Cayman Islands | Loeb Smith

Wonderful news: Loeb Smith Attorneys’ Cayman Islands team has once again been recognised in the rankings of Legal500, one of the top international publications that evaluates law firms and legal professionals worldwide.

In the 2026 edition, Loeb Smith Attorneys reaffirms its strong Cayman Islands positioning standing out in the Investment Funds practice top tier firms and receiving an accolade for Client Satisfaction.

This recognition highlights the trust our clients place in us, the depth of our expertise and the strength of our multidisciplinary teams focused on delivering outstanding client service.

We are very proud of our team and thankful to our clients for taking their time to talk to Legal500. Here is what our clients shared to Legal 500 about us:

‘Their deep knowledge of the nature of digital assets, wallet structures, and Web3 business
models is reflected directly in their drafting. Instead of relying on generic fund templates, they
proactively incorporate crypto-specific wordings and clauses into fund documents, making them
clear, accurate, and practical for all stakeholders, from fund managers to service providers and
even auditors.’

***

‘I’ve worked with Loeb Smith on a number of crypto fund matters, including fund formation,
regulatory compliance, and handling in-kind subscriptions using digital assets.’

***

‘Gary Smith is particularly impressive. He is not only highly knowledgeable on the legal side but
also well-versed in how crypto businesses operate in practice. Their ability to explain complex
regulatory matters in plain language makes decision-making much easier on our end and the
crypto client side.’

View Full PDF

Cayman Islands exempted companies are widely utilized in structuring cross-border finance transactions. One of the key reasons for this is that the Cayman Islands provides a flexible and well-tested regime for secured financing transactions that is attractive to borrowers and lenders alike. The process for creating security in the Cayman Islands is also straightforward and will not typically impact the timeframe of a proposed transaction.

In this brief guide, we address certain of the key Cayman Islands law points pertaining to the creation and protection of security over shares (the “Secured Shares”) in a Cayman Islands exempted company (the “Secured Company”).

Creation of Security

The Companies Act (as Revised) of the Cayman Islands (the “Act”) does not contain any provisions with respect to the creation of security over Secured Shares in a Secured Company. Therefore, the security should adhere to the following principles derived from common law:

1. it must be in writing;
2. the security document must be signed by, or with the authority of, the security provider; and
3. the security document must clearly indicate the intention to create security over the Secured Shares and the amount secured or how that amount is to be calculated.

Cayman Islands law recognizes various forms of security over assets, including equitable mortgages and charges which are most commonly taken over Secured Shares in a Secured Company.

Execution Formalities and Regulatory Approvals

Cayman Islands law does not prescribe a particular mode of execution with respect to security over Secured Shares in a Secured Company and it is not necessary for such security to be certified, notarized or apostilled to make the security valid or enforceable from a Cayman Islands law perspective. That being said, in practice, a security document with respect to Secured Shares in a Secured Company is customarily executed as a deed.

From an execution standpoint, it is important to review the memorandum of association and articles of association (the “M&A”) of the relevant security provider and the relevant Secured Company, to the extent it is a party to the security document, to ensure compliance with any applicable signing formalities.

Unless security is being taken in a Secured Company which is a “regulated person”, such as a bank or a mutual fund, no regulatory approvals are necessary to create valid and enforceable security as a matter of Cayman Islands law.

Stamp Duty and Taxes

No stamp duty or taxes are payable with respect to the creation of security over Secured Shares in a Secured Company or upon any transfer thereof in an enforcement as a matter of Cayman Islands law so long as:

1. the security document and any ancillary documents thereunder are not executed or delivered in, brought into, or produced before a court of, the Cayman Islands; and/or
2. the Secured Company does not have an interest in land in the Cayman Islands, or shares in a subsidiary that has an interest in land in the Cayman Islands.

Governing Law of the Security

Cayman Islands law permits security over Secured Shares in a Secured Company to be governed by Cayman Islands law or foreign law.

In cross-border finance transactions, it is relatively common for the governing law of a security document over Secured Shares in a Secured Company to be aligned with the governing law of the principal finance documents. One advantage of adopting a foreign governing law clause in a security document is that it may make available certain additional remedies (such as appropriation) which are not available under Cayman Islands law. Care should however be taken to ensure that there are no conflicts of law issues where a security document is governed by foreign law. English, Hong Kong and Singapore law are frequently adopted to govern security over Secured Shares in a Secured Company and no major conflicts of law issues are likely to arise.

Cayman Islands law governed security document

Where the security document is governed by Cayman Islands law, so long as it is in customary form, the secured party is entitled to the following remedies in the event of a default:

1. the right to take possession of the Secured Shares in the Secured Company (subject to redemption by the security provider upon the settlement of the debt);
2. the right to sell the Secured Shares in the Secured Company; and
3. the right to appoint a receiver who may:
  1. 1. vote the Secured Shares in the Secured Company;
    2. receive distributions in respect of the Secured Shares in the Secured Company; and
    3. exercise other rights and powers of the security provider in respect of the Secured Shares in the Secured Company.

If the secured party acquires legal title to the Secured Shares in the Secured Company, it also has a right of foreclosure. This remedy extinguishes the security provider’s legal and beneficial title to the Secured Shares in the Secured Company but not its obligation to pay any secured and unpaid sums. Foreclosure involves a time-consuming and costly court process and is not usually exercised in practice given its draconian nature.

For further details regarding the enforcement of security over Secured Shares in a Secured Company, please refer to our guide entitled “Enforcing security over shares in a Cayman Islands exempted company”.

Foreign law governed security document

Where the security document is governed by foreign law, the:

1. security document should comply with the requirements of its governing law to be valid and binding; and
2. remedies available to a secured party are governed by the governing law and the terms of the security document.

Application of Proceeds of Enforcement

Subject to any provisions to the contrary in the security document, all amounts that accrue from the enforcement of the security document are applied in the following order of priority:

1. firstly, in paying the costs incurred in enforcing the security document;
2. secondly, in discharging the sums secured by the security document; and
3. thirdly, in paying any balance due to the security provider.

Security Deliverables

The terms of a well-drafted Cayman Islands law governed security document with respect to Secured Shares in a Secured Company and the principal finance document will usually require the security provider to deliver the following documents to the secured party to assist with an enforcement:

1. any original share certificate(s) with respect to the Secured Shares in the Secured Company;
2. an undated share transfer form with respect to the Secured Shares in the Secured Company;
3. an undated resignation letter from each director of the Secured Company;
4. a letter of authorization from each director of the Secured Company authorizing the secured party to date each undated letter of resignation upon the occurrence of a default under the security document;
5. an irrevocable proxy with respect to the Secured Shares in the Secured Company in favor of the secured party;
6. a letter of instruction to the Secured Company’s registered office service provider containing, among other things, directions to register a transfer of Secured Shares in the Secured Company upon the occurrence of a default under the security document;
7. a letter of acknowledgement from the registered office service provider with respect to the instructions referenced in the letter of instruction;
8. if the security provider is a Cayman Islands exempted company, a certified copy of its register of mortgages and charges showing the security created over the Secured Shares in the Secured Company (see further below);
9. a certified copy of the Secured Company’s register of members annotated to show the security created over the Secured Shares in the Secured Company (if commercially agreed – see further below);
10. if the security provider is a Cayman Islands exempted company, a copy of the board resolutions of its board of directors authorizing:
  1. 1. its entry into and execution of the security document; and
    2. the updates to its register of mortgages and charges;
11. a copy of the board resolutions of the Secured Company authorizing:
  1. 1. its entry into and execution of the security document (if it is a party);
    2. its register of members to be annotated (if commercially agreed); and
    3. its register of members to be annotated (if commercially agreed); and
12. special resolution passed by the Secured Company with respect to certain changes to its M&A, if required (see further below).

Security Protection Steps

Register of mortgages and charges of a Cayman Islands security provider

Pursuant to section 54 of the Act, if the security provider is a Cayman Islands company, it must record particulars of the security created over any Secured Shares in the Secured Company in its register of mortgages and charges. The register of mortgages and charges must include:

1. a short description of the property mortgaged or charged;
2. the amount of charge created; and
3. the names of the mortgagees or persons entitled to such charge.

There is no statutory timeframe within which the register needs to be updated. However, a well-advised secured party will request that the register is updated promptly so that third parties that inspect it are on notice of the security.

Any variations and releases of charge should also be reflected in the register of mortgages and charges.

As there is no statutory regime for registering security interests under Cayman Islands law, the common law rules of priority continue to apply. In general terms, these rules specify that priority between competing security interests is determined by the dates on which the relevant security interests were created. It is important to note that inserting details of mortgages and charges in the register of mortgages and charges of a Cayman Islands company does not confer priority on a charge in respect of the relevant secured asset.

Register of members of the Secured Company

A Secured Company may annotate its register of members to include:

1. a statement that security has been created over the Secured Shares;
2. the name of the secured party; and
3. the date on which the statement and the secured party’s name are entered in its register of members.

Although it is optional to annotate a Secured Company’s register of members with details of any security that has been created, this puts third parties that inspect the register on notice of the security. Therefore, a secured party usually insists on this.

M&A of the Secured Company

A secured party will usually request the Secured Company to make certain changes to its M&A to ensure, among other things, that there are no restrictions on the transfer of Secured Shares in the Secured Company which may impede enforcement action. Any changes to the Secured Company’s M&A must be made by passing special resolutions. Although such resolutions need to be filed with the Registrar of Companies of the Cayman Islands within 15 days of being passed, they take effect upon signing.

Further Assistance

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

E: vanisha.harjani@loebsmith.com
E: max.lee@loebsmith.com

This article was first published in the Hong Kong Lawyer: https://law.asia/cayman-digital-asset-law/Granting and Protecting Security Over Shares in a Cayman Islands Exempted Company | Hong Kong Lawyer.

Author

Vanisha Harjani

An increasing number of high-net-worth individuals are utilizing offshore trusts in the Cayman Islands and the BVI as instruments for family wealth succession. The Discretionary Trust, as one of the most flexible types of trust, can grant the trustee(s) very broad discretionary powers. For more on Discretionary Trusts, please see our Briefing on Cayman Islands and BVI Trusts.

However, when establishing a Discretionary Trust, the settlor may often be concerned that the Trustee might make decisions contrary to their wishes and the Trust’s purpose. Therefore, at the time of establishing the trust, in addition to the trust instrument, the settlor will typically also sign a Letter of Wishes (LoW), outlining their intentions regarding trust beneficiary arrangements, assets distribution, investments, management, and other matters of the Trust. How effective is the Letter of Wishes? What details need to be considered in a Letter of Wishes? Can a Trust have only one Letter of Wishes throughout its existence? When multiple Letters of Wishes conflict, which one prevails? Will a Trustee’s decision contrary to the intentions expressed in the Letter of Wishes be valid? This Briefing will focus on these questions to provide a brief introduction to the effectiveness and role of the Letter of Wishes in Trusts.

1. Legal Effectiveness and Role of the Letter of Wishes

Firstly, the Letter of Wishes is a document separate from the Trust Instrument. Unlike the Trust Instrument, the Letter of Wishes does not have binding legal force. It is more akin to a guiding document, providing advisory guidance to the Trustee in administering the Trust. This means the Trustee has the discretion to decide whether or not to adopt the contents of the Letter of Wishes. Settlors might ask the question: if the Letter of Wishes lacks enforceability, isn’t creating one meaningless?

In practical application, if a Trustee’s failure to follow the Letter of Wishes results in harm to a beneficiary’s interests, the beneficiary may sue the Trustee in court. If the Trustees cannot provide sufficient evidence to prove that their decision-making process and purpose complied with the law and the provisions of the Trust Instrument, the court may assume the Trustees’ decision is invalid. For further details, see the section below on the validity of Trustee decisions contrary to the Letter of Wishes.

2. Considerations of details in Drafting the Letter of Wishes

Typically, settlors do not include excessive detail within the Trust Instrument itself. Instead, specific wishes for trust administration will be placed in the Letter of Wishes. The main contents of a Letter of Wishes usually cover the following points:

1. Trust/Beneficiary Arrangements. These often include prioritizing children’s education and medical needs. Additionally, conditions for beneficiaries to receive benefits can be set, such as age thresholds or educational requirements. Specific scenarios for excluding beneficiaries can also be stipulated. For example, distribution may be suspended or a beneficiary may be excluded if they are involved in drug-related crimes.
2. Principles for Trust Asset Distribution. The Letter of Wishes can specify methods for distributing Trust assets, such as regular distributions, emergency distributions, and distributions upon the occurrence of significant events.
3. Explanation of Trust Purpose. Elaborating on the Trust’s purpose within the Letter of Wishes is also a key measure to prevent Trust disputes. For instance, stating that the Trust aims to safeguard the livelihood of family members and their descendants. The Trustee must then weigh these purposes when making decisions.
4. Stipulation of Special Clauses. For example, sometimes, while the law grants Trustees discretionary power to invest the Trust assets, the Letter of Wishes could state a recommendation to limit the proportion of assets invested in high-risk financial products to a specific range.
5. Confidentiality Requirements. The settlor may state in the Letter of Wishes that its contents will not be disclosed to minor beneficiaries.

3. Resolving Conflicts Between Multiple Letters of Wishes

A settlor can usually sign multiple Letters of Wishes, reflecting the flexibility of Trusts. The settlor can update and adjust such non-binding guidance to the Trustee over time, based on changes in their circumstances (e.g., family situation, financial status, tax environment). It is generally understood that the most recently signed Letter of Wishes takes precedence, as it better reflects the settlor’s current situation and intentions. To avoid conflicts between multiple Letters of Wishes, a new Letter of Wishes should clearly and explicitly state that it revokes and replaces all prior Letters of Wishes or specified prior Letters of Wishes.

However, if the settlor fails to explicitly revoke prior versions in the new Letter of Wishes and conflicts arise between the old and new documents, the Trustee can face difficulties in decision-making. In such cases, the Trustee needs to consider all the Trust documents and make decisions based on the settlor’s overall intent. If the conflict is irreconcilable, the Trustee should seek legal advice to determine the course of action that best serves the interests of the Trust and aligns with the settlor’s true intentions, while avoiding liability for breaching fiduciary duties.

4. Validity of Trustee Decisions Contrary to the Letter of Wishes

As mentioned, the Letter of Wishes itself lacks binding force. This means that, under specific circumstances, the Trustee has the right to make decisions that deviate from or even contradict the instructions in the Letter of Wishes. However, this does not mean the Trustee can arbitrarily disregard the settlor’s wishes. The Trustee’s power to deviate is strictly limited by the core requirement that the Trustee must fulfill his/her/its fiduciary duties, particularly the duties of loyalty, prudence, and adherence to the Trust’s purpose and terms.

Referencing a classic case, the Wong Case (Grand View Private Trust Company v Wong & Others [2022] UKPC 17), the UK Privy Council (whose judgment is persuasive authority in the Cayman Islands and the BVI) issued a number of guiding principles.

Based on the facts stated in the UK Privy Council’s judgment, the Wong brothers co-founded the large Taiwanese conglomerate Formosa Plastics Group (FPG) in the 1950s. In 2001, the brothers established two Bermuda trusts. The first was a discretionary family trust named the Global Resource Trust No. 1 (GRT), holding approximately US$560 million worth of FPG shares, with the beneficiaries being the settlors’ children and descendants. This discretionary family trust also granted the Trustee the discretionary power to add or remove “any person or class or description of persons” to the beneficial class of the Trust. The second Trust was a purpose trust named the Wang Family Trust (WFT), serving both charitable and non-charitable purposes. In 2005, The Trustee of the GRT exercised its powers of addition and exclusion to exclude all family members of the founders from the beneficial class of the Trust, and to add the Trustee of the WFT as the sole beneficiary. The dispute accordingly focused on the GRT trust deed, which granted the Trustee the power to add or exclude beneficiaries. Further, as early as 2001, the founding brothers had signed a memorandum of wishes before establishing the Trusts. This memorandum stated their intention in establishing the family trust was for the benefit of their children. The UK Privy Council admitted this memorandum as evidence, concluding that the purpose of the GRT discretionary trust was for the benefit of the founder’s family members. According to the Letter of Wishes, if the family Trust was established to benefit the family, how could excluding the family members to benefit another Trust serve a proper purpose? Consequently, the UK Privy Council found that the Trustee’s exercise of its power to exclude the existing beneficiaries and add the purpose Trust as a beneficiary was invalid.

Although the above case is an extreme and unusual example, it illustrates that a Trustee cannot ignore the settlor’s wishes and purposes when exercising their administrative powers. However, when dealing with such cases, courts will not automatically find a Trustee in breach simply for not following the Letter of Wishes. The reasonableness of the Trustees’ decision-making process and basis, and whether they have complied with their fiduciary duties, are also crucial factors. The court will consider the Letter of Wishes as significant evidence for understanding the settlor’s intent.

5. Summary

The Letter of Wishes, as a key non-binding document within a Trust, plays an indispensable role in family wealth succession planning. Its core value lies in providing guiding principles for the Trustee regarding the management of Trust assets, distribution of gains or profits, and addition or removal of beneficiaries, thereby significantly compensating for the potential lack of detailed execution provisions in the Trust Instrument, which prioritizes flexibility.

Although the Letter of Wishes itself lacks binding legal force, its practical influence and risk management value in practice of Trust administration cannot be overlooked. When making discretionary trust administration decisions, Trustees should fully understand the settlor’s Trust intentions to avoid dispute.

View Full PDF

Further Assistance

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com

Our firm has been ranked as Lexology Legal Influencer for Private client – Central and South America for Q3 2025. This is the third ranking from Lexology this year.

Loeb Smith was honoured to be awarded Law Firm of the Year: Client Service at the Hedgeweek® US Awards 2025 held last week in New York.

Partner, Robert Farrell, and Senior Associate, Juliette Schembri, attended the award gala to accept the accolade and celebrate this achievement. This recognition underscores the firm’s consistent commitment to providing exceptional legal services to clients worldwide. This honour inspires us to continually push forward, grow stronger, and deliver effective legal advice and solutions to our clients.

Event photos: US Awards 2025 – Hedgeweek – Law Firm of the Year – Client Services | Loeb Smith

Global Vision. Client Focus.

The Cayman Islands Monetary Authority (the “Authority”) has announced the launch of its One-time Non-Compliant Directors’ Amnesty Scheme (“Scheme”) – a limited opportunity for eligible registered directors to voluntarily settle outstanding annual fees and accrued penalties at a discounted rate.

According to the Authority’s announcement, “this initiative reflects the Authority’s commitment to supporting good governance and regulatory compliance, while also recognising the practical challenges that may have contributed to past non-compliance. By offering this limited-time opportunity, the Authority seeks to help directors return to good standing and ensure the continued integrity of the jurisdiction’s regulatory framework.”

The Scheme will run from 16 September to 15 October 2025 and is open to registered directors within the 1–19 covered entities category, who as of 31 August 2025, have more than two years of unpaid annual fees. It provides these directors with the opportunity to regularise their status under the Directors Registration & Licensing Act, 2014 (“DRLA”). The announcement clarifies that directors currently under investigation or subject to enforcement action by the Authority or another regulatory body are not eligible.

Apparently, the Authority has contacted Directors who meet the criteria directly via email with the relevant participation instructions. If you believe you may be eligible but did not receive a notification, please contact the Authority at amnesty@cima.ky.

Applications under this scheme will only be accepted through the Directors’ Gateway Portal at https://gateway.cimaconnect.com. Eligible directors should log in to the portal to review and confirm their status in preparation for the launch of the Scheme. Further details are available on the portal effective 16 September 2025.

The Authority is encouraging Directors wishing to return to good regulatory standing to take advantage of this 30-day window. Once the Scheme closes, the full fees and penalties will apply without exception.

The Ministry of Financial Services & Commerce released a Consultation Paper on 26 August 2025 of amendments to introduce tokenized funds in the Cayman Islands, along with amendment bills (“Amendment Bills”) to each of the Mutual Funds Act, Private Funds Act, and the Virtual Asset (Service Providers) Act (“VASP Act”) (together, the “Acts”).

The Consultation Paper and proposed legislative changes set out in the Amendment Bills follow a much welcome amendment to the VASP Act passed in May 2025, which paved the way for tokenized funds in the Cayman Islands, by materially revising the definition of “issuance of virtual assets” to exclude both (i) the issuance of equity interests under the Mutual Funds Act, and (ii) investment interests under the Private Funds Act, from the requirement to register under the VASP Act. Please see our Legal Insight from 24 July 2025 for further detail.

Now, the Amendment Bills are designed to provide further regulatory certainty to (i) adapt the Acts so that they explicitly cover tokenized funds and address the additional specific considerations that apply to a tokenized fund e.g. custody arrangements, and (ii) ensure that the Cayman Islands Monetary Authority (“CIMA”) has sufficient powers to effectively supervise tokenized funds.

Key changes

The ten (10) key takeaways of the Amendment Bills are as follows.

1. They introduce new defined terms into each of the Acts to clearly distinguish tokenized funds.
2. They clarify that digital equity or investment tokens must convey the same rights and privileges as traditional non-tokenized equity or investment interests.
3. The operators of a tokenized fund must ensure that (i) adequate records relating to the creation, sale, transfer and ownership of digital equity tokens/ digital investment tokens are maintained and available for inspection by CIMA within 24 hours of any such request (ii) the tokenized fund must have staff who possess the necessary skills, knowledge and experience, and (iii) the tokenized fund must maintain adequate capital and cybersecurity measures.
4. Requirement to appoint an Administrator/ additional obligations of the Administrator:
  1. Private Fund – Whereas there is currently no statutory requirement in the Private Funds Act for a non-tokenized private fund to appoint a third party Administrator, the Amendment Bill to the Private Funds Act requires a tokenized private fund to appoint an Administrator who is licensed by CIMA and acts as the principal office of the tokenized private fund.
  2. Mutual Fund – While there is currently no specific requirement in the Mutual Funds Act which mandates that the Administrator appointed by a regulated non-tokenized mutual fund must be a CIMA licensed fund Administrator (i.e. a foreign Administrator can be appointed), the Amendment Bill to the Mutual Funds Act requires the Administrator appointed by a tokenized mutual fund to be a CIMA licensed Administrator, which shall also act as the principal office to the tokenized mutual fund.The Amendment Bill to the Mutual Funds Act also increases the obligations that apply to a CIMA licensed fund Administrator. For example, the proposed amendment to section 16(d) of the Mutual Funds Act set out in the applicable Amendment Bill states that a CIMA licensed mutual fund Administrator shall not provide mutual fund administration to a tokenized mutual fund, unless (i) the issuance, redemption and transfer of digital equity tokens comply with the terms of the offering document, (ii) all records relating to the creation, sale, transfer and ownership of digital equity tokens are securely maintained and available to CIMA within 24 hours of request, (iii) the tokenized mutual fund is staffed with staff who possess the necessary skills, knowledge and experience and has appropriate facilities, books, records and accounting systems, capital and cybersecurity measures, and (iv) the tokenized mutual fund has complied with every other requirement under the Mutual Funds Act (as amended).
5. Any risks specific to the digital equity tokens/ digital investment tokens, including considerations regarding cybersecurity, the liquidity of the digital equity tokens/ digital investment tokens to be issued by a tokenized fund should be disclosed in the offering document, along with details of any measures to mitigate such risks.
6. They add a requirement for a tokenized fund to notify CIMA if it is not able to meet its obligations to tokenholders.
7. The operator of a tokenized fund must ensure that digital equity tokens/ digital investment tokens are held in secure custody and in a manner to protect the interests of the tokenholders.
8. The audit of a tokenized fund by an independent auditor shall include (i) an analysis of the digital equity token’s/ digital investment token’s design, creation, supply and distribution, as well as the processes and controls which govern the digital investment tokens, (ii) an information technology security audit, and (iii) any features of programmable contracts or self-executing contracts.
9. The independent auditor is also required to confirm as part of the audit of a tokenized fund that (i) no fraudulent transactions have been identified during the audit, (ii) all digital equity tokens/ digital investment tokens created and issued are backed effectively by underlying assets, and (iii) to include a statement of compliance of the tokenized fund with all applicable custody, cybersecurity and risk management measures issued by CIMA.
10. They grant CIMA supervisory powers including the power to carry out inspections of the underlying technology, digital equity tokens/ digital investment tokens and underlying asset valuations.

Conclusion and next steps

The Consultation Paper and Amendment Bills provide much needed legal clarity and modernization of the existing Cayman Islands legal and regulatory framework to effectively “catch-up” with the evolving technology developments in the financial and digital assets industry.

The Consultation Paper (including Amendment Bills) are subject to any comments or feedback from industry stakeholders by 12 September 2025 and given the subject matter of the Amendment Bills, it is likely that further regulatory measures will be issued by CIMA in relation to tokenized funds to provide further guidance.

Further Assistance

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

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com

In the prevailing economic conditions investors in offshore companies registered in the Cayman Islands or the British Virgin Islands (“BVI”) are increasingly being forced to consider their rights against directors who may have been responsible for mismanagement of the company’s affairs. Minority shareholders, in particular, are keen to understand the availability of remedies which allow them to overcome “wrongdoer control.” That is to say, the common situation where the composition and direction of the board is controlled by majority shareholders. We have set out below a brief summary of the duties owed by directors and the remedies available to shareholders in each of these two jurisdictions.

What is scope of director’s duties?

Cayman Islands

The duties of a director of a Cayman company are found in the common law and include the duty to act bona fide in the best interests of the company, a duty not to exercise his or her powers for purposes for which they were not conferred and not to make secret profits.

BVI

The law governing the duties of directors and conflicts is set out in the BVI Business Companies Act (as revised) (the “Act”). These largely mirror the position at common law and include, for example:

1. the duty to “act honestly and in good faith and in what the director believes to be in the best interests of the company”;
2. the duty to exercise powers “for a proper purpose” and a requirement that a director “shall not act, or agree to the company acting, in a manner which contravenes this Act or the memorandum or articles of the company”; and
3. a requirement that a director “shall, forthwith after becoming aware of the fact that he or she is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board of the company.”

It is interesting to note that the Act provides that a director of a company that is a wholly-owned subsidiary, subsidiary or joint venture company may, subject to certain requirements, act in the best interests of the relevant parent, or in the case of the joint venture company, the relevant shareholders even though such act may not be in the best interests of the company of which they are a director.

What are the standard director’s duties?

Cayman Islands

While the decisions of English common law cases are not binding in the Cayman Islands, they are persuasive authority. Accordingly, a large body of the English caselaw authority on a director’s duties has been followed by the Cayman Islands court and applies to the Cayman Islands such that a director is under a duty to act with reasonable care, skill and diligence in the performance of his or her duties. In the English authority of Re City Equitable Fire Insurance Co [1925] Ch. 407 it was held that “a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. This highly subjective test, however, has been met with increasing criticism in more recent years and there is further English caselaw authority to suggest that directors are nevertheless subject to an objective duty to “take such care as an ordinary man might be expected to take on his own behalf” (Dorchester Finance Co v Stebbing [1989] BCLC 498 (decided in 1977)). As such, a distinction appears to be drawn between the duty of skill on the one hand and the duty to take care on the other. However, in Re City Equitable Fire Insurance Co it was further held that “in respect of all duties that, having regard to the exigencies of business, and the articles of association, may be properly left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting to that official to perform such duties honestly.”

BVI

In terms of the standard of care that directors of BVI companies must show, the Act provides that a director “when exercising powers or performing duties as a director, shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation-

1. the nature of the company;
2. the nature of the decision; and
3. the position of the director and the nature of the responsibilities undertaken by him or her.”

This duty is qualified in the Act to the extent that the director of a company is entitled to rely upon the books, records and financial statements of the company in question and/or employees and professional advisers provided that in doing so he or she acts in good faith, undertakes a proper inquiry where this is warranted and has no knowledge of a reason for not placing reliance on the said documents.

What are the key remedies available to a member or shareholder?

Cayman Islands

The following remedies are available to a member of a Cayman company:

1. A personal action against the company (where the company has breached a duty which is owed to the member personally);
2. A representative action (similar to a personal action such a claim would lie for breach of a duty owed to a group of shareholders);
3. A derivative, or multiple derivative claim (this is the most common type of action. See below); or
4. A petition to wind up the company on just and equitable grounds. (This is seen as a last resort because it risks placing the company into liquidation although the Cayman Companies Act (As Revised) (the “Companies Act”) provides the Court with the option of making an alternative order. See below).

BVI

The members of a BVI company may pursue the following remedies:

1. A personal action (on the same grounds as at common law in the Cayman Islands);
2. A representative action which provides that the Court may appoint a member “to represent all or some of the members having the same interest and may, for that purpose, make such order as it thinks fit”. An order would include an order “as to the control and conduct of the proceedings” and “directing the distribution of any amount ordered to be paid by a defendant in the proceedings among the members represented.”;
3. A derivative claim; or
4. An unfair prejudice claim.

The most common type of remedies sought by minority shareholders are derivative claims and unfair prejudice claims (see below).

What are derivative claims and what is their legal basis?

Cayman Islands

A derivative action is a claim commenced by one or more minority shareholders on behalf of a company of which they are a member in respect of loss or damage which that company has suffered. Such a claim can only be brought in certain circumstances and amounts to an exception to the rule that a company, as a separate legal person, should sue and be sued in its own name (often referred to as the rule in the English authority of Foss v Harbottle (1843) 2 Hare 461; 67 E.R 189). In the Cayman Islands the law governing derivative actions is drawn from the common law rather than statute.

BVI

While the English common law applies in the BVI, members’ remedies have been given a statutory footing in the Act (see below).

What is the procedure for commencing a derivative action?

Cayman Islands

As with the majority of actions commenced in the Cayman Islands, derivative claims are normally begun by serving a writ and statement of claim on the relevant defendant or defendants. Grand Court Rules O.15, r. 12A provides that where the defendant gives notice of an intention to defend the claim then the plaintiff must apply to the court for leave to continue the action. Such an application should be supported by affidavit evidence verifying the facts on which the claim and entitlement to sue on behalf of the company are based. Pursuant to Grand Court Rules O.15 r.12A(8) on the hearing of the application, the court may grant leave to continue the action for such period and upon such terms as it thinks fit, dismiss the action, or adjourn the application and give such direction as to joinder of parties, the filing of further evidence, discovery, cross-examination of deponents and otherwise as it considers expedient. In Renova Resources Private Equity Limited v Gilbertson and Others [2009] CILR 268, Foster., J affirmed the application in the Cayman Islands of the test to be applied in determining whether to grant leave to continue the action put forward by the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch 257. Foster, J., held that: “(…) there are two elements to this: first the plaintiff [is] required to show prima facie that there [is] a viable cause of action vested in the company and, secondly, that the alleged wrongdoers [have] control of the company (or could block any resolution of the company or the board) and thereby prevent the company bringing an action against themselves.”

BVI

The Act provides that subject to certain exceptions, “the Court may, on the application of a member of a company, grant leave to that member to-

1. bring proceedings in the name and on behalf of that company; or
2. intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.”

Without limiting the above, in determining whether to grant leave, “the Court must take the following matters into account-

1. whether the member is acting in good faith;
2. whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters;
3. whether the proceedings are likely to succeed;
4. the costs of the proceedings in relation to the relief likely to be obtained; and
5. whether an alternative remedy to the derivative claim is available.”

It should be noted that leave to bring or intervene in proceedings may be granted “only if the Court is satisfied that-

1. the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
2. it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.”

Is it possible to bring multiple derivative claims (“MDCs”)?

Cayman Islands

In Renova the Grand Court held that in appropriate circumstances MDCs would be permitted. In that case, the plaintiff had brought an action in respect of loss incurred by a wholly-owned subsidiary of the company in which it was a shareholder and therefore loss to the subsidiary caused indirect loss to its parent company and shareholders. However, the rule against the recovery of reflexive loss applied such that a shareholder or parent company would not be permitted to claim for indirect losses which mirrored those losses suffered directly by the relevant subsidiary or indeed sub-subsidiary on whose behalf action was being brought.

BVI

In Microsoft Corporation v Vadem Ltd^[1] the Court of Appeal of the Eastern Caribbean Supreme Court held that BVI law which has been codified in this area “does not permit double derivative proceedings.” That said, English caselaw authority such as Universal Project Management Services Ltd v Fort Gilkicker Ltd^[2] may open up arguments that such actions are nevertheless available in the jurisdiction at common law.

What remedies are available for unfair prejudice and what is their legal basis?

Cayman Islands

Pursuant to the Companies Act the court may wind up a company if it is of the opinion that it would be just and equitable for it to do so. The Companies Act provides that where such a petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court shall have jurisdiction to make the following orders, as an alternative to a winding-up order, namely:

1. an order regulating the conduct of the company’s affairs in the future;
2. 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;
3. an order authorising civil proceedings to be brought in the name of and on behalf of the company by the petitioner on such terms as the Court may direct; or
4. 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 capital accordingly.

BVI

The Act provides that a member “who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity, may apply to the Court for an order”. If on an application “the Court considers it just and equitable to do so, it may make such order as it thinks fit, including, without limiting the generality of this subsection, one or more of the following orders:

1. in the case of a shareholder, requiring the company or any other person to acquire the shareholder’s shares;
2. requiring the company or any other person to pay compensation to the member;
3. regulating the future conduct of the company’s affairs;
4. amending the memorandum and articles of the company;
5. appointing a receiver of the company;
6. appointing a liquidator of the company;
7. directing the rectification of the records of the company; and
8. setting aside any decision made or action taken by the company or its directors in breach of this Act or the memorandum or articles of the company.”

[1] BVIHCVAP2013/0007
[2] [2013] 3 WLR

Further Assistance

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: edmond.fung@loebsmith.com

Once registered under the Cayman Islands Companies Act (As Revised), a segregated portfolio company (“SPC”) can operate segregated portfolios (“SPs”) with the benefit of statutory segregation of assets and liabilities between portfolios. The principal advantage of an SPC over a standard exempted company is to protect the assets of one portfolio from the liabilities of other portfolios.

The benefits of SPCs

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

SPC provides ability to set up a statutory “ring-fence” to protect against cross liability issues relating to the assets and liabilities of the various SPs within a SPC.
The annual Government fees for an SP is less than 50% less than the annual Government fees for an exempted company.
The SPC is a Cayman corporate structure, like a standard exempted company, where there are no residency restrictions on Directors or Shareholders.
There are no exchange control restrictions.
There are no Cayman taxes on the SPC or its shareholders, among other benefits.
As shown in figure 1 below, the SPC structure is used increasingly as an investment platform on which investors can use different SPs to hold varying asset classes (e.g. real estate, intellectual property, stocks and shares, and distressed assets) and have their investments managed separately from other investments held by other SPs on the same SPC platform.

Figure 1. An unlimited number of SPs can be created by the SPC to hold various assets, employ different investment strategies or have varying sector focus.

What are the features of a Segregated Portfolio Company?

Under Cayman Companies Act, 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 Memorandum of an SPC usually gives the SPC full capacity to pursue very broad objects. For example, the Memorandum of an SPC typically has a clause such as this (emphasis added):“The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Act…or any other law of the Cayman Islands.”
Cayman Companies Act permits an SPC 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.
The Companies Act requires an SPC to make a distinction between “segregated portfolio assets” (which are assets of the SPC that have been designated or allocated for the account of a particular SP) and general assets (which are assets of the SPC that have not been designated or allocated for the account of any particular SP of the SPC). 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.
How are SP assets comprised? – The assets of an SP comprise (a) assets representing the share capital and reserves (“reserves” include profits, retained earnings, capital reserves and share premiums) attributable to the SP; and (b) all other assets attributable to or held within the SP (e.g. bonds, stocks, real estate, IP). Shares of the SPC are permitted to be issued in respect of a particular SP, the proceeds from the issue of such shares are included in the assets of that SP and the shares may carry the right to distributions from that SP. The proceeds of the issue of shares which are not segregated portfolio shares shall be included in the SPC’s general assets.
The Companies Act also requires an SPC to make a distinction between “segregated portfolio liabilities” (which are liabilities of the SPC that have been designated or allocated for the account of a particular SP of the SPC) and general liabilities (which are liabilities of the SPC that have not been designated or allocated for the account of any particular SP of the SPC).
It is the duty of the Directors of the SPC to establish and maintain (or cause to be established and maintained) procedures:
(a) to segregate, and keep segregated, portfolio assets separate and separately identifiable from general assets;
(b) to segregate, and keep segregated, portfolio assets of each SP separate and separately identifiable from segregated portfolio assets of any other SP; and
(c) 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 controls the SPC? – The SPC will have a Board of Directors. In addition, each SP can have its own segregated portfolio directorate or investment or management committee which effectively controls and manages the operations of the relevant SP. The segregated portfolio directorate, investment or management committee would obtain its powers through powers delegated to it by the Board of Directors of the SPC.
Contracting on behalf of an SP – Whilst the SPC is a company and therefore a corporate entity with separate legal personality, an SP does not have separate legal personality. Accordingly, the Companies Act requires that when contracting on behalf of a particular SP, it should be made clear which SP the SPC is contracting on behalf. Each SP can have its own investment manager, trading advisor, and other service providers but it should be made clear in the agreements which SP of the SPC has engaged them for their services. For example, if ABC Investments SPC enters into a trading advisory agreement to engage a trading advisor for segregated portfolio A1, the SPC should make it clear in the agreement that it is acting as: “ABC Investments SPC acting solely for and on behalf of segregated portfolio A1”. The trading agreement should also be executed as: “ABC Investments SPC acting solely for and on behalf of segregated portfolio A1”.
Who can bind an SPC or an SP? – The SPC has the capacity to enter transactions “acting solely for and on behalf” of one or more SPs as stated above, the SPC must identify the relevant SP and state that it is: “acting solely for and on behalf of” the particular named SP. It is the Board of Directors of the SPC (or other person to whom the Directors have delegated authority, e.g. the investment manager) that will be able to bind the SPC and the relevant SP in respect of which the SPC is acting.
Directors at SP level? – There will not be a Board of Directors as such at the SP level because it is not a separate corporate entity. However, often the Board of Directors of the SPC in a fund structure will delegate management of the SPC and/or the SPs to an investment manager or to an investment or management committee.
Can assets be transferred between SPs? – The Companies Act requires the Directors of the SPC to ensure that assets and liabilities are not transferred between SPs otherwise than at full value
Rights of creditors – The Companies Act requires that segregated portfolio assets must only be available and used to meet liabilities to the creditors of the SPC who are creditors in respect of that SP and who shall thereby be entitled to have recourse to the segregated portfolio assets attributable to that SP for such purposes. Segregated portfolio assets should not be available or used to meet liabilities to, and shall be absolutely protected from, the creditors of the SPC who are not creditors in respect of that SP, and who accordingly shall not be entitled to have recourse to the segregated portfolio assets attributable to that SP.
Accordingly, a creditor will only have recourse to assets from SPs with which it has contracted and creditors will have no recourse to the assets of other SPs of the SPC which are protected under the Companies Act. This statutory protection afforded under the Companies Act to the assets of each SP is one of the key feature and benefit of the SPC structure.
Transfers to General Assets to meet expenses – Sometimes the Articles of Association of the SPC empowers the Directors of the SPC to transfer segregated portfolio assets to the general assets of the SPC (and, if more than one SP is in existence, pro rata in proportion to the net asset value of each SP or in such other proportion as the Directors determine) in order to discharge the following liabilities: government registration fees, annual return fees, professional fees, service provider fees, taxes, fines and penalties and any other liabilities or a recurring nature necessarily incurred in maintaining the continued existence and good standing of the SPC.
Segregation of Liabilities and rights of third parties – The liabilities to a person arising from a matter imposed on, or attributable to, a particular SP, only entitle that person to have recourse to that particular SP in the first instance and then to the general assets of the SPC, unless the Articles of Association of the SPC prohibits payments from the general assets of the SPC, in which case there is no recourse to the general assets.

Further Assistance

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 topic covered in this Briefing, please contact us. We would be delighted to assist.

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

OPEN-ENDED FUNDS

The Mutual Funds Act (for open-ended funds) and the Private Funds Act (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman Islands. The Cayman Islands Monetary Authority (“CIMA”) is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement.

The Mutual Funds Act defines a mutual fund as “a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments but does not include a person licensed under the Banks and Trust Companies Act (2021 Revision)…” The reference to “equity interests” means that debt instruments (including warrants, convertibles and sukuk instruments) are excluded and funds issuing such instruments will not be required to register with CIMA as a mutual fund.

Limited Investor Funds:

The scope of regulation extends to Cayman Islands incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. Changes to the Mutual Funds Act means that certain mutual funds, which were previously exempted from registration with CIMA because they had 15 investors or less, the majority of whom have the power to appoint and/or remove the operators of the investment fund (the operator being the directors, the general partner or the trustee, as is relevant given the corporate structure used for the fund) (“Limited Investor Funds”), are no longer exempt from registration with CIMA. Limited Investor Funds are now required to be registered with, and are regulated by, CIMA.

Audit Requirement:

Each CIMA registered mutual fund is required to have its accounts audited annually and filed by a firm of auditors on the CIMA approved list of auditors with CIMA within six (6) months of the end of each financial year of the mutual fund (along with a Financial Annual Return in CIMA’s prescribed form).

Single Investor Funds:

Mutual funds that are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Mutual Funds Act. Nonetheless, a mutual fund with a single investor can apply for voluntary registration to, among other things, benefit from the status of being a regulated fund.

Cayman Islands laws and regulations do not impose restrictions on, or prescribe rules for investment strategies of open-ended funds, or their use of leverage, shorting or other techniques.

Registration of Directors:

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as an exempted limited partnership (in each case, wherever in the world these persons are located, not just Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Act (DRLA). The DRLA enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLA who are directors of closed-ended funds that fall within the scope of the Private Funds Act. However, this may change in the future.

CLOSED-ENDED FUNDS

The Private Funds Act requires the registration of closed-ended funds (typically, investment funds that do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with CIMA. The Private Funds Act applies to private equity funds, real estate funds, venture capital funds, and the other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies. The Private Funds Act also applies to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands.

In addition to registration with CIMA, the Private Funds Act also imposes the following regulatory requirements to be met by private funds:

Audit

Each private fund is required to have its accounts audited annually and filed by a firm of auditors on the CIMA approved list of auditors with CIMA within six (6) months of the end of each financial year of the private fund (along with a financial annual return in CIMA’s prescribed form).

Valuation of assets

A private fund must have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Private Funds Act. Valuations of the assets of a private fund are required to be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.

Safekeeping of fund assets

The Private Funds Act requires a custodian: (1) to hold the private fund’s assets that are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify title to, and maintain records of, fund assets.

Cash monitoring

The Private Funds Act requires a private fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the private fund):

- to monitor the cash flows of the private fund;
- to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund; and
- to ensure that all payments made by investors in respect of investment interests have been received.

Identification of securities

A private fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes of the securities that it trades and holds and make this available to CIMA upon request.

Anti-Money Laundering

All investment funds are required to comply with Cayman Islands anti-money laundering legislation and regulations, including appointing an anti-money laundering compliance officer, a money laundering reporting officer, and a deputy money laundering reporting officer. The Cayman Islands government and CIMA actively work with the European Union, the Organisation for Economic Co-operation and Development, the Financial Action Task Force and regulators in numerous jurisdictions to observe and maintain international standards on transparency, and good corporate governance.

View Full PDF

Further Assistance

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

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