Cayman Islands Foundation Companies – Lexology
The Foundation Companies Act 2017 introduced foundation companies into Cayman Islands law on October 18, 2017.
What is a Cayman Islands Foundation Society?
It is a type of not-for-profit company (i.e. a company which cannot distribute profits to members) which is incorporated under the Companies Act (2022 Revision) (the Companies Act). The Companies Act applies to foundation companies with two important differences which allow it to operate in the same way as a civil law foundation: it does not need to have members and its constitution cannot be amended unless expressly provided for in its constitution.
This approach has significant advantages over introducing an entirely new legal construct – the latter approach means that the legislature must provide a comprehensive set of rules to cover all eventualities, from incorporation to dissolution. There will therefore likely be areas that will require clarification by the courts, but there will be no case law to help fill these gaps and it may be unclear whether the case law on corporations, trusts or foundations of civil law will be relevant.
With a founding company, these issues are much less acute, as most company laws expressly apply and, secondly, the founding company will benefit from considerable corporate case law.
Foundation company requirements
To become a founding company, it must meet the “founding company requirements”, which are as follows:
(a) it is limited by shares or guarantee (it can do without members after its incorporation); (b) he has a memorandum that:
(i) indicates that it is a founding company;
(ii) generally or specifically describes its objects (which may, but need not, be beneficial to persons);
(iii) prohibits dividends or other distributions of profits or assets to its members or proposed members in their capacity as such; but the following are not considered dividends or distributions for these purposes:
- benefits received by any person in their capacity as beneficiary;
- reasonable remuneration received by directors, officers or other persons having an obligation under the constitution;
- reimbursement of expenses or commitments incurred in connection with the founding company;
- benefits from arm’s length transactions with the parent company; and
- the benefits likely to be collected on the surplus assets during a liquidation,
(iv) provides for the disposition of any surplus assets it may have on liquidation.
(c) it has adopted statutes; and
(d) its secretary is a qualified person; i.e. a person licensed or authorized by Business Management Act to provide business management services in the Cayman Islands.
If the Registrar of Companies (the Clerk) is satisfied that these requirements are met, the certificate of incorporation will contain a statement that it is a founding corporation. Subject to this, a foundation company is incorporated in the same way as any other company in the Cayman Islands.
Existing companies can transform into founding companies if they meet the conditions.
Rights, Powers and Duties
Foundation companies are very flexible: in addition to providing for management by its administrators, the constitution can confer on any person all rights, powers and duties of any kind. Except as otherwise expressly provided in the Constitution:
a) the rights are due only to the founding company;
(b) the rights are only enforceable against the founding company;
(c) the directors have an obligation to provide interested persons with the information and documents required by ordinary resolution or at the written request of interested persons; (“interested persons” are
(i) members and supervisors; (ii) any person entitled to be a member or supervisor and (iii) any other person designated as such in the constitution);
(d) an interested person may bring an action on behalf of the founding company for the performance of the duties of directors in the same circumstances and in the same manner as a member of any other company; and
(e) a Beneficiary has no power or rights.
Other Key Features
A founding company can cease to have members provided it has a supervisor, who has the right to attend and vote at general meetings. Supervisors may be given a broader role, but this is not a requirement.
The constitution may only be amended if and to the extent and in the manner permitted by its constitution. Amendments to the memorandum cannot prevent the founding company from complying with the founding company requirements and must be filed with the Registrar within 15 days.
The constitution may provide for the settlement of disputes by arbitration or any other legal method.
Operation and management
Day-to-day management is generally carried out by the board of directors. A foundation company may have articles of association, which are binding but do not form part of its constitution and are not filed with the Registrar, so are entirely private.
There is no defined role of “founder” or need to provide for a founder as such, but the constitution may provide for rights, powers and duties to be given to a “founder”, if necessary.
Purposes and beneficiaries
A foundation corporation may be established for lawful purposes, which may be for commercial, philanthropic or private purposes (or a combination thereof) and may (but need not) have specified beneficiaries or otherwise benefit any person.
A foundation company need not have a guardian, executor or similar third party with fiduciary duties, but there must be a secretary who is a qualified person. The secretary has a regulatory function. In particular, the founding company:
(a) shall ensure that the Secretary receives such information as it reasonably requires to comply with any regulatory law; and
(b) may not accept any contribution of assets unless the Secretary has given notice to the founding company that there does not appear to be any objection under the regulatory laws,
and there are criminal penalties for violations. The secretary also has a duty to keep complete and appropriate records in connection with this function.
Uses of foundation companies include:
(a) securitization vehicles for off-balance sheet structures – there is no need for a trust to hold shares (as they do not need to have shares) so the structure can be simpler
(b) private trust companies (TPC), performers (e.g. STAR non-charitable purpose trusts) and protectors – again, a trust does not need to hold shares
(c) hold shares in PTCs, executors or protectors
(d) philanthropy – it need not be charitable, so there is no risk of failure if the stated purposes do not fall within the narrow definition of charity and the founder can specify their own mechanism to enforce the duties of trustees, rather than relying on the Attorney General to do so (as is the case with charities)
(e) estate planning, asset protection and most other uses for which trusts are traditionally used
Why use a Cayman foundation company?
There are a number of potential advantages over a trust.
(a) It is a legal person with limited liability – companies are generally more easily understood
(b) It is easier to conclude transactions with third parties
(c) It is easier to change management (because directors of a company are not personally liable for contractual and other obligations as are trustees)
(d) This normally avoids the need for indemnities in the event of a change of service provider and the need to transfer property and contractual obligations to new trustees (because it is the founding company itself which incurs obligations and owns property)
e) Greater flexibility in management and control – the duties of directors have been established by centuries of case law; the rights and duties with regard to a foundation company are governed by its constitution and its articles of association.
(f) Rights are due to the founding company and not to the beneficiaries, unless otherwise stated
(g) The founder decides the rights (if any) of the beneficiaries
(h) There is no risk of invalidity – the certificate of incorporation is conclusive proof of its existence and that it is a founding company
(i) There is less risk of non-recognition by foreign courts, as the notion of society is familiar to most courts
(j) There is less risk of agreements being voided by the court – the court has more limited jurisdiction to do so with companies, compared to the inherent supervisory jurisdiction of the court with respect to trusts
(k) The risks (for service providers) of management companies are generally lower than for trusts
There are also potential advantages over foundations in other jurisdictions (depending on the specific rules of the relevant jurisdiction), including:
(b) greater certainty (due to the fact that it is a type of company, not a new legal construction); and
c) Greater flexibility as to what obligations are owed and to whom, as well as regarding the extent of access to a tribunal and the use of alternative dispute resolution procedures.