The Foundation Companies Law 2017 (the "Law") introduced another innovative and flexible vehicle in the Cayman Islands which can be used in a myriad of ways to assist clients with finding solutions to structuring issues. Foundation companies ("FCs") were initially introduced to meet the demands of clients located in civil law jurisdictions who were unaccustomed to traditional common law trust structures. The legislators responsible for drafting the Law certainly did not have the FinTech sector in mind when they were designing the FC. However, we have seen a number of clients in the FinTech space embrace the flexibility and adaptability of the FC and use it in a number of ways.
Background to Foundation Companies
FCs take the form of a traditional company limited by shares or guarantee but with characteristics of a civil law foundation. Historically civil law foundations were used for succession planning and philanthropic purposes. However, foundations were not available in the Cayman Islands. Therefore civil law clients were required to use more traditional common law trust structures.
The concept of a trust, although a flexible and reliable succession planning tool for centuries, was less attractive to many civil law clients. Two of the main reasons were unfamiliarity with the separation of legal and beneficial interests and uncertainty as to tax treatment. As a result, a number of offshore jurisdictions (such as the Bahamas, Jersey, Guernsey and St. Kitts) used the opportunity to establish common law or offshore foundations by statute. However, the difficulty with this approach is that offshore foundations are statutory constructs with no established body of jurisprudence. This has resulted in considerable uncertainty in determining how a court of law will interpret, apply or treat these entities.
Cayman's solution to this issue was to establish a hybrid that looks like a civil law foundation but benefits from long-established jurisprudence which relates to companies.
Forming a Foundation Companies
A FC may be incorporated within 24 hours of submission of the documents to the Registrar of Companies (the "ROC") and the process for incorporation is the same as that for a traditional exempted company. The memorandum and articles of association will be filed with the ROC, however the by-laws which may include details of management and governance, distributions or beneficiary information are not filed with the ROC and are kept confidential. The following additional requirements must be satisfied before incorporation, that is, the FC:
- must be limited by shares or by guarantee, with or without a share capital;
- has a memorandum that:
- states that the company is a FC;
- generally or specifically describes its objects (which may, but need not be, beneficial to other persons);
- provides for to whom and how the surplus assets of the FC will be disposed of on its winding-up;
- prohibits dividends or other distributions of profits to its members or proposed members;
- has adopted articles; and
- has a secretary who is a qualified person (i.e. a person licensed or permitted under the Companies Management Law (2003 Revision) to provide company management services) and the secretary should have the same address as the registered office.
The ROC will issue a special certificate of incorporation to a FC declaring that the company is a FC.
Constitution and Roles
One of the most attractive features of FCs is that its constitution can be very bespoke and flexible. It may give rights, powers and duties to any of its members, directors, officers, supervisors, founders or others concerning the FC. The constitution may be tailored to meet the specific needs of the client. Typical roles that you will expect to have in a FC are discussed in more detail below.
Founder A FC may have a founder, which may be an individual or a company. Typically, the powers that would be reserved to the founder would include the power to:
- designate or remove members, directors, supervisors, beneficiaries;
- adopt or revoke by-laws;
- amend the constitution;
- wind up the company.
However, it is important to note that the FC does not have to have a founder and may be incorporated without one.
There must be at least one director of which the founder, member, beneficiary may be one. Similar to a traditional company the business and affairs of the FC will be managed by or under the control of the directors other than those expressly reserved to other persons related to the FC or those to be exercised in the general meeting. Directors have a duty to act in the best interest of the FC.
Another attractive feature of the FC is that even though it must have one or more members for the purposes of incorporation of the FC, following incorporation, the FC can be orphaned (whereby the shares of the FC are held off balance sheet) or cease to have members as long as it has one or more supervisors. If a FC ceases to have any members, it cannot subsequently admit members or issue shares unless expressly authorised to do so in its constitution.
The supervisor is an individual or company, other than a member of the FC, who under the constitution, has voting rights at general meetings or rights of access to some of all of the accounts, records or information of the FC, whether or not that person has supervisory or other duties. The Supervisor may bring an action in the name of or on behalf of the FC for the enforcement of duties of the directors.
The articles will usually include a provision for the appointment and removal of beneficiaries. Details of the designation may be set out in the by-laws or otherwise. Unless otherwise provided in the constitution, the beneficiary has no power or right relating to the FC its management or its assets and is not an interested person as defined in the Law. Beneficiaries may only attend general meetings if given the specific right to do so in the constitution.
Foundation Companies in the Fintech Space?
One of the most interesting ways in which FCs have been used in the Cayman Islands is in the blockchain world. The vast majority of blockchain protocols, which have their own custom blockchain, are community projects; many of them with community governance at their core. As these protocols mature and seek to attract investment to fund their growth they are required to house the protocol into something tangible which can accept this investment. Traditional corporate structures are at odds with the protocol's "community". These structures require there to be a shareholder or member; in other words an "owner". FCs provide a solution to this problem. They can be structured in such a way that they do not require an owner and instead they can be governed by a community elected board acting in accordance with bylaws which have been established to protect and promote the protocol in question.
FCs are also flexible enough that they can be used as the token issuers to facilitate Initial Coin Offerings ("ICOs"), Security Token Offerings ("STOs") and Initial Exchange Offerings ("IEOs"). An FC can be moulded to fit the specific needs and circumstances of each issuance. FCs are seen as popular vehicles for token issuers in light of ICOs traditionally being Swiss foundations.
In summary, FCs are a new form of Cayman Islands vehicle which is currently being used for succession planning, philanthropic purposes and token issuances. As the use of FCs evolve over time, we look forward to working with our clients on the different ways FCs may be used in light of their flexible nature.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.