Voluntary liquidation or Strike-off?

Alternatives to voluntarily achieving the conclusion of operations and dissolution of Cayman companies

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. If the company has entered into any agreements with clients, customers and suppliers and/or undertaken any trading activities since its incorporation, the more common and appropriate choice is to undertake a formal liquidation of the company by way of a shareholders’ voluntary liquidation. If the company has not entered into any agreements and/or undertaken any trading activities since its incorporation then it might consider a strike-off. However, a strike- off is only suitable as an alternative to a voluntary liquidation for companies that have never actually traded or have not traded for a long period of time because any shareholder or creditor, during the period of two years (see further details below) of the strike-off, can apply to have the company restored to the Register maintained by the Registrar of Companies in the Cayman Islands.

Assessment

1. The main advantage of seeking dissolution of the company via the strike-off route is that this would be a simpler legal process (even though not necessarily a simpler process for the company’s Directors as they have to deal with paying, settling and discharging all liabilities and distributing any remaining company assets prior to a strike-off) and is normally quicker than a shareholders’ voluntary liquidation of the company.

2. There are risks associated with achieving a dissolution via the strike-off route, including:

i. the strike-off process is more suited to companies which have never traded because it does not deal with the company’s liabilities to creditors and is not suitable for companies with extensive trading operations or valuable assets;

ii. in cases where there are any dissatisfied creditors or shareholders of the company, they can apply to the Cayman Islands Court at any time within a period of up to 2 years (this period may be extended by the Governor of the Cayman Islands for up to 10 years from the strike-off date) after the strike-off to have the company restored to the Companies’ Register. The Court will normally order a restoration if it feels that the company was at the time of the strike-off, carrying on business, or was in operation, and it is “just” to restore it – for example, in cases where the Court feels that creditors should be allowed to take proceedings to recover assets. If the company is restored to the Register it is deemed to have continued in existence as if its name had not been struck off but the Court can also make other orders as seem “just” for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been subject to a strike-off;

iii. unless the company has properly distributed all residual assets prior to strike-off, any assets held by the company at the time of strike-off will pass to the Financial Secretary of the Cayman Islands government (and will be subject to being disposed of by the Governor of the Cayman Islands or being retained for the benefit of the Cayman Islands) upon dissolution;

iv. the strike-off process, therefore, does not cut off creditors’ options in the way that a properly executed voluntary liquidation process would, and the creditors who wish to challenge distributions made to the shareholders prior to a strike-off, for example, may be able to apply to the Court to have the company restored and raise claims well after the strike-off and dissolution.

3. Unlike the strike-off process, the ability to restore the company is not available to creditors or shareholders after the conclusion of a properly executed voluntary liquidation.

4. In determining whether to (i) seek a voluntary liquidation or (ii) a strike-off, the directors of a Cayman Islands company should assess, among other things:

i. the nature and extent of the assets and liabilities of the company and deal with these accordingly (i.e. discharge any and all creditors and transfer out all assets);

ii. whether or not there is a real risk of, for example, a shareholder or creditor seeking a restoration of the company in the future if the company is dissolved by strike-off.

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Assessment

1. The main advantage of seeking dissolution of the company via the strike-off route is that this would be a simpler legal process (even though not necessarily a simpler process for the company’s Directors as they have to deal with paying, settling and discharging all liabilities and distributing any remaining company assets prior to a strike-off) and is normally quicker than a shareholders’ voluntary liquidation of the company.

2. There are risks associated with achieving a dissolution via the strike-off route, including:

    • the strike-off process is more suited to companies which have never traded because it does not deal with the company’s liabilities to creditors and is not suitable for companies with extensive trading operations or valuable assets;
    • in cases where there are any dissatisfied creditors or shareholders of the company, they can apply to the Cayman Islands Court at any time within a period of up to 2 years (this period may be extended by the Governor of the Cayman Islands for up to 10 years from the strike-off date) after the strike-off to have the company restored to the Companies’ Register. The Court will normally order a restoration if it feels that the company was at the time of the strike-off, carrying on business, or was in operation, and it is “just” to restore it – for example, in cases where the Court feels that creditors should be allowed to take proceedings to recover assets. If the company is restored to the Register it is deemed to have continued in existence as if its name had not been struck off but the Court can also make other orders as seem “just” for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been subject to a strike-off;
    • unless the company has properly distributed all residual assets prior to strike-off, any assets held by the company at the time of strike-off will pass to the Financial Secretary of the Cayman Islands government (and will be subject to being disposed of by the Governor of the Cayman Islands or being retained for the benefit of the Cayman Islands) upon dissolution;
    • the strike-off process, therefore, does not cut off creditors’ options in the way that a properly executed voluntary liquidation process would, and the creditors who wish to challenge distributions made to the shareholders prior to a strike-off, for example, may be able to apply to the Court to have the company restored and raise claims well after the strike-off and dissolution.

3. Unlike the strike-off process, the ability to restore the company is not available to creditors or shareholders after the conclusion of a properly executed voluntary liquidation.

4. In determining whether to (i) seek a voluntary liquidation or (ii) a strike-off, the directors of a Cayman Islands company should assess, among other things:

  • the nature and extent of the assets and liabilities of the company and deal with these accordingly (i.e. discharge any and all creditors and transfer out all assets);
  • whether or not there is a real risk of, for example, a shareholder or creditor seeking a restoration of the company in the future if the company is dissolved by strike-off.

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The Cayman Islands (Cayman) has been the leading offshore jurisdiction for merger and acquisition (M&A) activity over the last three (3) years. In 2015, Cayman-incorporated companies were the target of 863 transactions worth a combined value of USD116.41bn. The value was more than twice the amount of the British Virgin Islands with USD49.62bn (with 387 M&A transactions) and well in excess of Bermuda with 498 M&A transactions with a combined value of USD67.57bni. In 2016, Cayman-incorporated companies again led the way in terms of offshore M&A activity and were the target of transactions worth a combined USD68.85bn followed by the British Virgin Islands with USD41.65bn and Bermuda with USD41.25bnii. By way of comparison, Hong Kong incorporated companies were the target of transactions worth a combined USD33.19bn in 2016iii. Cayman-incorporated companies were the target of transactions worth a total USD80bn in 2017 and USD60bn in the first half of 2018.

 

The Cayman Merger Law regime is attractive for both companies and investors, due to the process being relatively straightforward and simpler than either a takeover offer (tender offer) under section 88 of the Cayman Islands Companies Law or a court-approved scheme of arrangement under section 86 or 87 of the Cayman Islands Companies Law. Set out below are the basic steps in the process of effecting a merger under Part XVI of the Cayman Islands Companies Law (As Revised).

 

  1. Forming MergerCo. The most straightforward structure used for a merger take-private is that a new company (“MergerCo”) is formed in the Cayman Islands by the investors adhering to the takeover group (often involving the founders/managers of the listed company, its parent and/or several private equity (PE) investors acting as sponsors for the purposes of the take-private transaction) (the “Buyout Group”) to take on finance and to be ultimately merged with the company which is the target of the take-private (“Target”).
  2. Take-Private Offer. After obtaining legal and financial advice, the Buyout Group agrees on the terms of the proposed merger take-private and the consideration which would be offered to the shareholders of the Target and makes an offer to the Board of the Target (the “Initial Take-Private Offer”). Since most of the take-private transactions are initiated by or with involvement of the management or certain shareholders represented at Board level, the merger process requires that a special committee formed of independent directors (the “Special Committee”) be designated to review the take-private offer and negotiate on behalf of the Target with the Buyout Group. This is both to ensure that the Board is in compliance with the fiduciary duties it owes the Target, and to avoid any accusation of self-dealing.
  3. Negotiations. The Special Committee reviews and negotiates the offer with the help of its own independent legal and financial advice, which may lengthen the process. Overall, the typical mission of the Special Committee is to: (i) investigate and evaluate the Initial Take-Private Offer, (ii) discuss and negotiate any terms of the merger agreement (the “Merger Agreement”), (iii) explore and pursue any alternatives to the Initial Take-Private Offer as the Special Committee deems appropriate, including maintaining the public listing of Target or finding an alternative buyer, (iv) negotiate definitive agreements with respect to the take-private or any other transaction, and (v) report to the Board the recommendations and conclusions of the Special Committee with respect to the Initial Take-Private Offer.
  4. Board Approval. The directors of each company participating in a merger (MergerCo and Target) are required to approve the terms and conditions of the proposed merger (the “Plan of Merger”), including, among other things:
    1. how shares in each participating company will convert into shares in the surviving company or other property (e.g. cash payable to shareholders);
    2. what rights and restrictions will attach to the shares in the surviving company;
    3. how the Memorandum and Articles of Association of the surviving company are amended; and
    4. what are the amounts or benefits paid or payable to any director consequent upon the merger.
  5. Shareholder Approval. For each constituent company (MergerCo and Target), the Plan of Merger is required to be authorized by a special resolution of the shareholders who have the right to receive notice of, attend and vote at the general shareholders’ meeting (“EGM”), voting as one class with at least two-thirds majorityiv.
  6. Consents. Each participating company must also obtain the consent of (i) each creditor holding a fixed or floating security interestv, and (ii) any other relevant consents or filings with relevant regulatory authorities, such as the Cayman Islands Monetary Authority or authorities in the overseas jurisdiction where the Target is registered and/or operates.
  7. Filing and Registration. After obtaining all necessary authorizations and consents, the Plan of Merger is required to be signed by a director on behalf of each participating company and filed with the Cayman Islands Registrar of Companies, who will register the Plan of Merger and issue a certificate of merger.
  8. Effective Date. The merger will be effective on the date that the Plan of Merger is registered by the Registrar of Companies unless the Plan of Merger provides for a later specified date or eventvi. Upon the effective date, all rights and assets of each of the participating companies shall immediately vest in the surviving company and, subject to any specific arrangements, the surviving company shall inherit all assets and liabilities of each of the participating companies (MergerCo and Target).
  9. Shareholder Dissent. Any shareholder of a company participating in the merger is entitled to payment of fair value of its shares upon dissenting from the merger under Section 238 of the Cayman Islands Companies Law. Fair value can either be agreed between the parties or determined by the Cayman Court.

 

i Figures from the M&A Latin America and Global Review published by Bureau van Dijk (Zephyr) for the year 2016.
ii Ibid.
iii Figures from the M&A Greater China Review published by Bureau van Dijk (Zephyr) for the year 2016.
iv Or such higher threshold as may be specified in the Memorandum and Articles of Association.
v Or, if the secured creditor fails to grant such consent, the company may apply to the court for a waiver.
vi If date or event is not more than 90 days after the Plan of Merger is registered by the Registrar of Companies.

LEGAL UPDATE

 

Undertaking Voluntary Liquidations of Cayman Islands’ Entities prior to 31 December 2019.

 

Voluntary liquidations generally

 

As the conclusion of 2019 approaches, clients should give some thought to whether or not they have Cayman entities which they are no longer using and wish to liquidate prior to the end of 2019 in order to, among other things, avoid annual government registration fees due in January 2020. A voluntary liquidator of a Cayman company or exempted limited partnership (ELP) is required to hold the final general meeting for that company or file the final dissolution notice for that ELP on or before 31 January 2020.

 

Voluntary liquidations – Funds registered with CIMA

 

Investment Funds which are registered with the Cayman Islands Monetary Authority (CIMA) should commence voluntary liquidation and submit documents to CIMA in order to have those Funds’ status change from “active” to “license under liquidation” by Tuesday, 31 December 2019 if they are to avoid their annual fees payable to CIMA for 2020. It is also important for investment funds registered with CIMA to give some thought to CIMA’s requirement for a final “stub” audit for the period of 2019 in respect of which the Fund operated before going into liquidation. CIMA may be reluctant to grant a partial year audit waiver for a liquidating Fund.

 

As an alternative to voluntary liquidation, some investment fund managers might be considering a wind down of one or more CIMA registered funds prior to the end 2019 and wish to de-register from CIMA or at least go into the status of “licence under termination” with CIMA in order to avoid or reduce annual registration fees payable to CIMA for 2020. If not already started, we recommend that action be taken now to begin this process.

 

For specific advice on voluntary liquidations of Cayman Islands’ entities or winding down investment funds before 31 December 2019, please contact any of:

 

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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The Cayman Islands Data Protection Law, 2017 (“DPL”) which will regulate the future processing of all personal data in the Cayman Islands or by any entity established in the Cayman Islands will come into effect on 30 September 20191. Cayman Islands’ entities that handle any individual’s personal information will have certain obligations with respect to that information, including ensuring that any such individual is formally notified as to what any of their personal data is being used for, and by whom. The DPL will have significant implications for investment funds, investment managers and fund administrators, either based in the Cayman Islands or dealing with personal data collected or processed by Cayman Islands entities.

 

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As part of the subscription process in a Cayman Islands investment fund, investors are required to provide a government-issued photo ID, information relating to source of funds and wealth, contact details, payment details, and tax residence information, and sometimes certain additional information about employment, dependents, income and investment objectives (the “Investor Personal Data”), which are processed and stored by or on behalf of the investment fund (the “Fund”) and/or by one or more of the service providers to the Fund. Some of the processing may be done in various jurisdictions.

 

Generally, the Fund, the administrator of the Fund, any transfer agent or distributor, and the investment manager of a Fund may fall within the definition of a Data Controller or Data Processor under the DPL. For purposes of ensuring compliance, the distinction between a Data Controller and a Data Processor is important, since there is no specific liability under the DPL for Data Processors. Data Controllers will instead be held liable for how the Investor Personal Data is processed.

 

The Fund’s Board of Directors should review the contractual arrangements with the Data Processors and update them as needed to ensure compliance with the DPL; based on the number of investors in the Fund, a Data Protection Officer may need to be appointed, although this is not a formal requirement under the DPL. The Fund’s Board of Directors may also request that the current administrator and investment manager of the Fund, if they are not based in the Cayman Islands, document and confirm compliance with the DPL or a similar data protection legislation.

 

As a reminder, the Board of Directors of the Fund is required to supervise third party service providers and ensure that there are sufficient measures in place to protect Investor Personal Data. Privacy Notices in the Fund’s offering documents and in the subscription application should be updated to ensure that investors are fully aware of where their Personal Data is being processed, by whom, and for what purpose.

Main Provisions of the Data Protection Law 2

Personal Data

Any information relating to an individual who can be identified, directly or indirectly, from that data (including online identifiers such as IP addresses and cookies may qualify as personal data if they are capable of being linked back to the individual).

Data Controller

A Data Controller is a person who, alone or jointly with others determines the purposes, conditions and manner in which any personal data are, or are to be, processed. The DPL applies to any Data Controller if (a) the Data Controller is established in the Cayman Islands3 and the personal data are processed in the context of that establishment; or (b) the Data Controller is not established in the Cayman Islands but the personal data are processed in the Cayman Islands otherwise than for the purposes of transit4. In this case, Art. 6(2) of the DPL requires the appointment of a local representative which shall be considered a Data Controller.

Privacy Notice

At the time of collection of the data, individuals must be informed of the purposes and details behind the processing, the details of transfers of data and any security and technical safeguards in place. This information is generally provided in a separate privacy notice.

Right to Access

Individuals have the right to obtain confirmation that their Personal Data is processed and to have access to it. Data Controllers must respond within a month of the access request. The DPL permits a reasonable fee to be charged in certain cases.

Retention Period

If there is no compelling reason for a Data Controller to retain Personal Data, a data subject can request its secure deletion.

Right to Erase

Should the individual subsequently wish to have his/her data removed and the Personal Data is no longer required for the reasons for which it was collected, then it must be erased. Data Controllers must notify third party processors or sub-contractors of such requests.

Transfers

International transfers of Personal Data are permitted to third party processors or between members of the same group.

Data Security

Appropriate technical and organisational measures must be taken to prevent unauthorised or unlawful processing of Personal Data and against accidental loss or destruction of, or damage to, Personal Data5.

Data Processors

A Data Processor is any person who processes Personal Data on behalf of a Data Controller (but does not include the employees of the Data Controller). There is no liability for processors under the DPL. However, they may be held liable based on contract or tort law.

Data Breach

In the event of a Personal Data breach, the Data Controller must, “without undue delay” but no longer than five (5) days after the Data Controller should have been aware of that breach, notify the Cayman Ombudsman and any affected individuals6.

Breach Notice

The notification should describe the nature of the breach, its consequences, the measures proposed or taken by the Data Controller to address the breach, and the measures recommended by the Data Controller to the individual concerned to mitigate the possible adverse effects of the breach.

Right to be Forgotten

The DPL contains a similar right, although this is expressed as a general right of “erasure”. Under the UK’s Data Protection Act, the right is limited to processing that causes unwarranted and substantial damage or distress. Under the DPL this threshold is not present. If there is no compelling reason for a Data Controller to retain Personal Data, a data subject can request its secure deletion.

Right to Object

An individual has the right at any time to require a Data Controller to stop processing his/her Personal Data for the purposes of direct marketing. There are no exemptions or grounds to refuse. A Data Controller must deal with an objection to processing for direct marketing at any time and free of charge.

Direct Marketing and Consent

Including an unsubscribe facility in each marketing communication is recommended best practice. If an individual continues to accept the services of the Data Controller without objection, consent can be implied.

Data Processors

Best practice would always be to put in place a contract between a controller and processor. Essentially, the contract should require the Data Processor to level-up its policies and procedures for handling personal data to ensure compliance with the DPL. Use of sub-contractors by the service provider should be prohibited without the prior approval of the Data Controller7.

Data Protection Officer

The DPL does not require the appointment of a Data Protection Officer, although this is recommended best practice.

Penalties

Refusal to comply or failure to comply with an order issued by the Cayman Ombudsman is an offence. Penalties are also included for unlawful obtaining or disclosing Personal Data8. Directors may be held liable under certain conditions9.

The Data Controller is liable on conviction to a fine up to CI$100,000 (circa US$122,000) or imprisonment for a term of 5 years or both. Monetary penalty orders of an amount up to CI$250,000 (circa US$304,878) may also be issued against a Data Controller.

 

If you would like to discuss the application of the DPL to your particular Cayman Islands entity, please contact your usual Loeb Smith attorney or any of:

 

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

 

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1. The Data Protection Law, 2017 (Commencement) Order, 2019
2. This is not a comprehensive analysis of the DPL.
3. Other than residents, fall under this category companies incorporated or registered as a foreign company in the Cayman Islands, partnerships and associations formed in the Cayman Islands, as well as any persons who maintain in the Cayman Islands an office, branch or agency, or a regular practice.
4. See Art. 6 of DPL
5. See Schedule 1 of DPL
6. See Art. 16 of DPL
7. Under DPL, the Data Controller is liable for breaches and non-compliance, whereas processors may not be. It is therefore very im-portant for a Fund’s Board of Directors to ensure that adequate contractual protections are in place.
8. See Arts. 53-54 of DPL
9. See Art. 58 of DPL

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REMINDER FOR ENTITIES REGISTERED WITH CIMA AS SIBL EXCLUDED PERSONS

The deadline for filing the following AML/CFT Reporting Forms:

AML/CFT Inherent Risks – Securities – AIR-157-75

AML/CFT Risk Controls – Securities – ARC-158-75

with the Cayman Islands Monetary Authority is 15th August, 2019.
Each Form is available on the Regulatory Enhanced Electronic Forms Submission (REEFS) platform. The Guidance Notes for the completion of the AML/CFT Reporting Forms are available on CIMA’s website https://www.cima.ky/reefs-forms-guidance-notes.

For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com

E: ramona.tudorancea@loebsmith.com

E: vivian.huang@loebsmith.com

E: yun.sheng@loebsmith.com

E: elizabeth.kenny@loebsmith.com

E : santiago.carvajal@loebsmith.com

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The Cayman Islands International Tax Co-operation (Economic Substance) Law, 2018 (the “Economic Substance Law”), which is part of the OECD’s global Base Erosion and Profit Shifting (BEPS) initiative, was passed on 17 December 2018 and came into effect on 1 January 2019. The Economic Substance Law will be implemented, including by further regulations and guidance to be provided, by the Cayman Islands Tax Information Authority (“TIA”). All international offshore financial centres (including Bermuda, BVI, Jersey, Guernsey and Hong Kong) already have or will implement similar legislation.

 

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To whom does the new Economic Substance Law apply?

 

All companies incorporated under the Companies Law (2018 Revision) (the “Companies Law”), limited liability companies registered under the Limited Liability Companies Law (2018 Revision) (the “LLC Law”), limited liability partnerships registered in accordance with the Limited Liability Partnership Law (2018 Revision) (the “LLP Law”), or companies incorporated outside of the Cayman Islands and registered under the Companies Law, which are registered as exempted will fall under the scope of the new Economic Substance Law (collectively referred to as “Relevant Entities”).

 

Relevant Entities which carry out certain activities (defined as “Relevant Activities”) will have several reporting obligations and will be required to satisfy an economic substance test in relation to each Relevant Activity carried out. As defined in Schedule 2 of the Economic Substance Law, the Relevant Activities are (i) banking (ii) distribution and service centre, (iii) financing and leasing, (iv) fund management, (v) headquarters business, (vi) holding company, (vi) insurance, (vii) intellectual property (IP), and (viii) shipping.

 

In this Alert, we highlight the principal requirements and obligations imposed on Relevant Entities under the Economic Substance Law, which is applicable to existing Relevant Entities from 1st July 2019, and immediately applicable for newly created entities. Existing Relevant Entities have accordingly been granted a six (6) months transitional period to review their activities and corporate organization in the Cayman Islands and determine what (if any) steps are needed for compliance purposes. Further guidance will be provided by the TIA on certain aspects as indicated below.

Who are excluded from the application of the new Economic Substance Law?

 

The new Economic Substance Law will not apply to Relevant Entities where:

 

i. their business is centrally managed and controlled in a jurisdiction outside the Cayman Islands and the Relevant Entities themselves are a tax resident of another jurisdiction; or

ii. the Relevant Entities are investment funds or an investment vehicle (SPVs).

 

Main Requirements and Obligations of the new Economic Substance Law

 

1. Relevant Entities are required to satisfy an economic substance test with respect to each Relevant Activity carried out by them. Section 4 of the Economic Substance Law sets out the specific requirements which have to be met in order to satisfy the economic substance test, as follows:

 

(a) The Relevant Entity is required to conduct Cayman Islands core income generating activities (“CIGAs”) in relation to that Relevant Activity. CIGAs are defined as being activities which are of central importance in terms of generating income and which are being carried out in the Cayman Islands. Specific examples of such activities are included for each Relevant Activity. For example, in relation to fund management business, such activities include making investment decisions (i.e. regarding holding or selling investments), calculating risk and reserves, making decisions on currency or interest fluctuations and hedging positions, preparing reports or returns, or both, to investors or to the Cayman Islands Monetary Authority (“CIMA”), or both. In relation to headquarters business, such activities include making relevant management decisions, incurring expenditures on behalf of group entities, and coordinating group activities. In relation to intellectual property business, such activities include research and development and/or branding, marketing and distribution, and in certain cases making strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the IP, to acquisition by third parties and subsequent exploitation and protection of the IP, and/or carrying on the underlying trading activities through which IP rights are exploited.

 

(b) The Relevant Entity is required to be directed and managed in an appropriate manner in the Cayman Islands in relation to that Relevant Activity. The specific requirements with respect to management are:

 

i. the board of directors, as a whole, should have the appropriate knowledge and expertise to discharge its duties as a board of directors;

ii. meetings of the board of directors should be held in the Cayman Islands at adequate frequencies given the level of decision making required;

iii. during a meeting of the board of directors a quorum of directors should be present in the Cayman Islands for such meetings;

iv. the minutes of the meetings of the board of directors should record the making of strategic decisions at the meeting; and

v. the minutes of all meetings of the board of directors and appropriate records should be kept in the Cayman Islands.

 

(c) Having regard to the level of relevant income derived from the Relevant Activity carried out in the Cayman Islands:

 

i. the books of the Relevant Entity should record an adequate amount of operating expenditure incurred in the Cayman Islands;

ii. the Relevant Entity should have an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and

iii. the Relevant Entity should have an adequate number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

Service Provider Arrangements – The Relevant Entity may also satisfy the economic substance test if its CIGAs are conducted by another person in the Cayman Islands, provided that the Relevant Entity is able to monitor and control the carrying out of the CIGAs by such other person. Service provider arrangements may therefore be used for purposes of maintaining a sufficient physical presence in the Cayman Islands.

 

Also, provisions have been included for holding companies (including intellectual property holding companies), taking account of the specific nature of their activities.

 

Finally, further guidance will be issued by TIA on satisfying the economic substance test.

2. Relevant Entities are required to report to TIA on an annual basis. Relevant Entities will be required to notify the TIA annually as (i) to whether or not they are carrying on one or more Relevant Activities, (ii) if any portion of the gross related income is taxed in any jurisdiction outside of the Cayman Islands, and (iii) the date of the end of their financial year. Relevant Entities will also be required, within twelve (12) months after the end of each financial year commencing on or after 1 January 2019 , to make a detailed annual report to the TIA regarding any Relevant Activities carried out during the year, which will include information with respect to income, assets, expenses, location of the business in the Cayman Islands, employees, CIGAs, information with respect to the group (if applicable), as well as certain other information if the Relevant Activity is defined as a high risk intellectual property business. In addition, the TIA has authority to request further information and the Relevant Entities have an obligation to provide such further information, and also retain all records related to the economic substance test for a period of six (6) years.

3. Relevant Entities which fail to report or provide information or are deemed by TIA not to satisfy the economic substance test will be sanctioned.

 

If a Relevant Entity fails, in the determination of the TIA, to satisfy the economic substance test for a financial year, TIA will issue a notice to that effect, advise the Relevant Entity of what actions would be required, and impose a penalty of CI$10,000 (approximately USD$12,200), to be paid within twenty-eight (28) days after the date of issue of the notice. If the TIA determines that such Relevant Entity has failed the economic substance test for the following year as well, then a further notice with an increased penalty of CI$100,000 (approximately USD$122,000) is issued and a report is filed by the TIA with the Registrar of Companies (which is then required by law to apply to the Grand Court to have an order issued against the Relevant Entity or have it declared defunct). The TIA’s decisions are subject to appeal.

 

Directors, managers or managing members of Relevant Entities may also be liable for offenses, including in case of neglecting their duties. Finally, persons failing to provide information upon a request by the TIA or which knowingly or wilfully alter, destroy or remove information commit an offence and are liable on summary conviction to a fine of CI$10,000 (approximately USD$12,200) or to imprisonment for a term of two (2) years, or to both.

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

 

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com

 

1  Banking is defined by reference to Section 2 of the Cayman Islands Banks and Trust Companies Law (2018 Revision), according to which banking is the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or other similar account money which is repayable by cheque or order and may be invested by way of advances to customers or otherwise.

 

2  Distribution and service centre business means either or both purchasing from an entity in the same group component parts or materials for goods or goods ready for sale, and reselling such component parts, materials or goods, and/or providing services to an entity in the same group in connection with the business outside the Cayman Islands.

 

3  Financing and leasing means the business of providing credit facilities for any kind of consideration to another person but does not include financial leasing of land or an interest in land.

 

4  Fund management means the business of managing securities as set out in paragraph 3 of Schedule 2 to the Securities Investment Business Law (2015 Revision) (“SIBL”), carried on by a Relevant Entity licensed under SIBL for an investment fund.

 

5 Headquarters business means providing, to an entity in the same group, senior management services, assumption or control of material risk for activities carried out, or the provision of substantive advice in connection with the assumption or control of risk.

 

6 Intellectual property business means holding, exploiting or receiving income from intellectual property assets, i.e. an intellectual property right including a copyright, design right, patent and trademark.

 

7  See The International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018.

 

8 For the purposes of the Economic Substance Law, an “investment fund” means an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates, but does not include a person licensed under the Cayman Islands Banks and Trust Companies Law (2018 Revision) or the Cayman Islands Insurance Law, 2010, or a person registered under the Cayman Islands Building Societies Law (2014 Revision) or the Cayman Islands Friendly Societies Law (1998 Revision).

 

9  It is, however, unclear on what basis the TIA would be able to decide if this requirement is met. If it likely that for any entities already licensed by CIMA this requirement would be deemed as having been met.

 

10 The Companies Law is generally permissive of Board meetings in any video- or conference call format and typically does not require a certain frequency for meetings. Due to the new requirements set out by the Section 4(3) of the Economic Substance Law, the Memorandum and Articles of Association of the relevant Entities may need to be amended on these aspects. For LLCs and partnerships, these new requirements would be adjusted based on the corporate governance structure of such entities.

 

11 Section 7(1) of the Economic Substance Law

 

12 Evidence to be provided to TIA to support such declaration of tax residence.

 

13 See The International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018.

 

14 Sections 7(3) and 7(4) of the Economic Substance Law

 

15 Section 8(1) of the Economic Substance Law

 

16 Sections 8(10) and 8(11) of the Economic Substance Law

 

17 Section 8(9) of the Economic Substance Law

 

18 Section 14 of the Economic Substance Law

 

19 Section 7(9) of the Economic Substance Law

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Introduction

In general, the rights of shareholders of Cayman Islands domiciled companies are governed by the provisions of the Companies Law (2018 Revision) as amended (the “Companies Law”) and the provisions contained in the Memorandum of Association (“Memorandum”) and Articles of Association (“Articles”) of the company. Section 25(3) of the Companies Law states that, when registered, the Articles bind the company and its members to the same extent as if each member had subscribed his name and affixed his seal thereto, and there were in such Articles contained a covenant on the part of himself, his heirs, executors and administrators to conform to all the regulations contained in such Articles subject to the Companies Law. The Articles therefore creates a statutory contract between the members and the company. Each shareholder by agreeing to be a member of the company agrees to be bound by the voting provisions set out in the Articles and subject to the decisions of the majority or special majorities required under the Companies Law and the Articles

The provisions of the Companies Law which govern minority shareholder protection are to a large extent derived from the equivalent provisions in English law. However there are some differences.

Unfair Prejudice

Unlike under English law, there is no ability for a shareholder of a Cayman Islands company to bring a petition before the Cayman Islands Grand Court (the “Court”) on the basis of “unfair prejudice”. However under section 95(3) of the Companies Law, the Court hearing a just and equitable winding-up petition has the discretion to grant alternative remedies to a winding-up, which are the same as the remedies which an English court can grant on an “unfair prejudice” petition, including the following:

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

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

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

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

Right to Information

A shareholder of a Cayman Islands company has no right by virtue of his position as shareholder to be provided with information regarding the company, including the company’s accounts unless such a right is specifically stated in the Articles, or has been agreed by contract (e.g. in a shareholders agreement) which is binding on the company. A search request can be submitted to the Cayman Islands Companies Registry in respect of the company but the only information a search will reveal is the company’s name, number, formation date, type, registered office and status.

Under section 64(b) of the Companies Law, the Court may appoint one or more competent inspectors to examine into the affairs of a company and to report thereon to the Court in such manner as the Court may direct on the application of the holders of not less than one-fifth (1/5) of a company’s issued and outstanding shares. Section 65 of the Companies Law states that it is the duty of all officers and agents of the company to produce for examination by an inspector all books and documents in their custody or power; any inspector may examine upon oath the officers and agents of the company in relation to its business, and may administer such oath accordingly; and any officer or agent who refuses or neglects to produce any book or document directed to be produced, or to answer any question relating to the affairs of the company, shall incur a penalty in respect of each such offence.

Right to bring Personal Action

A shareholder in a company may be able to bring an action directly against the company’s directors if the shareholder can show that the directors have breached a duty owed to the shareholder personally (instead of a duty owed to the company). However actions against directors for breach of their duties, are typically brought to enforce a right belonging to the company rather than to one or more shareholders and accordingly such actions brought to enforce a right belonging to the company, as a general rule of law, have to brought by the company itself (i.e. the right will lie with the Board of Directors of the company for and on behalf of the company).

Derivative Actions

As stated above, the general principle is that an action seeking to enforce a right belonging to a company has to be brought by the company itself. This rule derives from the English common law case of Foss v. Harbottle [1843] 2 Hare 461. The Cayman Islands Court of Appeal has affirmed this principle in two cases: Schultz v Reynolds [1992-93] CILR 59; and Svanstrom v Jonasson [1997] CLLR 192.

Since the right to bring an action to enforce a right belonging to the company belongs to the company, the litigation has to be brought by the company itself. Normally, a company’s Articles will state that the right to commence litigation will lie with the company’s Board of Directors. The shareholder(s) will therefore need to persuade the directors to bring an action on behalf of the company. If the directors decline to take this action, the shareholder(s) would then typically want to consider whether they can replace the directors with a newly constituted Board, who can then initiate the action against the former directors. The procedure for removal and replacement of directors will be set out in the Articles.

There will be instances when a shareholder, who is in the minority on a vote at a general meeting, will wish to object to the result. Generally speaking, a shareholder will object to the result of a vote in circumstances where (X) in the shareholder’s view, harm will result to the company (and consequently the value of the shareholder’s shareholding), or (Y) the shareholder’s personal rights as shareholder have been infringed.

The English common law case of Foss v. Harbottle mentioned above, has also been extended to cover the principle that “an individual shareholder cannot bring an action in the courts to complain of an irregularity (as distinct from an illegality) in the conduct of the Company’s internal affairs if the irregularity is one which can be cured by a vote of the Company in general meeting” (Prudential Assurance Co. Ltd. v Newman Industries (No. 2) [1982] Ch. 204, C. A,). This is often referred to as the second limb of the rule in Foss v Harbottle. The reason behind what is known as the second limb of the rule in Foss v Harbottle was the courts desire to avoid futile litigation. If the thing complained of was an action which in substance was something the majority of the company’s shareholders were entitled to do, or if something has been done irregularly which the majority of the company’s shareholders are entitled to do regularly, there was no point in having litigation about it as the ultimate result of the litigation would be that a general meeting of the company’s shareholders has to be called and ultimately the majority gets its way (per Mellish LJ in MacDougall v. Gardiner).

The result of these combined principles is that a minority shareholder can seldom bring an action in his own name against those in control of the company where the action is in respect of a wrong done to the company. The minority shareholder will simply not have locus standii to do so. Furthermore, it will be difficult for a minority shareholder to use the name of the company to bring an action (i.e. a derivative action).

However, based upon established English case law authorities, if the shareholder can bring himself within one of the exceptions to the rule in Foss v Harbottle, the shareholder may be able to bring a derivative action, whereby he or she may bring an action in his or her own name but on behalf of the company. The exceptions are as follows:

where the alleged wrong is ultra vires (i.e. beyond the capacity of) the company or illegal;

where the action complained of is an irregularity in the passing of a resolution which could only have been validly done or sanctioned by a special resolution or special majority of shareholders (i.e. a majority which is more than a simple majority of over 50%);

where what has been done amounts to a “fraud on the minority” and the wrongdoers are themselves in control of the company, so that they will not cause the company to bring an action; and

where the act complained of infringes a personal right of the shareholder seeking to bring the action.

Where the Acts amount to a Fraud on the Minority and the Wrongdoers are themselves in control of the Company

The reason for this exception is that if minority shareholders were denied the right to bring an action on behalf of themselves and all others in such circumstances, their grievance would never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue. In order for this exception to apply, first it must be shown that there has been a fraud within the meaning of that word in the English case law authorities on this area and second, it must be shown that the wrongdoers are in control so that the minority shareholder is being improperly prevented from bringing a legal action in the name of the company. In this context, fraud is thought to comprise “fraud in the wider equitable sense of that term, as in the equitable concept of a fraud on a power”. Fraud does not include pure negligence, however gross. The traditional approach that appears to have been followed by English courts in the circumstances is to examine the nature of the act complained of to determine whether it is ratifiable by the majority and if it is not, then it will amount to a fraud on the minority. Based on English case law authorities (which are persuasive authority in the Cayman Islands), the following points can be made:

The misappropriation of the company’s property or assets by the majority for their benefit, at the expense of the minority, is an act which can be interfered with by the Court at the suit of the minority, since it is not ratifiable by the majority.

Many breaches of directors’ duties are ratifiable by the majority shareholders in general meeting, and in these circumstances the minority will have no remedy. Therefore, for example, in the case of Pavlides v. Jensen where it was alleged that the directors were grossly negligent, but not fraudulent, in selling property of the company at an under-value, this was ratifiable by the majority.

There may be circumstances in which the majority shareholders do not exercise their powers bona fide for the benefit of the company as a whole which could amount to a fraud on the minority.

As stated above, an individual shareholder will only be permitted to bring an action in respect of a fraud on the minority if he shows that the company is controlled by the wrongdoers. The meaning of control in this context is not clear although it covers voting control, even where shares are held by nominees.

The question of whether or not there has been a fraud in the sense discussed above and whether or not the wrongdoers are in control of the company must be determined before the minority shareholder’s action is allowed to proceed.

Just and Equitable Winding Up

An alternative remedy to taking a derivative action for an aggrieved shareholder would be to petition the Cayman Islands court on the basis that it is just and equitable that the company should be wound up under Section 92(e) of the Companies Law. If a winding-up order is made, liquidators will be appointed who can then investigate the company’s affairs and pursue claims against the former directors (and any others who have caused loss to the company).

As stated above, under section 95(3) of the Companies Law, the Cayman Islands courts hearing a just and equitable winding-up petition has the discretion to grant alternative remedies to a winding up of the company (see Unfair Prejudice above).

Schemes of Arrangement

Sections 86 to 88 of the Companies Law set out provisions regarding schemes of arrangement that may be entered in relation to the company pursuant to which a minority shareholder may be bound by the actions of the majority specified in such provision. We would draw your attention to the provisions of Section 88 which set out the powers to acquire the shares of dissenting shareholders.

Dissenting Rights under the Cayman Merger Law Regime

Section 238 of the Companies Law, provides a shareholder of a Cayman Islands company, involved in a merger or consolidation under the merger regime set out in Part XVI of the Companies Law with the entitlement to be paid the fair value of his or her shares upon dissenting from the merger or consolidation.

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

gary.smith@loebsmith.com

ramona.tudorancea@loebsmith.com

elizabeth.kenny@loebsmith.com

santiago.carvajal@loebsmith.com

vivian.huang@loebsmith.com

(per McGarry V-C in Estmanco (Kilner House) Ltd. v. GLC [1982] 1 All ER 437).

(Pavlides v. Jensen [1956] 2 All ER 518).

(Menier v. Hooper’s Telegraph Works [1874] LR 9 CH APP 350), (Cook v. Deeks [1916] 1 AC 544).

(Estmanco (Kilner House) Ltd. v. GLC).

(Russell v. Wakefield Waterworks Co. [1875] LR 20 EQ 474).

(Pavlides v. Jensen [1956] 2 All ER 518).

(Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1980] 2 All ER).

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Introduction

Could you briefly explain the concept of the Segregated Portfolio Company?

Once registered under the Cayman Islands Companies Law, a segregated portfolio company (“SPC”) can operate segregated portfolios (“SPs”) with the benefit of statutory segregation of assets and liabilities between portfolios.

 

Under Cayman Companies Law, an SPC is an exempted company which has been registered as a segregated portfolio company. It has full capacity to undertake any object or purpose subject to any restrictions imposed on the SPC in its Memorandum of Association (“Memorandum”). The SPC is able to create one or more SPs in order to segregate the assets and liabilities of the SPC held within one SP from the assets and liabilities of the SPC held within another SP of the SPC.

The general assets and general liabilities of the SPC (i.e. assets and liabilities which cannot be properly attributed to a particular SP) are held within a separate general account rather than in any of the SP accounts.

This statutory requirement for an SPC to make a distinction between “segregated portfolio assets” (i.e. assets of the SPC designated or allocated for the account of a particular SP of the SPC) and general assets (i.e. assets of the SPC not designated or allocated for the account of any particular SP of the SPC) and similarly the distinction between “segregated portfolio liabilities” (i.e. liabilities of the SPC designated or allocated for the account of a particular SP) and general liabilities means that each SP should have, as appropriate, its own bank account, brokerage account, and other accounts to hold its assets to avoid co-mingling with the assets of other SPs and out of which liabilities can be satisfied. It is the duty of the Directors of the SPC to establish and maintain (or cause to be established and maintained) procedures:

to segregate, and keep segregated, portfolio assets separate and separately identifiable from general assets;

to segregate, and keep segregated, portfolio assets of each SP separate and separately identifiable from segregated portfolio assets of any other SP; and

to ensure that assets and liabilities are not transferred between SPs or between an SP and the general assets otherwise than at full value.

Who, historically, has tended to use SPC structures and what would you say one or two of the key benefits are to doing so?

In the investment funds context, SPCs have traditionally been used as a basis for investment platforms on which a Fund Manager can employ varying strategies and use different SPs to hold and segregate assets relating to such strategies (e.g. trading public securities, bonds and other debt instruments, and certain crypto currencies) on the same SPC platform.

The SPC structure is also frequently used for multi-class hedge funds, umbrella funds and master-feeder structures owing to the various benefits of the SPC structure.

What level of activity have you seen among fund managers using SPCs over the last couple of years and have you noticed growing interest among PE/RE managers?

One of the benefits of our firm having a strong investment funds’ practice for clients in the United States and in Asia is that we get to see and to advise on developing trends for offshore funds and the Cayman corporate structures which are preferred for strategies in both geographical markets for funds.

While the SPC structure has been traditionally used in the manner described above, we have seen SPCs being used increasingly in Asia as the preferred structure for private equity funds, real estate funds, and certain other closed-ended funds that allow investors to participate entirely on a deal-by-deal basis.

The more typical approach for structuring a private equity (PE) or real estate (RE) fund in certain other geographical markets (e.g. the US, the UK) is the LP/GP structure where investors invest by acquiring interests in a limited partnership (LP) managed by a general partner (GP) and investors invest on a blind pool basis.

With this approach, the Fund Manager can attract institutional investors who are either not equipped or do not wish to review investments on a deal-by-deal basis and prefer to rely on the expertise of the Fund Manager or GP. Investors are effectively investing in a blind pool fund and do not have any clear indication at the time they make their investment of any of the underlying assets that the Fund will ultimately acquire. Trust is placed by investors on the reputation and ability of the GP or Fund Manager to source and execute unknown deals on terms that will lead to attractive returns over time.

The increasing use in Asia of the SPC structure for PE and RE funds allows the Fund Manager to create one or more SPs in order to segregate the assets and liabilities of each SP from the assets and liabilities of any other SP. The creation of the SP is straightforward and negates a large number of the requirements for setting up an entirely new exempted company for each new transaction to acquire a portfolio asset. These SPC funds appear more likely to attract non-institutional high net worth investors who prefer overseeing each investment decision. The increasing use of the SPC in this way is, among other things, a result of there being less appetite from many non-institutional high net worth investors to invest on a blind pool basis.

What additional considerations or difficulties, if any, do private equity managers face when utilising the SPC structure to cater to investors’ preference for a deal-by-deal approach?

First, with a typical GP/LP structure, GPs and Fund Managers will have some certainty as to how much investor capital is available for any given transaction. With such an SPC structure, which allows investors to invest on a deal-by-deal, the Fund Manager will not have existing contractual commitments from investors, or that can be drawn down at very short notice, and this can affect the ability of the Fund Manager to commit to underlying transactions in a timely manner.

Secondly, the uncertainty of how much investor capital is available, delays caused by investors’ review and decision period and the need for possible joint venture participation can make it difficult for Fund Managers to bid for portfolio acquisition opportunities on time-sensitive transactions.

Thirdly, as all of the capital raised by each SP will often be used to fund the acquisition of the single underlying asset for which the SP was created, the management fees charged on the portfolio asset are often charged up-front at the launch of the SP as a percentage of the aggregate subscription proceeds and often several years’ management fees are charged in advance. This deals with the issue of the SP not having access to cash to make monthly or quarterly management fee payments after acquisition of the portfolio asset.

Fourthly, some of our Fund Manager clients in Asia have used the deal-by-deal SPC fund as a springboard to subsequently launching a larger blind pool fund structured as LP/GP, thereby allowing themselves time to build a track record, build reputation, and importantly meet demands of investors by utilising Cayman fund structures.

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The EU’s General Data Protection Regulation (“GDPR”) applies to offshore investment funds with European investors since 25 May 2018. The Cayman Islands Data Protection Law (“DPL”), which will regulate the future processing of all personal data, is intended to come into effect in January 20191. Inspired from the UK’s Data Protection Act, DPL includes provisions very similar to GDPR (together “Data Protection Laws”), with certain notable differences.

As part of the subscription process, investors are required to provide a government-issued photo ID, source of funds and wealth, contact details, payment details, and tax residence information, or even additional information about employment, dependents, income and investment objectives (the “Investor Personal Data”), which are processed and stored by or on behalf of the investment fund (the “Fund”) and/or by one or more of the service providers to the Fund. Some of the processing may be done by different parties in various jurisdictions.

Generally, the Administrator, Transfer Agent, Distributor, and the Investment Manager of a Fund may fall within the definition of a Data Controller or Data Processor. To ensure compliance with GDPR and/or DPL, the Fund’s Board of Directors should review the contractual arrangements with these parties and may need to appoint a Data Protection Officer. As a reminder, the Board of Directors of the Fund is required to supervise third party service providers and ensure that there are sufficient measures in place to protect Investor Personal Data. Privacy Notices in the Fund’s offering documents would need to be updated to ensure that investors are fully aware of where their Personal Data is being processed, by whom and for what purpose.

For ease of reference, a brief comparison between GDPR and DPL is included below2.

Comparison of the Main Provisions

 

GDPR DPL
Personal Data Any information relating to an individual who can be identified, directly or indirectly, from that data (including online identifiers such as IP address-es and cookies may qualify as personal data if they are capable of being linked back to the individual). Same as GDPR.
Data Controller The person who, alone or with others, determines the purposes, conditions and means of the processing of Personal Data. DPL applies to any Data Controller in respect of Personal Data (a) es-tablished and processed in the Cayman Islands; or (b) processed in the Cayman Islands otherwise than for the purposes of transit3.
Privacy Notice At the time of collection of the data, individuals must be informed of the purposes and detail behind the processing, the details of transfers of data and any security and technical safeguards in place. This information is generally provided in a separate privacy notice. Same as GDPR.
Right to Access Individuals have the right to obtain confirmation that their Personal Data is processed and to access it. Data Controllers must respond within a month of the access request. A copy of the information must be provided free of charge. Same as GDPR, but DPL permits a reasonable fee to be charged.
Retention Period Personal data should not be kept for longer than is necessary to fulfil the purpose for which it was originally collected. Controllers must inform data subjects of the period of time (or reasons why) data will be retained on collection. Not a requirement under DPL. However, as with the GDPR, if there is no compelling reason for a Data Controller to retain Personal Data, a data subject can request its secure deletion.rsonal data should not be kept for longer than is necessary to fulfil the purpose for which it was originally collected. Controllers must inform data subjects of the period of time (or reasons why) data will be retained on collection.
Right to Erase Should the individual subsequently wish to have their data removed and the Personal Data is no longer required for the reasons for which it was collected, then it must be erased. Data Controllers must notify third party processors or sub-contractors of such requests. Same as GDPR.
Transfers International transfers permitted to third party processors or between members of the same group. Same as GDPR.
Data Security Minimum security measures are pre-scribed as pseudonymisation and encryption, ability to restore the availability and access to data, regularly testing, assessing and evaluating security measures. Appropriate technical and organisational measures must be taken to prevent unauthorised or unlawful processing of Personal Data and against accidental loss or destruction of, or damage to, Personal Data4.
Data Processors Security requirements are extended to data processors as well as Data Controllers. There is no liability for processors under DPL. However, they may be held liable based on contract or tort law.
Data Breach Data Controllers must notify the regulatory authority of Personal Data breaches without undue delay and, where feasible, not later than 72 hours after having become aware of a breach. In the event of a Personal Data breach, the Data Controller must, “without undue delay” but no longer than five (5) days after the Data Controller should have been aware of that breach, notify the Om-budsman and any affected individuals5.
Breach Notice The notification should describe the nature of the breach, its conse-quences, the measures proposed or taken by the Data Controller to ad-dress the breach, and the measures recommended by the Data Controller to the individual concerned to miti-gate the possible adverse effects of the breach. Same as GDPR.
Right to be Forgotten An individual may request the deletion or removal of Personal Data where there is no compelling reason for its continued processing. DPL contains a similar right, although this is expressed as a general right of “erasure”. Under the UK’s Data Protection Act, the right is limited to processing that causes unwarranted and substantial damage or distress. Under DPL this threshold is not present. As with the GDPR, if there is no compelling reason for a data controller to retain Personal Data, a data subject can request its secure deletion.
Right to Object An individual has the right at any time to require a Data Controller to stop processing their Personal Data for the purposes of direct marketing. There are no exemptions or grounds to refuse. A Data Controller must deal with an objection to processing for direct marketing at any time and free of charge. Same as GDPR.
Direct Marketing and Consent The Data Controller must inform individuals of their right to object “at the point of first communication” and in a privacy notice. For any consent to be valid it needs to be obvious what the data is going to be used for at the point of data collection and the Data Controller needs to be able to show clearly how consent was gained and when it was obtained. Including an unsubscribe facility in each marketing communication is recommended best practice. If an individual continues to accept the services of the Data Controller without objection, consent can be implied.
Data Processors The GDPR sets out more detailed statutory requirements to apply to the controller/processor relationship, and to processors in general. Data Pro-cessors are now directly subject to regulation and are prohibited from processing Personal Data except on instructions from the Data Controller. Best practice would always be to put in place a contract between a controller and processor. Essentially, the contract should require the Data Processor to level-up its policies and procedures for handling personal data to ensure compliance with DPL. Use of sub-contractors by the service provider should be prohibited without the prior approval of the Data Controller6.
Data Protection Officer Mandatory if the core activities of the Data Controller consist of processing operations which require large scale regular and systematic monitoring of individuals or large scale processing of sensitive Personal Data. Does not require the appointment, although this is recommended best practice.
Penalties Two tiers of sanctions, with maximum fines of up to €20 million or 4% of annual worldwide turnover, whichever is greater. Refusal to comply or failure to comply with an order issued by the Ombudsman is an offence. Penal-ties are also included for unlawful obtaining or disclosing Personal Data7. Directors may be held liable under certain conditions8.

The Data Controller is liable on conviction to a fine up to CI$100,000 or imprisonment for a term of 5 years or both. Monetary penalty orders of an amount up to CI$250,000 may also be issued against a Data Controller.

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

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com

 

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  1. The Data Protection Law, 2017 (Law) was passed on 27 March 2017 and it is not yet in force.
  2. The comparison only includes provisions which may be relevant to offshore investment funds and is therefore not a comprehensive analysis.
  3. See Art. 6 of DPL
  4. See Schedule 1 of DPL
  5. See Art. 16 of DPL
  6. Under DPL, the Data Controller is liable for breaches and non-compliance, whereas processors may not be. It is therefore very important for a Fund’s Board of Directors to ensure that adequate contractual protections are in place.
  7. See Arts. 53-54 of DPL
  8. See Art. 58 of DPL

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