IP encompasses inventions, literary and artistic works, symbols, names and images used in commerce, and is currently the most important assets of many technology and industrial companies. The ability to protect and maximize the value of IP assets is therefore of strategic importance and often is one of the main factors which contribute to a company’s growth.

According to the most recent statistics from the WIPO IP Statistics Data Center, global patent applications in 2015 rose to 2.9 million, with more than 1 million inventions coming from China, while trademark applications reached about 6 million, almost half of them filed by Chinese companies. In a report from the U.S. Department of Commerce published in September 2016, more than 25% of the existing industries in the United States were defined as “IP-intensive”, and in 2014 they already accounted for more than a third of the total GDP of the United States.

Largely known as one of the premier offshore financial centres for hedge funds and other investment vehicles, Cayman is now trying to become a popular destination for IP migration but also development⁵. Businesses in areas related to innovation and technology can now be established in Cayman under the special rules of the Special Economic Zone (SEZ). The SEZ now includes more than 180 tech and knowledge-based companies and is rapidly growing due to entrepreneurs realizing that Cayman is a very attractive place to house IP-intensive businesses.

In the first of our series of legal insights on owning IP through a Cayman Islands structure, we will explore some of the key benefits of incorporating an exempted company as part of the SEZ.

For many of the IP-intensive industries, intangibles are the only fixed assets on a company’s balance sheet. Technology and media businesses develop their customer base all over the world. Such companies often start small, with a team of talented and dedicated people, and in their growing stage may be attracted to relocating in the Cayman Islands⁶ to benefit from its stable yet business-friendly legal framework.

The Cayman Islands exempted company is the preferred corporate structure for such businesses (no regulatory approvals, no need for resident directors, no requirement for an annual audit, and no need for an annual shareholders’ meeting).

In addition, the existing or newly incorporated exempted company may apply to be registered as a Special Economic Zone Company (SEZC), allowing it to benefit from specific advantages such as speeding up very significantly work permit applications for the employees to be relocated to the Cayman Islands or access to very good infrastructure and support services. The SEZ, offering a lean, flexible and tax-friendly regulatory environment in an all-inclusive package, often gives talented inventors and entrepreneurs the best solutions for growth.

Businesses in the following sectors may qualify to set up as an SEZC:

• Commodities & Derivatives
• Media & Marketing
• Internet & Technology
• Biotechnology
• Education & Training

 1.  No Prohibition on Financial Assistance

There is no prohibition in the Cayman Islands for an exempted company to provide financial assistance with regard to the acquisition of its own shares. This provides the founders of a company with significantly more flexibility to structure a deal to buy out a previous shareholder for example without the need to find a third party investor or to become extremely indebted. (The directors of the company owe however 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.)

2.  No Taxes on Income, Disposal of IP Assets or Capital Gains

Remunerations paid to the employees and distributions to shareholders are not subjected to any tax in the Cayman Islands. There are also no taxes for the corporate income or any registration taxes or stamp duty to be paid 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).

3.  More Flexibility for Distributions

Under the Cayman Islands Companies Law, the company has a greater latitude in distributing profits as dividends. For example, a sale of a portion of the IP assets could result in a dividend distribution, but also a simple revaluation of the IP assets on the balance sheet (provided that the valuation is not speculative). Also, the company is permitted to use its share premium account to fund the payment of dividends (provided that the company remains solvent thereafter).

4.  IP Protected by Commercial Confidentiality

The accounts and financial statements of the Cayman Islands exempted company are not filed or published and the corporate documents are not available to inspection by the public, therefore providing a high degree of commercial confidentiality, which is often critical for IP asset protection. Before the company reaches critical mass and is ready to go public, no competitor will be able to glean any information from management reports or financial statements.
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Cayman Islands holding companies, operating companies, and investment funds structured as companies pay dividends and make other distributions to shareholders and investors all the time, but what are the Cayman Islands’ rules governing the payment of dividends and making of distributions? In the first of our series of legal insights on the payment of dividends and other distributions1 by Cayman companies, we explore the concept of “profits” and how “profits” are calculated under Cayman Islands law.

Under Cayman Islands law, even though the shareholders are the owners of a Cayman company the property of that company belongs to the company and not to its shareholders. For this reason a company cannot simply pay or distribute its property to its shareholders. There are legal requirements to be followed in order to ensure, among other things, that the Directors of the company do not, for example, find themselves personally liable for authorising an unlawful dividend or distribution2.

The legal position is that dividends and other distributions of a Cayman company may be paid out of profits or from the company’s share premium account. However, where dividends or other distributions are to be paid from the company’s share premium account, there is a solvency test which must be passed (i.e. immediately following the date on which the distribution or dividend is proposed to be paid, the company must be able to pay its debts as they fall due in the ordinary course of business)3.

Distributions of capital are also permitted by means of the redemption of redeemable shares or the company purchasing its own shares. Under section 37(3)(f) of the Companies Law4, shares may be redeemed or purchased (A) out of profits of the company, (B) out of the share premium account, or (C) out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase, or (D) out of capital if (i) it is authorised by the company’s articles of association and (ii) provided that it passes the solvency test (i.e. immediately following the date on which the payment out of capital is proposed to be made the company must be able to pay its debts as they fall due in the ordinary course of business).

Cayman Islands law as it relates to the payment of dividends out of profits is largely judge-made law. There is no statutory definition of “profits” in the Companies Law and no authority of the Cayman Islands courts which may be looked to for guidance as the meaning of “profits”.

In determining what constitutes “profits” of a Cayman company for the purposes of paying dividends and making other distributions to shareholders and investors5 it is necessary to look at the rules laid down by English case-law authorities based on the English Companies Act 1948 and also earlier English Companies law statutes which are of persuasive authority in the Cayman Islands. Subsequent statutes in England (e.g. the Companies Act 1985 which has been superseded by the Companies Act 2006) and the case-law authority based on such subsequent enactments would not necessarily be regarded as persuasive authority in the Cayman Islands since the Cayman Islands Companies Law is based, in the material part, upon the Companies Act 1948 (and its predecessors) and has not been amended subsequently in a manner analogous to the legislative amendments introduced in England.

In practice, “profits” is normally taken to mean the accumulated retained earnings or profit of previous years which have not been capitalised by a bonus issue or transferred to the capital redemption reserve, shown on the company’s balance sheet, plus all net trading profits shown in the profit and loss account for the current financial year6.

In light of the rulings in the English case-law authorities based on the English Companies Act 1948 and also earlier English Companies law statutes, it would appear that the following rules can be applied as a guide with regard to how the Cayman Islands’ courts would determine the question of how profits in a Cayman company are to be calculated for the purposes of making lawful dividend payments and other distributions:

1.1 A loss made on fixed assets does not have to be recovered before treating a revenue or income profit as available for distribution to shareholders and it is not legally essential to make any provision for depreciation. Sums written off out of past profits as depreciation of fixed capital may be applied as profit available for distribution if on a revaluation of the fixed assets no depreciation has in fact taken place.

1.2 Losses of circulating assets (i.e. trading stock) in the current accounting period must be made good however for otherwise there is no profit.

1.3 A realised capital profit on the sale of fixed assets may be treated as a profit available for distribution at any rate if there is an overall surplus of fixed and circulating assets over liabilities. However best practice is probably to revalue all fixed assets before making this assessment.

1.4 An unrealised capital profit on a revaluation of assets may also be used to fund a distribution to shareholders. However caution must be exercised by the Directors in this situation because an unrealised capital profit may well involve speculative matters of valuation and in the event that a lesser amount is achieved on actual sale a question may always arise as to whether or not the Directors acted properly in arriving at the valuation.

1.5 Losses, even revenue losses on circulating assets (i.e. trading stock/assets being used up in the business) made in a previous accounting period need not be recovered, if there were no profits carried forward into that period to make them good, since such losses are then categorised as losses of capital.

1.6 A distribution to shareholders can be made provided there is a profit on the current financial year of the company regardless of capital losses of a prior financial year. In other words, for the purposes of this rule each accounting period is treated in isolation .

1.7 However, in contrast to the above-mentioned rule, past profits (retained earnings) from a previous financial period may be carried forward and used to fund a distribution in the current financial year.

This Guidance Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and general guidance only. For more specific advice please refer to your usual Loeb Smith contact or:

E gary.smith@loebsmith.com

E ramona.tudorancea@loebsmith.com

E elizabeth.kenny@loebsmith.com

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Renewal of Director registration

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

Resignation from a Covered Entity

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

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

Surrender of Director registration

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

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

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

1. that he or she has resigned as a Director of all Covered Entities;

2. that he or she no longer plans to act as a Director on any Covered Entity; and

3. that if he or she would like to act on any other Covered Entity or wishes to resume directorship services after he or she has surrendered his or her registration or licence, he or she will re-apply under the DRLL.

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

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

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

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

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

In our previous publication Interim Payment Relief: New Developments Regarding Dissenters’ Rights under Cayman Merger Law, we discussed a new and significant development for minority shareholders in their quest to obtain the “fair value” for their shares in the context of a merger take-private carried out under the Cayman Islands statutory merger regime (the “Cayman Merger Law”).

In an interim judgement issued on 26th January 2017 in the matter of Blackwell Partners LLC et al v. Qihoo 360 Technology Co Ltd., the Court decided that interim payments pursuant to the Grand Court Rules (G.C.R.) could be requested by dissenting shareholders and granted by the Court during the judicial proceedings initiated under Section 238 of the Cayman Merger Law. Dissenters’ rights to interim payments now seem entrenched after a second decision was issued on 8th August 2017 in the matter of Qunar Cayman Islands Ltd.

Building upon the reasoning previously adopted by the Court in Qihoo 360 Technology Co Ltd., the recent ruling in Qunar Cayman Islands Ltd. provides further guidance on interim relief available as part of proceedings initiated under Section 238 of the Cayman Merger Law.

1. Availability of Interim Relief Confirmed: As expected, the recent judgment followed Qihoo 360 Technology Co Ltd. and confirmed that requests for interim payment can be made by dissenting shareholders as part of the Section 238 proceedings, and that the Court has jurisdiction to grant such payments, in an amount determined to be “just”. In the matter of Qunar Cayman Islands Ltd., the “just” payment was deemed to be equal to the amount of the merger consideration which had been offered generally to the shareholders by the company.

2. Evidence Needed for Interim Relief to be Granted: At this stage, it seems unlikely that any interim payments ordered as part of Section 238 proceedings will exceed the merger consideration as approved as part of the merger agreement, especially if, as was the case in Qunar Cayman Islands Ltd., the request for interim relief is made before any expert report is submitted on valuation issues. For the purposes of interim relief, however, the Court appears willing and able to rely entirely on the company’s affirmations that the merger price represented the fair value of shares, without requiring dissenters to present any additional “fair value” evidence.

3. Costs of the Interim Relief Application: At this stage and taking account that interim payments in the context of judicial proceedings initiated under Section 238 of the Cayman Merger Law are a new development, the Court decided not to grant the dissenters’ request that the company bear the costs of the application. However, in the future, it cannot be excluded that such request for costs be granted by the Court.

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

Gary Smith

E gary.smith@loebsmith.com

Ramona Tudorancea

E ramona.tudorancea@loebsmith.com

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

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

Trademarks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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