A New Vehicle for the Cayman Trusts Industry: the Foundation Company
The Cayman Islands government published the Foundation Companies Bill, 2016 on 16 December 2016 (the "Bill"), which will allow for the formation of a new Cayman Islands vehicle: the foundation company.
A foundation company will be governed by the Companies Law, 2016 (the "Companies Law") save to the extent excluded or modified by Schedule 1 to the Bill, or otherwise inconsistent with the provisions of the Bill. This means that the foundation company will be familiar to private client and commercial practitioners alike, while key modifications to the Companies Law model company mean that it will be a highly flexible vehicle for achieving a wide range of private client, family office and philanthropic objectives.
Principal Features of a Foundation Company
Formation and Legal Status
The directors and members of an existing company or a company being formed may apply to the Registrar of Companies (the "Registrar") for the entity to be a foundation company. The Registrar may issue a declaration that an existing entity is a foundation company and, for a company being formed, may endorse such declaration on its certificate of incorporation. Either way, a foundation company is a body corporate with legal personality distinct from that of its members, directors, officers, supervisors and founder. Accordingly, it has capacity to sue and be sued and to hold property.
For a company to be a foundation company:
(a) it must be limited by shares or by guarantee, with or without share capital;
(b) it must have a memorandum that:
(i) states that the company is a foundation company;
(ii) generally or specifically describes its objects;
(iii) provides, directly or by reference to its articles, for the disposal of any surplus assets the company may have on a winding up; and
(iv) prohibits dividends or other distributions of profits or assets to its members or proposed members as such;
(c) it must have adopted articles; and
(d) its secretary must be a qualified person (see below).
Objects and Powers
A foundation company may be formed for any lawful object which need not be beneficial to other persons. The optional model memorandum at Schedule 2 describes possible objects of a foundation company: acting as a holding company or an investment company or providing financial assistance or benefits to beneficiaries. A foundation company will have a duty to carry out its objects only if the memorandum expressly so declares and designates, or provides for the designation of, persons with standing to enforce the duty by action against the foundation company.
Membership and Limited Liability
A foundation company's constitution (see below) may grant or authorise the grant to any person or description of persons, whether or not ascertained or in existence, the right to become a member of the foundation company and such right is enforceable by action against the foundation company. A foundation company may cease to have members if its memorandum so permits or requires and it continues to have one or more supervisors (see below). Ceasing to have members will not affect the foundation company's existence, capacity or powers. If a foundation company has ceased to have members, it may not subsequently admit members, or issue shares, unless expressly authorised to do so by its constitution. The model memorandum stipulates (and thus confirms) that the liability of members is limited.
This consists of a memorandum and articles; bylaws, if adopted, do not form part of the foundation company's constitution. The power to make or consent to alterations to a foundation company's memorandum may be given to any person or description of persons, whether or not members or supervisors, exercisable by such process as may be required by the constitution or, if no process is specified, by special resolution.
A foundation company must be limited by shares or by guarantee with or without share capital.
A foundation company's constitution may, as well as providing for its management by directors or their delegates, give rights, powers and duties of any type to members, directors, officers, supervisors, founders or others. Powers given by the constitution may be given for the benefit of the foundation company, for the benefit of the donee, or for any other purpose, and may be subject to any condition. Except as otherwise expressly provided by the constitution:
(a) duties are owed only to the foundation company;
(b) rights are enforceable against the foundation company only;
(c) a beneficiary as such has no powers or rights relating to the foundation company, its management or its assets and is not, as beneficiary, an "interested person" which class is limited to members, supervisors, persons declared under the constitution to be interested persons and those who have the right to be a member or supervisor;
(d) the directors shall give an interested person the reports, accounts, information and explanations concerning the foundation company's business and affairs; and
(e) an interested person may bring an action in the name of or on behalf of the foundation company for the enforcement of the duties or liabilities of directors in the same circumstances and manner as may a member of a company that is not a foundation company.
A foundation company must have at all times a qualified person as its secretary. A qualified person is a person who is licensed or permitted by the Companies Management Law (2003 Revision) to provide company management services in the Cayman Islands to the foundation company.
Contribution of Assets
A foundation company shall not accept an asset contribution that is gratuitous or is in consideration of a share issue unless its secretary has given the foundation company a notice that there appears to be no objection under regulatory laws to its acceptance. The secretary is under an obligation, subject to criminal sanction, to maintain a full and proper record of the secretary's activities and enquiries made for giving notices in relation to the acceptance of assets.
A foundation company may have supervisors, which are persons, other than members, who under the foundation company's constitution have a right to attend and vote at general meetings, whether or not the person has supervisory powers or duties.
Register of Supervisors
In addition to the register of directors, members and charges that Cayman Islands companies are required to keep, a foundation company must keep at its registered office an up to date register of supervisors. Failure to do so is subject to criminal sanction on the foundation company and every director or manager of the foundation company who knowingly and wilfully authorised or permitted the contravention.
A foundation company's constitution may provide for the resolution of disputes among its directors, officers, interested persons or beneficiaries (to the extent that beneficiaries have any rights) concerning the foundation company or its operations or affairs, or the duties, powers, or rights of persons under the constitution by arbitration or by any other lawful method.
Cayman Islands Tax Status
There are no forms of relevant direct taxation in the Cayman Islands and, if the objects of a proposed foundation company are to be carried out mainly outside the Cayman Islands, application may be made to register the proposed foundation company as an exempt company. Such registration will make the foundation company eligible for a tax exemption undertaking.
The Role of the Grand Court
A foundation company that has a duty to carry out its objects has a right to apply to the Grand Court (the "Court") for an opinion, advice or directions. Further, section 48 of the Trusts Law (2011 Revision) (the "Trusts Law"), allowing for trustees and personal representatives to apply for the opinion or direction of the Court, will apply to foundation companies with appropriate modifications.
The principle enshrined in sections 92 and 93 of the Trusts Law, the 'foreign elements' provisions of the Cayman Islands Trusts Law, known also as its 'firewall' provisions, will apply to property contributed to foundation companies.
The Bill may become law during the first half of 2017, although it will not enter into force until a separate commencement order is published. We will provide further updates as the Bill moves through the legislative process, and once the commencement date for the new law is confirmed.
For further information, please liaise with your usual Maples and Calder team or any of the contacts above.