In the previous issues of our series of legal insights on owning intellectual property (IP) through a Cayman Islands corporate structure, we presented a brief overview of the new trademark registration process which became effective in the Cayman Islands as at 1st August 2017 (see The New Cayman Islands Trademarks Regime).

In the meantime, blockchain technologies and ICOs have gained increasing popularity all over the world and in the Cayman Islands as well (see our FinTech series including Top Ten Risks for the Crypto-Currency Investor: A View from the Cayman Islands and Cayman Islands Legal Perspective on the Regulation of Initial Coin Offerings (ICOs)).

Confident in the security and their uniqueness or blinded by the open source aspects of their technology, blockchain start-ups may tend to forget one of the basic tenets of entrepreneurship: making certain that any newly generated intellectual property is well-protected. Beyond block-chain technology, commercial names and trademarks may become extremely valuable. If a block-chain start-up incorporates in the Cayman Islands, it now has the option of registering its name and logo in the Cayman Islands as well, providing additional protection after the launch or the projected Initial Coin Offering (ICO) or Initial Token Offering (ITO).

The Cayman Islands have now brought into effect the long-awaited Limited Liability Companies Law, 2016 (the “LLC Law”) which introduces a new Cayman Islands limited liability company (an “LLC”). The LLC Law was published on 8th June 2016 but had not been brought into effect until 8th July 2016 in order to provide the Companies Registry with sufficient time to implement internal systems for dealing with registration of new LLCs. The Companies Registry is currently undertaking pilot testing of its internal systems and has advised that it expects to be able to accept registration applications for new LLCs before 15th July 2016.

Key Features of Cayman LLCs 

• An LLC formed under the LLC Law will be similar in structure to that of the Delaware LLC as the LLC Law is broadly based on the Limited Liability Company Act in the State of Delaware. However, the LLC Law has also preserved the broad legal principles applicable to Cayman Islands companies and the rules of equity and common law. Section 3 of the LLC Law expressly states that: “The rules of equity and of common law applicable to companies registered in the Islands, as modified by the Companies Law and any other Laws in force in the Islands applicable to such companies, shall apply to a limited liability company, except in so far as such rules and law or modifications thereto are inconsistent with the express provisions of this Law or the nature of a limited liability company”.
• An LLC is a corporate entity which has separate legal personality to its members.
• Formation of an LLC is straightforward. It requires the filing of a registration statement with the Companies Registry and payment of the requisite Government fee.
• An LLC must have at least one member. It can be member managed (by some or all of its members) or the LLC agreement can provide for the appointment of persons (who need not be members) to manage and operate the LLC.
• The liability of an LLC’s members is limited. Members can have capital accounts and can agree amongst themselves (in the LLC agreement) how the profits and losses of the LLC are to be allocated and how and when distributions are to be made (similar to a Cayman Islands exempted limited partnership).
• An LLC may be formed for any lawful business, purpose or activity and it has full power to carry on its business or affairs unless its LLC agreement provides otherwise.
• An LLC may (but is not required to) use one of the following suffixes in its name: “Limited Liability Company”, “LLC” or “L.L.C.”.
• The following statutory registers are required to be maintained for an LLC but, similarly to the requirement for a Cayman Islands exempted company, only an LLC’s register of managers is required to be filed with the Companies Registry:

1. 1. a register of members;
   2. a register of managers; and
   3. a register of mortgages and charges.

The register of managers and register of mortgages and charges are required to be maintained in a manner similar to the register of directors and register of mortgages and charges for a Cayman Islands exempted company.

• Subject to any express provisions of an LLC agreement to the contrary, a manager of the LLC will not owe any duty (fiduciary or otherwise) to the LLC or any member or other person in respect of the LLC other than a duty to act in good faith in respect of the rights, authorities or obligations which are exercised or performed or to which such manager is subject in connection with the management of the LLC provided that such duty of good faith may be expanded or restricted by the express provisions of the LLC agreement.

Expected Benefits of the New LLC Vehicle 

Under the LLC Law, it is now possible to:

• Form and register a new LLC;
• Convert an existing Cayman Islands exempted company into an LLC;
• Merge an existing Cayman Islands exempted company into an LLC; and
• Migrate an entity formed in another jurisdiction (e.g. Delaware) into the Cayman Islands as an LLC.

It is expected that the new Cayman Islands LLC structure will be attractive for general partner entities and other carried interest distribution vehicles. It may also prove attractive for management company entities and possibly for offshore funds in order to align the rights of investors between onshore and offshore investment funds in a master/feeder structures.

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For Specific advice on Cayman Islands limited liability companies, please contact either of:

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

The Cayman Islands Government has issued The Confidential Information Disclosure Bill, 2016 (“Confidentiality Bill”) which, once it comes into force will bring into effect a fundamental overhaul of confidentiality laws in the Cayman Islands.

The introduction of the Confidentiality Bill is part of a series of actions being taken by the Cayman Islands Government to the assist global efforts to increase transparency.

Existing Law  

Under the existing law, which is found in The Confidential Relationships (Preservation) Law (2015 Revision), it is a criminal offence to divulge or attempt, offer or threaten to divulge “confidential information” (which is defined as including information concerning any property which the recipient thereof is not, otherwise than (in the narrowly construed exception of) “in the normal course of business”, authorised by the principal to divulge) except in a limited number of specified circumstances.

Notwithstanding the criminal penalties that follow a breach of the existing law, there has not been a criminal conviction under the existing law since its original enactment over 40 years ago.

The prohibition applies with respect to business of a professional nature (e.g. the relationship between a bank, trust company, an attorney-at-law, an accountant, an estate agent, an insurer, or a broker and its client) which arises in or is brought to the Cayman Islands and to all persons coming into possession of such information at any time thereafter whether they be within the jurisdiction or not.

As mentioned above, disclosure is permitted in a number of specified circumstances (e.g. (i) in respect of any professional person acting in the normal course of business, or with the consent, express or implied, of the relevant principal; or (ii) in response to statutory requests from certain criminal or regulatory authorities (e.g. the Cayman Islands Monetary Authority), or (iii) a court order).

Proposed new Law 

The Confidentiality Bill proposes the following key amendments:

It will no longer be a criminal offence to breach a duty of confidentiality.

In future it will be necessary to assess whether the information imparted was subject to a duty of confidence in the first place. This will effectively shift the burden of proof from showing that the disclosure falls within an exception to the current prohibition, to showing that the information imparted was in fact subject to a duty of confidence.

Where a person owes a duty of confidence, that person’s disclosure of such information within a widened list of specified circumstances will not constitute a breach of the duty of confidence and a person will not be able to sue the discloser.

A person who discloses confidential information in relation to a serious threat to the life, health, safety of a person or in relation to a serious threat to the environment will have a defence to legal action for breach of a duty of confidence, as long as the person acted in good faith and in the reasonable belief that the information was substantially true and disclosed evidence of a serious threat to life, health, safety of a person or of a serious threat to the environment.

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

Gary Smith
Partner
E: gary.smith@loebsmith.com

Loeb Smith has acted as Cayman Islands counsel to China Crystal New Material Holdings Co., Ltd., the world’s largest synthetic mica manufacturer in respect of its IPO on the Korea Stock Exchange (KRX)’s KOSDAQ market. It is the first time in four and a half years since a Chinese company has entered the KRX. The company’s shares began trading on 28th January 2016.

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The Loeb Smith team was led by Corporate Partner, Gary Smith.

For more information, please contact:

Gary Smith
Partner
E: gary.smith@loebsmith.com
www.loebsmith.com

Loss of substratum (or reason for existence)

Shareholders of a Cayman Islands company may petition the Grand Court for an order that a company is wound up pursuant to section 92(e) of the Companies Law (As Revised) on the basis that it is “just and equitable” for it to do so. One ground which is often relied on by shareholders for this purpose is that the company has lost its “substratum” or, in other words, its reason for being in existence. The seminal dicta in this area is that of Lord Cairns in In re Suburban Hotel (1867) LR 2 Ch App 737, where he held that:

“It is not necessary for me to decide it; but if it were shown to the Court that the whole substratum of the partnership, the whole of the business which the company was incorporated to carry on, has become impossible, I apprehend that the Court might, either under the Act of Parliament, or on general principles, order the company to be wound up.”

In the recent case of In Re Harbinger Class PE Holdings (Cayman) Ltd (unreported, 10 November 2015) Justice Clifford, noted that subsequent English authorities have followed the approach adopted by Lord Cairns. He quoted the decision of Lord Justice Baggallay in the English case In re German Date Coffee Company (1882) 20 Ch D 169 that:

“It appears to me that the principle involved in the decision of In re Suburban Hotel Company by Lord Cairns amounts to this, that if you have proof of the impossibility of carrying on the business contemplated by the company at the time of its formation, that is sufficient ground for winding up the company. Therefore the question arises in the present case, is there an impossibility of carrying out the objects of the company.”

However, Justice Clifford also noted the confines of the principle of the loss of substratum as set out in Re Kitson & Co Ltd [1946] 1 All ER 435 in which the English Court of Appeal held that there had been no failure of substratum where a company had sold its business, but at the same time was carrying on a similar type of business through a subsidiary. Provided that the company could carry on that type of business, then prima facie at least, it would be impossible to hold that the substratum had gone.

Divergence between the approach taken in the Cayman Islands and the British Virgin Islands in respect of open-ended corporate mutual funds  

In In Re Belmont Asset Based Lending Limited [2010] 1 CILR 83, Jones, J sitting in the Financial Services Division of the Grand Court held:

“To translate these statements into a modern context, it can be said that it just and equitable to make a winding-up order in respect of an open-ended corporate mutual fund if the circumstances are such that it has become impractical, if not actually impossible, to carry on its investment business in accordance with the reasonable expectations of its participating shareholders, based upon representations contained in its offering document. If such a company, organised as an open-ended mutual fund, has ceased to be viable for whatever reason, the court will draw the inference that it is just and equitable for a winding-up order to be made.”

In Harbinger, Clifford, J., noted that whilst this test had been applied in other Cayman Islands cases, the approach had not been followed in other jurisdictions, most notably, the British Virgin Islands, where Bannister, J., in Aris Multi-Strategy Lending Fund Ltd V Quantek Opportunity Fund Ltd (15 December 2010) held that:

“It seems to me that the underlying principle to be extracted from these cases, with the exception of In re Bristol Joint Stock [where Kekewich, J referred to the impossibility of a business being carried on with any hope of success] is that a minority seeking a winding up on the grounds that the business life of a company has come to an end will only be permitted to overcome the will of the majority if they can show that further conduct of the company’s business is impossible.”

Bannister, J., held that the reasoning of Jones, J in Belmont was confined to open-ended investment funds. Indeed, in that case, Jones, J., had referred to “sound policy reasons for making a winding-up order in respect of non-viable mutual funds.” As a consequence, Bannister, J., interpreted the ratio of the English case law authorities to the effect that there will only be a failure of substratum if it is impossible, as opposed to no longer viable, for the business of the company to be carried on.

The approach followed in Harbinger

In Harbinger, Clifford, J., was faced with the task of determining which of the two divergent approaches should be followed. That case concerned the question of the substratum of a subsidiary which had been incorporated as part of a restructuring of a closed-end fund which had suffered significant difficulties as a result of the financial crisis in 2008. The company was intended amongst other matters to hold a special class of shares in the parent fund company which related to largely illiquid assets held by the parent and “ear marked” for disposal so that the special shares would receive the benefit of the allocated assets after the discharge of all prior ranking liabilities of the fund. Clifford J., held that because company in question was not, and never had been, an open-ended corporate mutual fund the test to be applied was:

“founded upon the established underlying principle of the line of authorities referred to which requires the Court to determine whether it has become impossible for the company to achieve the purpose for which it was formed.”

Harbinger would therefore appear to confine the ruling of Jones, J., in Belmont to closed ended mutual funds, or at least to companies within structures where similar policy arguments may apply.

Interpretation of the objects of a company

In Harbinger significant argument was also lead about the interpretation of the objects of the subsidiary company which contained a modern form unrestricted objects clause. Clifford J., held that on the basis of previous authorities, including the BVI authority of Aris cited above, that the Court is required to look beyond a wholly general objects clause to ascertain on the particular evidence in a case the principal or main object of a company in line with the reasonable expectation of its participating shareholders. This is a useful reconfirmation of these principles as they apply to Cayman Islands companies.

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

David Harby
Head of Commercial Disputes and Litigation
E: david.harby@loebsmith.com
www.loebsmith.com