The Companies Law (2003 Revision) (the ¿Law¿) of the Cayman Islands authorizes registration of new and existing Cayman Islands investment funds as segregated portfolio companies (¿SPCs¿)
By Joel A. Adler, an attorney of Sokolow, Dunaud, & Carreras, an international law firm with offices in Paris, Brussels, New York and Atlanta.
segregate and keep segregated portfolio assets of each segregated portfolio separate and separately identifiable from segregated portfolio assets of any other segregated portfolio; and
where relevant, apportion and transfer assets and liabilities between segregated portfolios or between segregated portfolios and the general assets and liabilities of the SPC.
The Companies Law (2003 Revision) (the "Law") of the Cayman Islands authorizes registration of new and existing Cayman Islands investment funds as segregated portfolio companies ("SPCs"). The Law offers the opportunity to create multi-portfolio structures with segregation of assets and liabilities, such that there are no cross liabilities between separate portfolios within an SPC. Creditors are entitled to have recourse to the assets of that segregated portfolio and to the general assets of the SPC. This vehicle is ideal for multi-series investment funds since one series is not liable for the debts or liabilities of another series. A multi-series investment fund that is not an SPC offers no statutory protection for assets of one series from the liabilities of another.
The State of Delaware for several years has had legislation in place protecting the assets of one series from the debts and liabilities of other series. Bermuda has had similar legislation ("Segregated Accounts Companies") in place since November 2000. A number of other non-Caribbean jurisdictions, notably Guernsey, have adopted legislation relating to "Protected Cell Companies"; such entities are substantially similar to SPC. The British Virgin Islands last year adopted legislation for SPCs for insurance companies, but as of the preparation of this article, the British Virgin Islands had not yet adopted SPC legislation for investment funds.
An SPC may segregate the assets and liabilities of different series and the general assets of the SPC by the creation of one or more segregated portfolios. Segregated portfolio assets comprise assets representing share capital, retained earnings, capital reserves, share premiums and all other assets attributable to or held within the segregated portfolio. The assets of a segregated portfolio will only be available to meet liabilities to creditors in respect of that segregated portfolio. In the event that the assets of a segregated portfolio are inadequate to meet such obligations then recourse may be made to the general assets of the SPC which is defined in the Law as the assets of the SPC which are not segregated portfolio assets. Similarly, where there are liabilities arising from a matter attributable to a particular segregated portfolio, the individual or entity to whom the liabilities are owed may only have recourse to the assets attributable to that segregated portfolio. An SPC is a single legal entity and the segregated portfolios within the SPC will not be separate legal entities which are separate from the SPC.
An SPC must include as a part of its name the letters "SPC" or the words "Segregated Portfolio Company". Each segregated portfolio must be separately designated and must include in its designation the words "Segregated Portfolio." The terms "SPC" and "Segregated Portfolio" may be used only once the SPC has been approved as such by the Cayman Islands Monetary Authority ("CIMA"), the mutual funds regulator in the Cayman Islands.
An SPC may create and issue shares in one or more series including different series relating to a single segregated portfolio. An SPC may declare dividends in respect of segregated portfolio shares irrespective of whether any other series of segregated portfolio shares declares a dividend. Such dividends may only be paid on segregated portfolio shares out of the segregated portfolio assets of the segregated portfolio in respect of which the shares were issued. An SPC may enter into contracts for and on behalf of one or more segregated portfolios; however, the segregated portfolio on whose behalf the SPC is acting must be identified and where contracts are in writing it must be indicated that the execution of the contract is in the name of or by or for the account of the relevant segregated portfolio. Where an SPC fails to do so the directors may incur personal liability for the liabilities of the SPC and the segregated portfolio in question.
A Cayman Islands corporation that is formed as an SPC is an ideal vehicle for a multi-purpose and/or multi-manager fund since one segregated portfolio is not liable for the debts or liabilities of another segregated portfolio.
The constituent documents of a Cayman Islands SPC (the "Fund") are its Memorandum and Articles of Association. The Memorandum is akin to a certificate of incorporation; the Articles of Association are akin to a corporation¿s by-laws. Unlike in the United States, the Articles of Association of a non-publicly traded company are filed with the governmental authorities (Registrar of Companies) and are publicly available. A Form MF-1 and the Fund¿s Information Memorandum must be filed with the CIMA; once these documents are filed and approved, the Registrar of Companies will file the Memorandum and Articles of Association and the securities of the Fund can be sold to prospective investors, subject to any legal requirements in the jurisdiction of residence of the investor. The basic contract documents are substantially the same as one would expect to see in the case of any offshore fund, except that each SPC must be a party to the relevant contract documents.
At an early stage, proposed directors for the Fund should be identified; the directors need not be resident in the Cayman Islands. The proposed directors will need to submit copies of their passports, financial institution and professional reference letters. The directors will benefit from the indemnities customarily afforded corporate directors but may seek indemnity only from the assets of the SPC that gave rise to the liability in respect of which indemnification is sought.
In addition to the usual obligations of a director under the Law, a director of an SPC is under an obligation to establish and maintain procedures to:
- segregate and keep segregated portfolio assets separate and separately identifiable from general assets;
Once the Information Memorandum has been prepared, it will need to be submitted to the Administrator/Registrar and Transfer Agent for its comments and then to local counsel for its comments. Normally, the CIMA does not comment on the contents of the Information Memorandum of an "exempt fund". The simplest mechanisms by which to achieve exempt fund status are to require a minimum initial subscription of US$50,000 or to engage a Cayman Islands licensed Administrator. The contents of the Information Memorandum are substantially the same as one would expect to find in an Information Memorandum for an offshore fund.
Conversion of Existing Cayman Islands Fund to an SPC
In order to convert an existing Cayman Islands multi-class/multi-series fund to an SPC, the following steps must be taken:
- the fund¿s directors must prepare a statement of assets and liabilities and show how the fund¿s assets and liabilities will be allocated to the new portfolios. In doing so the assets must be allocated to the individual segregated portfolios or designated as general assets of the SPC;
- 95% of the fund¿s creditors by value must consent to the conversion and how the assets and liabilities will be allocated;
- the fund¿s shareholders must approve of the conversion by special resolution;
- the Memorandum and Articles of Association must be updated to describe the segregated portfolio company structure;
- the information memorandum must be updated to reflect the segregated portfolio company structure; and
- the CIMA must review the proposed information memorandum and consent to the conversion, before a filing may be made with the Registrar of Companies designating the fund as an SPC.
The filing with the Registrar of Companies for the fund must include:
- updated Memorandum and Articles of Association;
- notice to the Registrar of Companies with the names of each segregated portfolio which has been created; and
- consent from the CIMA.
Once converted to an SPC, the fund will have to file annually a notice stating the name of each segregated portfolio in addition to paying certain annual fees. It is the author¿s experience that Cayman Islands counsel advise that the fund investors should be included in the shareholder consent even if their shares are non-voting. Additionally, the Law requires a two-thirds majority to pass a special resolution such as the shareholder resolution required here.
Non-Cayman Islands Fund Converting to Cayman SPC
If the laws of the jurisdiction of organization of a non-Cayman Islands multi-series investment fund so permit (e.g., the British Virgin Islands), the fund may change its domicile by way of continuing as a Cayman Islands SPC. The requirements are generally the same as for the conversion of an existing Cayman Islands fund to an SPC.
There are some additional requirements. The change of domicile must be approved in the manner required by the jurisdiction of organization of the fund. A Memorandum and Articles of Association complying with Cayman Islands law must be duly adopted and a Form MF-1 must be filed with the CIMA. Additionally, the fund must de-register in the jurisdiction of its former domicile.