Financial Services Insights – August 2014 – A Changing Legal Landscape for Cayman
The first half of 2014 has been a busy time in the Cayman Islands for legislative changes. The Exempted Limited Partnership Law, 2014 and The Contracts (Rights of Third Parties) Law, 2014 have recently come into force. The Directors Registration and Licensing Law, 2014, which establishes a registration regime for directors of registered funds and management entities is also now in force. FATCA deadlines are now upon us and the Cayman Islands has signed key agreements which facilitate the registration and reporting process (FATCA is covered elsewhere on eisneramper.com). Further, the Cayman Islands Monetary Authority (“CIMA”) has recently produced additional guidance on corporate governance for funds.
The Exempted Limited Partnership Law, 2014
The Exempted Limited Partnership Law, 2014 (the “ELP Law”) was gazetted on 21 February 2014 and came into force 2 July 2014.
The ELP Law is a major re-working of the Exempted Limited Partnership Law (2013 Revision) following extensive public and private sector consultation. The ELP Law gives partners greater contractual flexibility to determine their affairs and will enhance the overall attractiveness of the Cayman Islands as a domicile for partnership formation.
The amendments to the ELP Law fall into three broad categories:
- Market-driven changes which enhance the Cayman Islands position as a leading jurisdiction for fund formation;
- Changes which convey greater authority for the partners to determine their business; and
- Changes which apply concepts used in the Cayman Islands Companies Law, so far as applicable.
The list of persons who are able to qualify as a general partner has been extended to include a limited partnership or limited liability partnership established in a recognized jurisdiction outside of the Cayman Islands (a “foreign limited partnership”). It is expected that the list of persons who can perform the role of general partner will be extended further in due course.
A number of the requirements under Cayman Islands law relating to the execution and delivery of partnership documents have been revised with a view to making it more manageable for investors to accede to the partnership or to execute partnership documents. In particular, a partnership agreement or subscription agreement will be executed validly where it is executed in any manner contemplated by the parties, including (a) execution of the complete agreement or (b) where any signature or execution page to the document is executed whether or not the agreement is in its final form. Further, where the agreement conveys a power of attorney, execution of the agreement will be deemed to be validly executed as a deed without any further demonstration of satisfaction of the requirements for execution as a deed. These provisions of the ELP Law also have retroactive effect.
The ELP Law extends the list of “safe harbour” activities which a limited partner can carry out without losing its limited liability status. A limited partner will not be taking part in the conduct of the business of the exempted limited partnership if the limited partner, or a representative of the limited partner, participates in a board or committee of the exempted limited partnership.
Provisions which allow a creditor to claw back monies that have been distributed to partners have been modified and restricted under the ELP Law and apply only if the exempted limited partnership was (a) insolvent at the time of the payment of the contribution to the limited partner or release of obligation; and (b) the limited partner has actual knowledge of the insolvency of the partnership.
Convey Power to the Partners to Determine Their Business
Partners now have the ability to determine approval thresholds between themselves in the partnership agreement, and determine, where there are multiple general partners, which general partner is entitled to exercise certain authority.
The general partner is required to act in the interests of the exempted limited partnership unless there is an express provision in the partnership agreement to the contrary. The ELP Law provides that a limited partner does not owe any fiduciary duties to the exempted limited partnership or any other partner when exercising any of its rights or authorities or otherwise in performing any of its obligations under the partnership agreement. This standard is analogous to the standard applicable to a shareholder of a company. Further, a member of any board or committee of an exempted limited partnership does not owe any fiduciary duty in exercising any of its rights as a member of the board or committee to the exempted limited partnership or any other partner.
Partners are at liberty to determine what consequences or remedies apply in the event that a partner fails to perform any of its obligations under the partnership agreement or otherwise breaches the provisions of the partnership agreement. The ELP Law makes it clear that a remedy or consequence which is penal in nature will not be unenforceable solely on that basis.
Companies Law Concepts so far as Applicable
Following the broad principles in the Cayman Islands Companies Law, it is now permissible for a Cayman Islands exempted limited partnership to have an additional dual foreign name.
Further, where the Registrar has reasonable cause to believe that an exempted limited partnership is not carrying on business or is not in operation, the Registrar may strike the exempted limited partnership off the register and de-register the exempted limited partnership. The provisions for strike off are broadly similar to those applicable to a company under the Companies Law, except that when a partnership is de-registered by strike off, any assets remaining in the partnership at the time of strike off vest in the applicable general partner.
The new Cayman Islands’ ELP Law is expected to make fund formation in the Cayman Islands even more attractive. Many of the changes will also facilitate the establishment of parallel fund structures with other jurisdictions. The ELP Law is an example of the proactive, cooperative process that helps the Cayman Islands to maintain its status as a leading offshore jurisdiction.
The Contracts (Rights of Third Parties) Law, 2014
The Contracts (Rights of Third Parties) Law, 2014 (the “CRTP Law”) was published in the Cayman Islands Gazette on 21 February 2014 and came into force 21 May 2014. The CRTP Law allows for the enforcement of contracts by third parties and reforms the well-known doctrine of privity of contract in the Cayman Islands.
The CRTP Law provides that a third party may, in his own right, enforce a term of a contract if the contract expressly provides that he is entitled to do so and identifies him.
The doctrine of privity of contract has meant, first, that a person may not have obligations imposed upon them by a contract to which they are not a party and, second, that a person who is not a party to a contract (a “third party”) may not enforce that contract. The second limb of the doctrine was criticised as it does not allow for cases where it was obvious on the facts that a contract was intended to benefit a third party. To combat circumstances where the application of the privity doctrine led to unfairness, the UK adopted the Contracts (Rights of Third Parties) Act in 1999 (the “UK CRTP Act”).
While the Cayman Islands’ CRTP Law is based on the UK CRTP Act, the significant difference is that under the CRTP Law, a third party can only enforce a contract when the contract expressly provides that right. The UK CRTP Act, on the other hand, applies when a contract purports to confer a benefit on a third party, and can therefore operate by implication without an express provision.
Pursuant to the CRTP Law, the contract can identify the relevant third party by name, as a member of a class or by a particular description, and includes persons who are not in existence when the contract is entered into.
If a third party is identified in the contract, and the contract expressly states that the CRTP Law applies, then the third party will have available to him any remedy that would have been available in an action for breach of contract as if he had been a party to that contract in accordance with the terms thereof.
If the parties to a contract wish for a third party to be able to enforce a term of that contract, then the CRTP Law provides a convenient mechanism for the third party to enforce the contract without having to be a party to it or provide consideration. The parties simply need to provide the mechanism within the contract for the CRTP Law to apply. The parties must carefully consider the limitations applicable under the contract and the rights of the third party to object to any potential rescission or variation.
If, on the other hand, the parties do not want third parties to be able to enforce their contracts, then, unlike under the UK CRTP Act, they simply need to do nothing. The CRTP Law will not apply to a contract unless the contract specifically provides for its application.
Fund Specific Guidance on Corporate Governance
On 5 December 2013, CIMA issued the Statement of Guidance on Corporate Governance for Mutual Funds (“SoG-MF”). The SoG-MF seeks to provide high-level guidance on the corporate governance standards expected in the oversight of regulated mutual funds by its operators (i.e., directors, general partner or trustee, as applicable) including the primary duties applicable to the operators of such funds.
Noteworthy Principles of the SoG-MF
The SoG-MF is largely a restatement of common law principles with a focus on mutual fund specific issues, relating to the oversight function and duties. The SoG-MF applies to all regulated mutual funds including funds licensed or administered under section 4(1) of the Mutual Funds Law and funds registered under section 4(3) of the Mutual Funds Law.
The governing body or board of directors of a regulated mutual fund has a positive duty to monitor laws and regulations affecting the funds industry (including anti-money laundering or combating terrorist-financing requirements) and to request information to ensure that the fund and its service and/or professional providers are complying with these and, where not, provide appropriate direction to ensure compliance. The governing body should require regular reporting from the investment manager and other service providers to enable it to make informed decisions and to adequately oversee and supervise the fund.
CIMA has recognised that the operator of a fund is often not actively administering or operating the fund but rather has a duty to retain sufficient oversight so as to enable the operator to satisfy itself that the fund is efficiently and effectively operated and managed in accordance with all applicable laws, regulations and rules.
The governing body and operators must ensure that the fund has a conflict-of-interest policy and ensure that it is adhered to. The governing body should meet at least twice a year and, where necessary, must request the presence of its service providers.
Operators must exercise independent judgement; operate with due skill, care and diligence; and act honestly and in good faith. Operators should not overly rely on a delegation of their duties to service providers and must have the relevant experience or capacity to fulfil the minimum expectations of the SoG-MF.
CIMA’s proactive approach to modernizing the corporate governance standards in the Cayman Islands is welcomed by the industry. It is viewed as promoting and enhancing market confidence which will only help the Cayman Islands maintain its position as the leading international financial centre for mutual funds.
The Directors Registration and Licensing Law, 2014
The Directors Registration and Licensing Law, 2014 (the “Director Law”), which regulates directors of certain entities established in the Cayman Islands, was published in the Cayman Islands Gazette on 21 May 2014 and came into force, with a few exceptions, on 4 June 2014. The subject entities, defined as “covered” entities, include regulated mutual funds under the Mutual Funds Law and “Excluded Persons” under the Securities Investment Business Law.
There are three classes of directors which are regulated: (1) “registered directors” who comprise natural persons appointed as directors to fewer than twenty covered entities; (2) professional directors, who comprise natural persons appointed as directors for twenty or more covered entities; and (3) corporate directors, comprising bodies corporate-appointed as directors for any covered entity.
The Director Law applies to each class of director whether or not the director is resident in the Cayman Islands.
Persons acting as registered directors of covered entities at the commencement date of the Director Law have until 3 September 2014 to register with CIMA.
An application for registration may be refused by CIMA where the applicant has been convicted of a criminal offense involving fraud or dishonesty, or the subject of an adverse finding, financial penalty, sanction or disciplinary action by a regulator, self-regulatory organisation or a professional disciplinary body.
Registered directors are subject to annual filing and fee requirements but are not required to maintain insurance.
Persons acting as professional directors of covered entities at the commencement date of the Director Law have until 3 September 2014 to license with CIMA.
There is a carve out which applies to a director of a covered entity who is a natural person and is a director, employee, member officer, partner or shareholder of a holder of a ‘companies management licence’ or a ‘mutual fund administrators licence’ and to fund managers of regulated mutual funds where the fund manager is registered or licensed by an overseas regulatory authority listed in the schedule attached to the Director Law. These individuals are not be required to be licensed as professional directors but are still be required to register as registered directors.
There are penalties for acting as professional director without complying with the licensing and annual filing and fee requirements. Professional directors must also maintain insurance with an authorised insurer.
Applicants must be fit and proper persons. The fit and proper person test is the same as set out in the Mutual Funds Law, focusing on (a) honesty, integrity, reputation; (b) competence and capability; and (c) financial soundness.
The licensing requirement for corporate directors applies from the first directorship. A carve out applies to the holder of a companies management licence or a mutual fund administrators licence where the holder of the licence is providing directors to or acting as director of a covered entity.
Corporate directors of covered entitites who are acting at the date of commencement of the Law have until 3 December 2014 to become licensed with CIMA.
A corporate director must be registered as an ordinary resident, exempted or foreign company in accordance with the Companies Law, must appoint to its board two natural persons who are registered under this Law, and must have any new or additional director appointed to its board approved by CIMA prior to that appointment.
Corporate directors (and members of their board) must themselves be fit and proper persons and comply with annual filing and fee requirements. Corporate directors must also maintain insurance.
Power and Duties of CIMA
CIMA is required to maintain a register of directors to include the name and address, location of the registered office and date of registration or licence issuance. CIMA shall also maintain a general review for the requirements for the qualification of directors, examine the capacity of registered professional directors to carry out their duties and to give directions where necessary and, inter alia, wherever it considers it necessary to examine by scrutiny the prescribed regulatory terms or onsite inspections or in such other manner as it may determine the affairs of business of any registered, professional or corporate director.
The balance of CIMA’s powers broadly mirror those contained in the Mutual Funds Law.
The Cayman Islands continues to listen to industry and stakeholders and make important changes to our legislation to meet the changing needs and requirements of key markets. The amendments to the Exempted Limited Partnership Law and the Contracts (Rights of Third Parties) Law make sense and will enhance the attractiveness of Cayman as a jurisdiction in which to do business.
Conyers Dill & Pearman is an international law firm advising on the laws of Bermuda, the British Virgin Islands, the Cayman Islands and Mauritius. Tania Dons is a shareholder in the general commercial and investment funds groups of Conyers Dill & Pearman’s Cayman office; contact her at (345) 814-7766.
Financial Services Insights – August 2014