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Cayman Islands prepares to unveil new vehicle

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The Cayman Islands is preparing to introduce a new vehicle, the Cayman LLC, in response to growing demand among U.S. fund managers and attorneys. The Cayman Islands published a bill for a new stand-alone LLC law on 18 December 2015 and according to Hayden Isbister (pictured), Partner at Mourant Ozannes (Cayman Islands), the expectation is that it will be approved by the Cayman Government and enacted in early 2016.

The draft bill is based, in part, on equivalent Delaware LLC legislation and therefore provides for a legal framework that will be familiar to practitioners using Delaware LLCs. 

"At the moment we have exempted limited partnerships, segregated portfolio companies (`SPCs'), unit trusts and exempted companies. Once introduced, the Cayman LLC would share many of the features of a Delaware LLC. However, one distinct difference is that a Cayman LLC won't initially have the series concept that a Delaware LLC has. Initially, we will keep the SPC for the segregation of assets and liabilities but in the main it will be similar to a Delaware LLC," explains Isbister.

One of the big advantages to having an LLC is that it will be well suited to operate as a closed-ended private equity fund and therefore give PE houses an alternative to existing vehicles. 

If fund promoters choose a Cayman Islands exempted limited partnership, the downside is that it lacks separate legal personality and exempted companies can be operationally quite cumbersome with respect to limitations in the constitutional documents. 

"It will be versatile and flexible, being governed by an LLC agreement," says Isbister. "This will be the constitutional document, rather than having a memorandum and articles of association, as is necessary for a company, or a limited partnership agreement for a limited partnership. Members will be bound by the terms of the LLC agreement and can decide how the LLC should operate, and will be free to decide on the internal workings of the LLC."

Existing exempted companies will be able to convert into an LLC, but this will not apply to SPCs or exempted limited partnerships. Also, an LLC may be free to merge with exempted companies or any foreign entity with separate legal personality.

The LLC is expected to have simplified accounting mechanisms and will also allow for more straightforward fund administration in terms of tracking and calculating the value of members' investments in the LLC. 

As Isbister explains: "With an exempted company one has share capital maintenance issues, whereas with an LLC structure the administrator will simply calculate the value of each member's investment in the LLC without having to consider issues related to share capital. The LLC may provide for capital accounts which is similar to partnership accounting."

Numerous US managers and fund sponsors have asked whether Cayman could provide such a vehicle, so this development, says Isbister, is very much "in response to client demand. At the moment, managers typically avail of a Cayman exempted company or exempted limited partnership for structuring fund vehicles. We think the flexibility of the LLC agreement, simplified fund administration and more flexible corporate governance, may prove attractive to fund sponsors.

"Clients will also be able to avail of a single LLC structure when structuring certain deals which have an onshore and offshore component. We think this will enhance Cayman's position even more as an offshore domicile of choice in the US market," concludes Isbister.

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