The Cayman Limited Liability Company structure has been up and running since mid-July 2016 and over that short period of time close to 200 LLCs have been registered in the jurisdiction.
One of its leading architects is Jonathan Green (pictured), head of the Cayman Islands Investment Funds team at Maples and Calder. Green was the chairman of the sub-committee that was charged with helping draft the Cayman LLC law but as he explains: "This is something Maples had been working on for more than a decade. As such, a lot of thought had been put into it before we got to the sub-committee stage.
"With the support of the Cayman Islands Government we helped develop what is hopefully a law that everyone is happy with. We are seeing Cayman LLCs formed at the rate of 1.5 per working day, on average, and I think that rate will increase over time as promoters and service providers become more aware that that option is on the table. It's been a very successful start."
Given the work Maples and Calder did in helping bring it to fruition it is perhaps unsurprising that the firm has so far worked on more Cayman LLCs than all other service providers combined. Green's expertise in the LLC law means that he and his team have an innate understanding for where and when the LLC can be used to solve structuring solutions that existing Cayman vehicles might be less suited to.
"I would describe the Cayman LLC law as quite pithy. It's an easy to read law, it is straightforward and relatively concise," remarks Green.
From a hedge fund perspective, when the decision was made to introduce the Cayman LLC there was no particular expectation that it would become a key vehicle for investment funds. After all, existing vehicles in the form of Cayman exempted limited partnerships for private equity funds and exempted companies for hedge funds are tried and tested.
"One would expect a degree of natural inertia. After all, why reinvent the wheel? Things are working fine for those investor-facing vehicles. We didn't expect LLCs to be visible in the hedge fund world but more in the private equity space where they can be used as downstream blockers and general partner vehicles – or perhaps for management vehicles.
"For private equity funds that need to have separate legal personality – which exempted limited partnerships do not currently have – in the past this was achieved by using a Cayman exempted company. However, this meant fitting a square peg into a round hole, pushing an exempted company into a PE format using the subscription documents as a way to try and replicate some of the mechanisms that fit more freely within a limited partnership agreement.
"The LLC now offers the combination of having a partnership-style agreement, but with separate legal personality that is not constrained by share capital. The manager can make allocations of assets and profits with more of a partnership feel, and yet at the same time it offers the hard outer casing of separate legal personality and limitation of liability that therefore would tick the box for investors who prefer not to invest in a limited partnership construct," outlines Green.
As a hybrid product it is therefore a very useful additional tool to consider.
Green says that one scenario where the LLC works very well is as a downstream blocker.
"We've seen in the funds space, for example, private equity funds looking to invest in certain assets that require the investor to be a regulated entity. They've been keen to consider, for the sheer convenience that the LLC offers, using an LLC subsidiary as a blocker, which they register with CIMA so that it has a mutual fund level of regulation; and then using the mutual fund blocker to trade securities/assets that need to have an investor with a regulatory complexion.
"Because of its flexibility, simplicity and cost-effectiveness, the Cayman LLC is very helpful for such downstream blockers."
The LLC could feature in a Master Fund-type scenario for hedge funds but as Green alluded to above, there are no great expectations for the LLC to be used as an investor-facing vehicle given the popularity of existing structures. To date, says Green, Cayman LLCs are proving most popular in solving for situations that previously didn't fit comfortably in one of Cayman's existing vehicle constructs.
"We view the LLC as a blank canvass for sophisticated parties to construct the types of deals they would like to do, without the default provisions of the law rewriting or overwriting those deals. We are seeing it as an interesting vehicle for people to structure general corporate transactions: any situation where people need a blocker or wish to do a joint venture. The internal flexibility of the LLC lends itself well to joint ventures.
"People might decide to migrate their Delaware LLCs that act as the GP to a Cayman LLC if they have an international management team. It might be beneficial for non-US partners to have their GP carried interest in a Cayman vehicle rather than a Delaware vehicle and avoid perhaps unnecessary tax or regulatory filings.
"GP vehicles, downstream vehicles, JV vehicles: those tend to be the areas where the LLC is most attractive."
One of the attractions of the Cayman LLC is that one doesn't have to maintain a share register, meaning it is much harder for a promoter to foot fault on a technicality. They can set out the capital contributions and it is more intuitive and straightforward to operate. Moreover, the LLC is more in line with how administrators might be running the accounts for some of these vehicles.
"As long as you keep a record of what you are doing it is very difficult to foot fault. It's a user-friendly vehicle that avoids people trying to contort hybrid deals into an exempted company format. We see the LLC as a supplemental vehicle for the Cayman Islands. It addresses the great majority of situations for those more exotic structuring issues where the exempted company and exempted limited partnership are not always entirely suitable," remarks Green.
The Cayman LLC differs slightly from the Delaware LLC in that, where it has attributes that are more like an exempted limited partnership or an exempted company, "we generally follow those attributes as they would be laid out in the Exempted Limited Partnership Law or Companies Law," adds Green.
It should, he says, be an easy vehicle for people to understand. Practitioners and stakeholders alike will be very familiar with the look and feel of the Cayman LLC given that it took concepts from vehicles that people have long been used to using in the Cayman Islands.
"The last time Cayman introduced a new vehicle was probably the Segregated Portfolio Company. As a jurisdiction, we see the introduction of the LLC as being responsive to the needs of stakeholders and promoters in the sense that the compliance and regulatory burden on funds are increasing.
"We wanted to come up with a vehicle that is easy to administer, is user friendly and is there as a vehicle for the future should existing vehicles not be the best fit for deal transactions. It keeps Cayman at the cutting edge of structuring solutions," concludes Green.
