the application for de-registration, thereby allowing the entity to avoid unnecessary annual CIMA license fees for the following year. Where, for example, an investment fund has ceased to trade within 2023, but is either not able to return the proceeds to investors, nor complete the final audit before the end of 2023, then 2024 CIMA annual license fees will be payable in full.

Following amendments by CIMA to the regulatory procedures, there is no longer any relief in relation to annual license fees available for a company which is in the process of terminating its license.

If the entity is registered with CIMA, it must first be de-registered with CIMA.

If the subject company is a regulated mutual or private fund registered with CIMA or a Registered Person investment manager or investment adviser under the Securities Investment Business Act (As Revised), prior to termination, it must first be deregistered from CIMA. To deregister, it must notify CIMA within 21 days of ceasing or formally intending to cease its business activities. As stated above, to avoid incurring 2024 CIMA annual license fees, the de-registration documents should be submitted and be approved by 31 December 2023.

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: cesare.bandini@loebsmith.com

E: wendy.au@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com

E: yun.sheng@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

• The Bill in effect consolidates the existing rules of the beneficial ownership framework which lie across the Companies Act, the Limited Liability Partnership Act and the Limited Liability Companies Act into one single Act.
• Such consolidation streamlines the beneficial ownership framework and allows for easier reference by concerned parties to the beneficial ownership framework.

• The scope of entities covered by the beneficial ownership framework has been significantly expanded by:

(a) including limited partnerships and exempted limited partnerships into the definition of “legal person”, hence bringing these partnerships into the scope of the beneficial ownership framework; and

(b) removing certain exemptions under the current beneficial ownership framework, including removal of the exemption for any legal entity registered under a regulatory law such as the Mutual Funds Act (As Revised), the Private Funds Act (As Revised), the Securities Investment Business Act (As Revised) and the Virtual Asset (Service Providers) Act (As Revised).

• For an investment fund registered under the Mutual Funds Act (As Revised) or registered under the Private Funds Act (As Revised), however, the Bill provides that such fund does not have to supply the full required particulars of beneficial owners as mandated in other cases, and instead such fund will only need to provide its corporate services provider with the contact details of a licensed fund administrator or another contact person licensed or registered under a Cayman Islands regulatory law for providing beneficial ownership information located within the Cayman Islands. Within 24 hours of a request being made by the Minister responsible for financial services (the “Minister”) (or at any other time as the Minister may reasonably stipulate), such licensed fund administrator or contact person of the fund will be required to provide the Minister with the requested beneficial ownership information.
• In light of the above, prior to the formal enactment of the Bill, Cayman entities are suggested to review whether they fall within the expanded scope of the beneficial ownership framework and whether the exemptions which they previously relied upon may no longer be applicable.

• The definition of “beneficial owner” under the beneficial ownership framework will be revised in order to align with the concepts and wordings used in that of the Cayman Islands Anti-Money Laundering Regulations (As Revised) (the “AML Regs”), such revisions include but are not limited to:

(a) replacing “hold” with “ultimately owns or controls” when describing the 25% threshold in shares, voting rights or partnership interests; and

(b) categorising an individual who “otherwise exercises ultimate effective control over the management” of a legal person as its beneficial owner.

• By making the definitions of “beneficial owner” in the beneficial ownership framework and the AML Regs more consistent with each other to certain extent, it will make it easier for relevant stakeholders to interpret and apply these laws and regulations.

Additional beneficial ownership information required

• The Bill expands the scope of required particulars of the relevant beneficial owner by requesting for the nationality and/or the nature of ownership or exercise of control of the relevant beneficial owner. These are not required to be provided in the existing beneficial ownership framework.

Through expanding the scope of required particulars, the Bill allows for the Minister to access more transparent beneficial ownership information, which may facilitate its identification of money laundering and/or terrorist financing risks.

Provision of leeway to create a public beneficial ownership register

• Currently, the beneficial ownership information provided to the Minister is not available to the public.
• Noting that the Cayman Islands Government made a commitment to the UK Government in 2019 to introduce a public register of beneficial ownership, the Bill grants the Cayman Islands Cabinet the power to, subject to the affirmative resolution by the Cayman Islands Parliament, make regulations empowering the Minister to provide access of certain beneficial ownership information to the public.
• However, in light of the November 2022 judgment made by the European Court of Justice which held that indiscriminate public access to information on beneficial ownership of legal persons was a disproportionate and serious interference with the fundamental rights to respect for private life and to the protection of personal data, the Ministry of Financial Services of the Cayman Islands Government emphasised that the Cayman Islands Parliament would only approve any such regulations to be made by the Cayman Islands Cabinet after discussions with the UK and its other overseas territories, as well as Crown Dependencies, relating to “the necessary privacy safeguards” have been concluded.
• As such, there will not be a public register of beneficial ownership even after the Bill is formally passed and enacted, so long as the relevant regulations have not been approved by the Cayman Islands Parliament.

The Bill is a keen effort by the Cayman Islands to solidify its status as a leading globally-recognised offshore financial centre which is compliant with global standards set by the FATF for combating money laundering and terrorist financing. The Bill is yet to be approved by the Cayman Islands’ Parliament, and as such the relevant obligations imposed by the Bill have not taken effect. The current beneficial ownership framework will remain in place for now. Nonetheless, Cayman entities which are in in-scope are encouraged to be prepared and actively review the Bill’s application on them well ahead of the Bill’s formal enactment, which will then be effected in a phased approach.

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: cesare.bandini@loebsmith.com

E: wendy.au@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

The Cayman Islands exempted company (including the segregated portfolio company) is the corporate vehicle of choice for series financing, mergers utilizing the Cayman merger regime, banking and finance transactions, investment funds, and other corporate transactions. The popularity of the exempted company is principally as a result of the Cayman Islands being rightly recognized as a stable jurisdiction which promotes legal and commercial certainty to control reputational risk for both the Cayman Islands and its business partners.

The flexibility of the structure of the Cayman Islands exempted company is one of its main appeal. For example, Cayman Islands’ companies law does not require any director or officer of the company to be resident in the Cayman Islands. The register of shareholders and minute books are not required to be held in the Cayman Islands and can be held in another jurisdiction. The company is not required to hold an annual general meeting of shareholders (unless this is required under a regulatory law). There is no Cayman Islands law requirement for an exempted company to undertake an annual audit (unless this is required under a regulatory law).

The incorporation procedure for an exempted company is simple, incorporation fees are low and no regulatory authority approval is required. Exempted companies can be incorporated within 5-7 business days on a standard basis and on a twenty-four (24) hours “express” basis.

There is no statutory prohibition on an exempted company providing financial assistance with regard to the acquisition of its own shares. The directors of the exempted company owe a fiduciary duty to the company to act in good faith in the best interests of the company in agreeing to provide the financial assistance.

The company is permitted to use its share premium account to fund the payment of dividends to shareholders subject to it remaining solvent after such payment.

The Cayman Islands does not impose stamp duty on the transfer of shares, other than in relation to the transfer of shares in a company which holds real estate in the Cayman Islands.

A shareholder is not subject to Cayman Islands taxes with respect to any distribution received from the company (including dividend and other distributions upon liquidation of the company) or with respect to any gain realised upon the sale, redemption or exchange of shares. There is no withholding of taxes with respect to any dividend or other distribution made to a shareholder on the sale, exchange or redemption of shares. No gift, estate or inheritance taxes will arise in the Cayman Islands on the transfer of shares by way of gift by, or on the death of, a person who is not a resident of the Cayman Islands.

The exempted company can merge with another corporate entity which can be either another Cayman Islands company or a company from another jurisdiction which has a comparable merger regime. The surviving company from the merger can either be a Cayman Islands exempted company or a company from another jurisdiction. The Cayman Islands merger regime is very popular for completing the “take private” of Cayman Islands companies listed on various stock exchanges including NASDAQ and the New York Stock Exchange.

The Cayman Islands legal regime provides a high degree of commercial confidentiality. The Register of Shareholders of exempted companies is not available for inspection by members of the public. There is no Cayman Islands requirement for the accounts or financial statements of the company to be publicly filed.

The Cayman Islands is a British Overseas Territory. The law of the Cayman Islands is based on English common law, together with local statutes appropriate for both international and local business. The Government has an active agenda to enact legislation to enhance Cayman Islands’ position as a leading international offshore financial centre. The jurisdiction is committed to providing a stable, responsible and responsive business environment and therefore takes an aggressive approach to countering money laundering, tax evasion or any other criminal activity. The jurisdiction also operates a business friendly and well-regulated financial system underpinned not only by a belief in proportionate, risk-based regulation and a conviction to integrity and transparency, but also by the belief that appropriate regulation and international cooperation drive commercial success.

The development of the Cayman Islands as an international financial centre has led to a sophisticated business environment with a full range of services including banks, trust companies, lawyers, accountants, insurance managers, mutual fund managers and fund administrators, and all the expected support services. There are approximately 324 banks and trust companies licensed in the Cayman Islands, including 47 of the 50 largest banks in the world.
Following the conclusion of the most recent plenary on 23 June 2023 of the Financial Action Task Force (the “FATF”), the FATF has determined that the Cayman Islands has substantively fulfilled its action plan to be removed from the list of “jurisdictions under increased monitoring” (the “Monitoring List”) subject only to the completion of an on-site visit by the FATF later this year, which forms part of the FATF’s standard process for removing a jurisdiction from the Monitoring List, the Cayman Islands will be delisted. As the EU has previously confirmed that it does not require the Cayman Islands to take additional steps beyond those set out in the FATF’s action plan to facilitate removal from the EU AML List, it is widely expected that the Cayman Islands will also be removed from the EU AML List.
The features set out above continue to enhance the Cayman Islands’ popularity as the leading jurisdiction for structuring international investments and other finance transactions.

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 formation of a Cayman exempted company or the structuring of finance, corporate or investment transactions using a Cayman exempted company, please contact us. We would be delighted to assist.
E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E. peter.vas@loebsmith.com

E. elizabeth.kenny@loebsmith.com

E: cesare.bandini@loebsmith.com

E: wendy.au@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

A Captive insurance company is a wholly-owned subsidiary insurer that provides risk mitigation services for its parent company or related entities. In its simplest form, the “Captive” wholly-owned subsidiary is incorporated to insure against one or more risks to which its parent company is exposed. It is essentially a form of self-insurance which is put in place within a group corporate structure for a number of reasons. Captives are usually established in the context of a company’s risk management strategy and are typically put in place because those risks which are looking to be insured by the Captive are either non-insurable or priced too high in the current market.

The potential benefits of having a Captive insurance company include:

1.  lower insurance costs,
2. tax advantages,
3. underwriting profits,
4. ability to tailor coverage for hard to insure or emerging risks,
5. ability to apply alternative strategies to deal with insurance market cycles,
6. ability to allocate costs to business units,
7. provide financial incentives for loss control,
8. offer flexibility in managing risk,
9. offer creative insurance solutions, and consolidate risk management, and greater 
10. control over coverage.

The Cayman Islands has historically been a jurisdiction for Captive insurance companies and is currently one of the leading Captive hubs in the world, both in terms of number of Captive insurance companies and total assets under management, owing to Cayman’s world-wide reputation as a highly professional, yet business friendly and well-regulated environment with a philosophy of imposing proportionate, risk-based regulations and rules backed by consistency of enforcement. In particular, the Cayman Islands is the absolute leader domicile for healthcare sector Captives, with healthcare-related Captives taking up over a third of Cayman’s Captive industry.

According to the latest data released by the regulatory authority for Captive insurance companies, which in the Cayman Islands is the Cayman Islands Monetary Authority (“CIMA”), there are currently 666 Captive insurance companies in Cayman. Single parent Captives (more commonly known as “Pure Captives”), Segregated Portfolio Companies (“SPCs”) and Captives with two or more shareholders (“Group Captives”) make up the largest part of Captives in the Cayman Islands, counting 278, 153 and 128 companies, respectively.

SPC’s growing popularity in the Captive insurance industry is partly owed to the fact that such structures allow insurers to add additional participants in a reinsurance programme without risk of cross liability. A distinctive feature of all SPCs, in fact, is that the assets and liabilities of each segregated portfolio (also referred to as ‘cells’) are, as the name suggests, segregated from one another. Each SPC cell, however, does not have legal personality and ownership of the underlying assets in the cells is through classes or series of shares in the SPC which are designated to that particular cell.

The SPC structure is often seen in the context of the so-called ‘Rent-A-Captives’ whereby those wishing to reap the benefits of a Captive insurance company (either for their own insurance or reinsurance) whilst minimizing matters such as time, upfront costs and maintenance, can simply become shareholders in an existing SPC and ‘rent’ a cell. The participants in a rent-a-Captive structure pay premiums and service fees into the cell and in return they get access to the capital base they need to underwrite the risk as well as an entitlement to any distributions made out of that cell.

There are also Portfolio Insurance Companies (“PICs”) which can be seen as a slight variation of the SPCs mentioned above. A PIC is similar to an SPC except that its cells have separate legal personality.

Other forms of Captives include “Association Captives” which are insurance companies owned by an association to meet the insurance needs of its members, and “Agency Captives” which are insurance or reinsurance companies owned by one or more insurance agents and are used to insure against the risks of those agents or any of their clients.

As with any other industry, the Cayman Islands is a dynamic jurisdiction and strive to offer cutting edge solutions to industry problems owing to the strong relationship and continuous dialogue between the regulator and the private sector. This is no different when it comes to the insurance industry. Captives in the Cayman Islands are principally governed by the Insurance Act, 2010 (the “Act”).

To establish a Captive in the Cayman Islands CIMA will require a formal application for a Class “B” Insurer’s Licence. This application is prescribed in the Act, and requires, among other things, the following information:

Name of applicant. This refers to the name that the Class “B” Insurer company will bear, which should be pre-approved for use by CIMA and the Registrar of Companies.

A detailed business plan. CIMA will expect to see from the business plan that the proposed Captive operation has been thoroughly researched and properly planned with, among other things, feasibility studies and risk management studies supporting the proposal. It is a requirement of the Act that all Captive insurance companies appoint a local insurance manager and the appointed insurance manager is usually integrally involved in the application process.

iii. Three (3) years’ financial projections.

Personal details and references for proposed directors and shareholders. A completed Personal Questionnaire should be provided in respect of ALL proposed Directors, Officers and Managers. A “police clearance certificate” is also required, but CIMA will accept a sworn Affidavit as an acceptable “other certificate”.

Last two (2) years’ audited statements and/or notarised net worth statement of ultimate beneficial owners.

Confirmation of appointment from a Licensed Insurance Manager and Approved Auditor.

Under the Act, the Class B insurer license is reserved to Captives and is sub-divided into three sub-groups, each relating to a different percentage of the insurer’s related business underwritten by it by reference to net premiums (i.e. Class B(i) 95% or more, Class B(ii) over 50%, and Class B(iii) equal or less than 50%, respectively).

These subdivisions allow CIMA to provide for different thresholds as to (a) Minimum Capital Requirement (“MCR”), (b) Prescribed Capital Requirement (“PCR”) and, consequently, (c) margin of solvency, under The Insurance (Capital and Solvency) (Classes B, C And D Insurers) Regulations, 2012 (the “Regulations”).

(a) Minimum Capital Requirement

Under the Regulations, the MCR, which is described as the minimum capital that an insurer must maintain in order to operate in accordance with the Act, for each Class B licensee is as follows:

In this Briefing Note, we provide a brief overview of the principles governing derivative actions in the Cayman Islands, both in a company and in a limited partnership setting.

A derivative action is one commenced by one or more minority shareholders on behalf of a company of which they are 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 Foss v Harbottle (1843), 2 Hare 461; 67 E.R 189). The circumstances in which such a claim may be brought were set out by Jenkins, L.J., in Edwards v Halliwell [1950] 2 All E.R. 1064:

“It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule [in Foss v Harbottle] is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.”

The true nature of a derivative claim is often misunderstood. In the leading case on such actions in the Cayman Islands, Renova Resources Private Equity Limited [2009] CILR 268, at p. 275, Foster, J cited the explanation of such actions offered by Professor Gower in Modern Company Law, 3rd ed. (1969), at 587:

“Where such an action is allowed, the member is not really suing on his own behalf nor on behalf of the members generally, but on behalf of the company itself. Although (…) he will have to frame his action as a representative one on behalf of himself and all the members other than the wrongdoers, this gives a misleading impression of what really occurs. The plaintiff shareholder is not acting as a representative of other shareholders, but as a representative of the company (…) In the United States (…) this type of action has been given the distinctive name of a “derivative action,” recognising that its true nature is that the individual sues on behalf of the company to enforce rights derived from it.”

Derivative claims, as with the majority of actions commenced in the Cayman Islands, 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 a 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. The same must be issued within 21 days of the later of (a) the date of service of the statement of claim; or (b) the date when notice of an intention to defend was given. Further, the application, together with the affidavit evidence in support and any exhibits, must be served on the defendant or defendants not less than 10 clear days before the date for the hearing of the application (known as the return date). Where the plaintiff does not meet this deadline, the defendant may apply for the dismissal of the action.

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, 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 Assur. Co. Ltd v Newman Indus. 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.”

The Judge further held that (at p. 283):

“For the plaintiff to obtain leave to continue with the action, I consider that I must be satisfied in the exercise of my discretion that its case is not spurious or unfounded, that it is a serious as opposed to a speculative case, that it is a case brought bona fide on reasonable grounds, on behalf of and in the interests of the company and that it is sufficiently strong to justify granting leave for the action to continue rather than dismissing it at this preliminary stage.”

Foster, J., ruled that in order to satisfy the Court in the above terms it was necessary for the plaintiff to do more than show the absence of the grounds required for a strike-out in the ordinary course of litigation. However, the Court should not look to hold a mini-trial of the issues. Instead, the Court should form a view based on its first impressions, having regard to its assessment of all of the evidence before it, including any evidence submitted by the defendant.

The First and Fifth Defendants in Renova Resources Private Equity Limited had sought to argue based on the English authority Airey v Cordell [2007] Bus. L.R. that the Court needed to go further and consider whether a hypothetical independent board acting reasonably would have brought the claim and proceeded with the case. After considering the authorities in the area, Foster, J., concluded that such a question was only relevant where the shareholder in question sought an indemnity for his costs from the company on whose behalf the action was being taken.

In Renova Resources Private Equity Limited the Grand Court held that in appropriate circumstances multiple derivative actions 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 recovery of reflective 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 whose behalf the action was being brought.

In Top Jet Enterprises Limited v Sino Jet Holding Ltd and Jet Midwest Incorporated [2018] CILR 18 the Grand Court held that a shareholder of a Cayman Islands company does not require leave from the Cayman courts (pursuant to Grand Court Rules O.15 r.12A(2)) to pursue a derivative action in a foreign jurisdiction and identified circumstances where an aggrieved shareholder may bring an action against a third party. It was held in that case that, if it can be shown that (i) the matter at hand falls within an exception to the rule in Foss v Harbottle allowing a minority shareholder to sue in the name of the company, and (ii) the third party is either “a party or accessory to or closely associated with the conduct which gives rise to the fraud on the minority”, then a derivative claim against a third party may be permissible.

In a recent decision by the Cayman Islands Court of Appeal in Kuwait Ports Authority & Ors v. Port Link GP Ltd & Ors (CICA (Civil) Appeal Nos. 002 & 003 of 2022, 20 January 2023), the Court of Appeal was asked for the first time to deal with the issue of derivative claims brought by a limited partner on behalf of an exempted limited partnership pursuant to section 33(3) of the Exempted Limited Partnership Act (2021 Revision) (the “ELP Act”) which provides that limited partners may bring an action on behalf of an exempted limited partnership if any one or more of the general partners with authority to do so have, without cause, failed or refused to institute proceedings.

The Court of Appeal’s judgment involved decisions on two separate matters: (i) direct claims brought by limited partners against the general partner, and (ii) derivative claims brought by limited partners both against the general partner and third parties. For the purposes of this note, we will focus on the latter.

As regards the derivative claims brought against the general partner, these were not successful for two main reasons. Firstly, the limited partnership in the case at hand had not suffered any loss or damage and therefore the limited partnership did not have a claim of its own to bring, which in turn meant that the limited partners could not bring a claim derivatively. Secondly, the claims were struck out due to the fact that the limited partners had an adequate alternative remedy in the form of a direct claim against the general partner such that a derivative action was not necessary.

With respect to the derivative claims brought against third parties, the Court of Appeal decided in the limited partners’ favour as it was found that the general partner was under a relevant inhibition due to a conflict of interest which meant that the general partner had, without cause, failed to institute proceedings within the meaning of section 33(3) of the ELP Act and it therefore justified the limited partners’ ability to bring a derivative claim in the circumstances.

This judgment will no doubt be of interest to all of those private equity investors and/or venture capitalists who have, or are looking to, set up their investment vehicle in the Cayman Islands by way of the established GP-LP structure.

For more information relating to derivative claims and/or shareholder/partner disputes more in general, please contact a member of the team at Loeb Smith.
E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E: cesare.bandini@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.