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The purpose of this memorandum is to provide a summary of themain legal requirements and general principles applicable to theformation, registration, operation and winding-up of a CaymanIslands limited liability company.
This memorandum is intended to provide a general summary of theposition under Cayman Islands law as at the date shown above; it isnot to be taken as specific legal advice applicable to particularissues or circumstances. Anyone considering establishing an LLCshould contact one of the Ogier partners listed on the lastpage.
Introduction
The Limited Liability Companies Law, 2016 of the Cayman Islands(LLC Law) was enacted in June 2016 and commencedon 8 July 2016. The LLC Law creates a new hybrid entity, a Caymanlimited liability company (LLC), similar to itsDelaware counterpart. A Cayman LLC is a corporate entity withseparate legal personality and limited liability of its members butone which has greater flexibility than a company around itsmanagement and organisation and which allocates profits and lossesin a manner similar to a partnership. As such, an LLC may be anappropriate vehicle for a range of uses in investment funds, jointventure companies, private equity transactions, securitisations andother corporate transactions and international structures.
Establishing an LLC
The formation of an LLC is straightforward and similar to theprocess of forming a Cayman Islands exempted limited partnership ora Delaware LLC. Only one member is required in order to register anLLC, by filing a signed registration statement(Registration Statement) with theRegistrar of Limited Liability Companies(Registrar) containing certain prescribedinformation and paying the initial registration fee. TheRegistration Statement must contain the following information:
- the name of the LLC (which may, but need not, contain the words"Limited Liability Company" or the abbreviation"L.L.C." or "LLC" and must not, in the opinionof the Registrar, be likely to mislead or suggest that it islicensed when it is not so licensed) and, if applicable, its dualforeign name together with its translated name;
- the address in the Cayman Islands of the registered office ofthe LLC for the service of process and to which all notices andcommunications may be addressed;
- if the LLC has not been formed for an unlimited duration, theterm for which the LLC is formed; and
- a declaration that the LLC shall not undertake business withthe public in the Cayman Islands other than so far as may benecessary for the carrying on of the business of that LLC outsidethe Cayman Islands as contemplated by the LLC Law. Contravention ofthis prohibition would mean that the LLC and every managerresponsible for the contravention would be guilty of an offence,and the LLC is liable to be immediately dissolved and removed fromthe Register of Limited Liability Companies(Register) in the discretion of theRegistrar.
Registration Certificate
On receipt of the initial registration fee and the RegistrationStatement, the Registrar will register the LLC and issue acertificate of registration (RegistrationCertificate). The Registration Certificate is conclusiveevidence of compliance with all the requirements of the LLC Law inrespect of formation and registration. An LLC is deemed to beregistered on the date of filing.
If a change occurs in any matter specified in an LLC'sRegistration Statement, the LLC must file a certificate ofamendment to the Registration Statement within 30 days of thechange.
The Registration Certificate is generally issued by theRegistrar between three and five working days (or 24 hours ifexpedited for an additional fee) following the payment of theinitial registration fee and the filing of the RegistrationStatement.
Tax treatment
An LLC may apply for a tax undertaking certificate from theCayman Islands Government on the same terms as currently availableto exempted limited partnerships and exempted trusts, to the effectthat, for a period not exceeding 50 years from the date of theundertaking, no law enacted in the Cayman Islands imposing any taxto be levied on profits, income, gains or appreciation shall applyto the LLC.
LLC Agreement
The LLC must have a written LLC agreement (LLCAgreement) of the member or members of the LLC as to thebusiness or affairs of the LLC. Although the LLC Agreement may beentered into at any time before, after or at the time of the filingof the Registration Statement, if it is filed before the filing ofsuch statement, it is deemed effective on the date of theRegistration Certificate. Such agreement may be referred to as anLLC agreement, operating agreement or otherwise. The RegistrationStatement can serve as the LLC Agreement for this purpose.
The LLC Agreement is not required to be filed with the Registrarexcept where the Registration Statement also serves as the LLCAgreement.
Pursuant to the LLC Law, the LLC Agreement may, among otherthings:
- provide for classes of LLC interests or groups of membershaving such relative rights, powers and duties as the LLC Agreementmay provide or permit;
- permit the future creation in the manner provided in the LLCAgreement of classes of LLC interests or groups of members havingsuch relative rights, powers and duties as may from time to time beestablished including rights, powers and duties senior to existingclasses of LLC interests and groups of members;
- permit the taking of an action, including the amendment of theLLC Agreement, without the vote or approval of any member or classof LLC interest or group of members, including an action to createunder the provisions of the LLC Agreement a class of LLC interestor group of members that was not previously outstanding orexisting;
- provide that any member or class of LLC interest or group ofmembers shall have no voting rights;
- provide that all or certain identified members or a specifiedclass of LLC interest or group of members have the right to voteseparately or with all or any class of LLC interest or group ofmembers or managers on any matter;
- permit voting by members to be on a per capita, number,financial interest, class, group or any other basis; and
- specify provisions relating to notice of the time, place orpurpose of any meeting at which any matter is to be voted on by anymembers, waiver of any such notice, action by consent without ameeting, the establishment of a record date, quorum requirements,voting in person or by proxy, or any other matter with respect tothe exercise of any such right to vote.
Unless otherwise provided in the LLC Agreement, writtenresolutions may be passed by members having not less than theminimum number of votes that would be necessary to authorise ortake such action at a meeting at which all members entitled to votethereon were present and voted. Therefore written members'resolutions do not need to be passed unanimously unless the LLCAgreement requires unanimous consent for written resolutions.
Membership
The initial member of the LLC is deemed admitted on the date ofregistration. The LLC Agreement should set out the conditions foradmission as a subsequent member which will occur on satisfactionof such conditions and when the member is entered into the registerof members of the LLC (Register of Members). Inthe absence of any such provision in the LLC Agreement, the consentof all existing members will be required for admission of asubsequent member. Transfers of a member's interest in an LLCmust be in compliance with the LLC Law and the provisions, if any,set out in the LLC Agreement. Provided all requirements foradmission have been complied with or waived, a person is deemed tobe a member and is subject to the terms of the LLC Agreementwithout the need of further action on his part.
Unless otherwise specified in the LLC Agreement, a member may beadmitted and may receive an interest without making or beingobligated to make a contribution.
The LLC Agreement must provide circumstances in which a personceases to be a member because the LLC Law provides that a personceases to be a member only on the happening of any event providedby the LLC Agreement. A member may only withdraw from the LLC andcease to be a member at the time or upon the happening of such anevent and in accordance with the LLC Agreement or as otherwisespecified in the LLC Law or with the consent of all of themembers.
Limited Liability
Generally, unless specified to the contrary in the LLCAgreement, a member's liability is limited to:
- the amount that the member has undertaken to contribute to theassets of the LLC, whether in the LLC Agreement or otherwise;
- making such other payments or performing such services as setout in the LLC Agreement or otherwise agreed between the member andthe LLC; and
- such other amounts as set out in the LLC Agreement.
Where a member receives a distribution at a time when the LLC isunable to pay its debts as they fall due, and the member had actualknowledge of such insolvency, such member shall be liable to theLLC for the amount of the distribution.
Members have no duties (fiduciary or otherwise) when exercisingtheir rights or authorities or performing any of their obligationsas members under the LLC Agreement.
Allocations
Unless otherwise provided in the LLC Agreement:
- profits and losses shall be allocated on the basis of theagreed value showing in the records of the LLC of the contributionmade by each member;
- distributions shall be made or paid on the basis of the agreedvalue showing in the records of the LLC of the contributions madeby each member and may be made in cash or in kind as specified bythe LLC Agreement; and
- members have capital accounts and make capital contributionsrather than subscribing for shares. Profits and losses areallocated among members in the manner set out in the LLC Agreementin a manner consistent with the way a Delaware LLC or a CaymanIslands exempted limited partnership allocates profits andlosses.
There are no capital maintenance requirements imposed on an LLCthat limit the ability of the LLC to make distributions, only acash-flow based solvency test.
Management
Unless otherwise provided in the LLC Agreement, the LLC Lawprovides that the members of the LLC, acting by a majority innumber, shall manage the LLC. However the LLC Law permits themembers of the LLC to determine the internal governance andmanagement arrangements of the LLC amongst themselves, subject tocertain statutory provisions. Such arrangements will be set out inthe LLC Agreement. Thus management of the LLC may be undertaken byone or more managing members acting by majority or by one or moreappointed non-member managers.
Where a manager is appointed under the LLC Agreement, suchmanager shall have the rights, powers and responsibilities andshall be subject to the obligations imposed on such manager by theLLC Agreement whether party to the LLC Agreement or not. In thecase of more than one manager being appointed, the LLC Agreementmay specify which manager is entitled to exercise such authority,consent or power to the exclusion of any other manager.
The LLC Agreement may provide for classes or groups of managerswith differing rights, powers and duties and may permit a managerto delegate its rights and powers to manage the LLC. The LLCAgreement may specify the voting rights of the managers and theprocedures to exercise such rights unless otherwise provided in theLLC Agreement. Manager resolutions may be passed in writing ifsigned by the requisite majority that could carry the vote at ameeting of the managers. Under the LLC Law a member may act in itsown best interests and not the best interests of the LLC itself orany other member. Similarly, under the LLC law, a person serving ona board or committee of the LLC may if so provided for in the LLCAgreement, act in the best interests of a particular member and notnecessarily the best interests of all of the members of the LLC asa whole.
The LLC Law provides that, subject to anything in the LLCAgreement to the contrary, a manager does not owe any duty(fiduciary or otherwise) to the LLC "other than a duty of goodfaith in respect of the rights, authorities or obligations whichare exercised or performed, or to which such manager is subject inconnection with the management of the LLC, provided that such dutyof good faith may be expanded or restricted by the LLCAgreement". This differs from the duties of a director, whichas a matter of general law comprise equitable fiduciary duties andthe common law duty to act with appropriate care, skill anddiligence. The duties of a manager, however, are partly a matter ofstatute and partly a matter of contract. There is thereforeconsiderable flexibility to determine the scope of duties that willbe owed by the manager to the LLC, subject
to a minimum duty to act in good faith. Depending on thedrafting of the LLC Agreement a manager may or may not havefiduciary duties akin to the directors of an exempted company orthe general partner of an exempted limited partnership under CaymanIslands law but will always have a minimum duty to act in goodfaith.
A manager may resign as a manager of an LLC at the time and asspecified in the LLC Agreement (or any other document pursuant towhich the manager is appointed) or with the consent of the members.If a manager wishes to resign in circumstances other than thoseprovided for, he may do so by written notice to the LLC and all ofits members but the LLC may seek remedies for breach of contract,including damages, which may be offset against any payments due tothe resigning manager.
Maintenance of records and accounts
An LLC must maintain:
- a Register of Members at its registered office or at any otherplace within or outside the Cayman Islands, which shall contain:
- the name and address of each person who is a member of theLLC;
- the date on which such person became a member; and
- the date on which such person ceased to be a member and suchregister shall be updated within twenty-one days of any change inthe particulars therein.
Where the Register of Members is kept at a place other than theregistered office of the LLC, the LLC shall maintain or cause to bemaintained at its registered office a record of the address atwhich the Register of Members is maintained, which record shall beupdated within twenty-one days of the date of any change in theparticulars therein. Where the Register of Members is kept at aplace other than the registered office of the LLC, the LLC shallmake available at the registered office, the Register of Membersupon service of an order or notice by the Tax Information Authoritypursuant to the Tax Information Authority Law (Revised).
- a register of managers which shall contain the name and addressof each manager. The register of managers must be filed with theRegistrar and the Registrar must be notified within 60 days of anychange of manager;
- a register of mortgages and charges; and
- a register of security interests.
The Register of Members, register of managers, register ofmortgages and charges and register of security interests are notpublicly accessible unless provided otherwise in the LLC Agreementor as otherwise permitted by the LLC manager.
Books of Account
Every LLC shall cause to be kept such proper books of account asare necessary to give a true and fair view of the business andfinancial condition of the LLC and to explain its transactions.
Every LLC shall maintain or cause to be maintained in anycountry or territory, a record of the amount and date of thecontribution of each member and the amount and date of any paymentrepresenting a distribution or, otherwise, a return of the whole orany part of the contribution of any member, which records shall beupdated within twenty-one days of the date of any change inparticulars.
Where the LLC causes such books and records to be kept at anyplace other than at the registered office of the LLC or at anyother place within the Cayman Islands, the LLC shall, upon serviceof an order or notice by the Tax Information Authority pursuant tothe Tax Information Authority Law, cause to make available at itsregistered office copies of its books of account or records, or anypart or parts thereof, as are specified in such order ornotice.
An LLC shall cause all such books of account to be retained fora minimum period of five years from the date on which they areprepared.
Such books of account and record of contributions are notpublicly accessible.
Annual Return
An LLC shall, in January in every year, file with the Registrara return signed by or on behalf of the LLC certifying that it has,during the calendar year, complied with the provisions of the LLCLaw and pay to the Registrar the prescribed annual fee. This willgenerally be done by the registered office service provider.
Winding-Up
An LLC shall be wound up voluntarily when its term (as set outin the LLC Agreement) expires, or, on the occurrence of a specifiedevent in the LLC Agreement or when the LLC has no members or,unless disapplied by the LLC Agreement, upon the affirmative voteor written consent of at least two-thirds (or such other majorityas the LLC Agreement provides) in number of the members of theLLC.
Unless the LLC Agreement expressly provides otherwise, voluntarywinding up of the LLC is not caused by the death, retirement,withdrawal, expulsion, bankruptcy, liquidation or dissolution ofany member or the occurrence of any event that terminates thecontinued membership of any member.
Where expressly provided for in the LLC Agreement, a manager or,if no manager has been appointed, a member, shall have authority topresent a winding up petition on behalf of the LLC upon theaffirmative vote or written consent of at least two-thirds innumber of the members or such other alternative vote or writtenconsent as the LLC Agreement.
Where the Registrar has reasonable cause to believe that an LLCis not carrying on business or is not in operation, he may strikethe LLC from the Register and the LLC shall thereupon be dissolved.The further provisions of Part VI of the Companies Law (Removal ofDefunct Companies) are applied to defunct LLCs.
Transfer by Way of Continuation or Conversion of ExemptedCompany to LLC
Provided that the LLC Agreement expressly contemplates it, anLLC can apply to deregister in the Cayman Islands and transfer byway of continuation to another jurisdiction as a partnership, bodycorporate or any other form of entity under the laws of thatjurisdiction. The LLC Law also permits an existing Cayman Islandsexempted company to merge with, consolidate with or convert to anLLC and permits non-Cayman Islands entities to re-register andcontinue into the Cayman Islands as LLCs. A statutory process isestablished for each such transaction. There is no mechanism for anexempted limited partnership to convert to an LLC.
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.