Knowledge

This briefing provides only a brief and general overview of the relevant law. It is not intended to be comprehensive and is not a substitute for professional advice in the context of a particular set of circumstances.

Exempted companies

A Cayman Islands exempted company is a type of company that is commonly used to undertake business activities exterior to the Cayman Islands. It is not permitted to conduct local business in the Cayman Islands, unless it holds a licence to do so.

An exempted company is incorporated by the subscription (signature) of the initial shareholder(s) to the memorandum of association.  In practice, the appointed incorporating agent would typically provide a nominee subscriber for the initial incorporation, which subscribes the memorandum and articles of association. 

There is an incorporation fee payable to the Cayman Islands Registrar of Companies ("RoC") which varies depending on the share capital of the exempted company.  As part of the incorporation process a declaration is also signed by the subscriber which confirms that the exempted company will not carry on business in the Cayman Islands unless it holds a licence to do so.  Once the memorandum and articles of association, declaration and incorporation fee are submitted to RoC, a certificate of incorporation is issued which serves as evidence that the exempted company has been incorporated and registered in accordance with the Companies Act (As Revised) of the Cayman Islands (the "Act").

Cayman Islands law does not impose direct tax of any kind.  Stamp duty may be payable on original documents executed or otherwise brought into the Cayman Islands certain circumstances but the charges are generally nominal in nature.  An exempted company may obtain an undertaking from the Cayman Islands Government that, in the event that direct taxation were ever introduced in the Cayman Islands, the company would be free from such taxation for a period not exceeding 30 years from the date of the undertaking. An exempted company is not able to offer its shares to members of the public of the Cayman Islands.

Framework

The principal legislation in the Cayman Islands relating to the operation and governance of Cayman Islands exempted companies is the Act. Regard must also be had to the common law, the memorandum and articles of association of the company and any applicable contracts e.g. a shareholders' agreement.

Memorandum of association and articles of association

The constitutional documents of an exempted company comprise the memorandum of association and the articles of association. These are two separate but connected documents. The memorandum of association sets out the objects and powers of the company and the articles of association set out the internal rules and regulations of the company encompassing such matters as the powers of the board of directors, the procedures for holding and conducting director and shareholder meetings and the rights and restrictions attaching to shares. The articles of association constitute a statutory contract between the shareholders and the company.

Limited liability

Subject to a narrow range of exceptions, the liability of shareholders in an exempted company is limited to the amount of unpaid on their shares. In the absence of fraud, the company being a sham or similar circumstances in which the court would not respect the limited liability of the shareholders, once a shareholder’s shares are fully paid, he or she has no liability to the company's creditors.

Share capital and shares

Cayman Islands law distinguishes between authorised share capital and issued share capital. Authorised share capital represents a ceiling on the amount of share capital that a company may issue. Once all of the authorised share capital has been issued, the authorised share capital must be increased by shareholder resolution before further shares can be issued.

In the Cayman Islands, the annual government fee paid by an exempted company is based upon the authorised share capital rather than the issued share capital. The lowest government fee band is for authorised share capital up to US$50,000 (or currency equivalent).  A company's memorandum may permit shares of nominal value of a fraction of a dollar or even a fraction of a cent. It is therefore not unusual for the authorised share capital, for example, to be US$50,000 divided into 5,000,000 shares of US$0.01 nominal value each.

If permitted by its articles of association, a company may redeem or repurchase shares and, with or without court approval, reduce its share capital.

Whilst an exempted company may have shares without par value, this is unusual and it is more common for an exempted company to have shares with a par (also called 'nominal') value. Where a shareholder subscribes for shares in an exempted company at a premium to their par/nominal value (e.g. US$100 for a share of a nominal value of US$1), the premium must be transferred to a share premium account (which is an internal account of the company). It can be useful to create a healthy share premium account because the Act permits an exempted company to pay dividends or make other distributions out of share premium account provided that the directors are satisfied that the company can pay its debts as they fall due in the ordinary course of business i.e. the company is solvent on a going concern or cash flow basis.

The means by which shares in an exempted company may be transferred will be set out in the articles of association. Articles of association frequently provide that any transfer of shares is subject to the approval of the board of directors.

Dividends

The articles of association will generally contain provisions dealing with the payment of dividends by an exempted company. Usually, an exempted company will be permitted to pay dividends out of profits and, as mentioned above, out of share premium account provided that the company is solvent. If permitted by the articles of association, an exempted company may also pay a dividend in specie i.e. satisfying the dividend by a transfer of one or more of the company’s assets to the shareholders rather than by making a cash payment.  

For further details, please see our separate article on the payment of dividends.

Directors and shareholders

Whilst the shareholders own shares in the capital of an exempted company, the day-to-day management and control will be in the hands of the board of directors. The directors act collectively as a board rather than individually (except to the extent that the board has delegated specific functions e.g. to a managing director or has otherwise resolved that one or more directors have authority to act on behalf of the Company in connection with a particular transaction) and have the authority to manage the company in the company’s best interests. It is therefore important that transactions and associated agreements and documents are approved by the board at a quorate board meeting or by written resolution signed by all directors. It is not appropriate for a single director to approve or sign unless authority to do so has been conferred upon him at a board meeting or by written resolution signed by all directors.

The first director(s) of the company will generally be appointed by the subscriber to the memorandum of association. Thereafter, directors will generally be appointed by a resolution of the shareholders or a resolution of the directors. Depending upon what the company’s articles of association provide, directors will either serve indefinitely or for a specified term after which they may be eligible for re-election to the board.

The directors are subject to fiduciary duties, including a duty of care and skill. In contrast, a shareholder is generally not subject to duties of this sort and can vote in his or her own personal best interests.

Most articles of association provide that all powers of the company are vested in the directors except for those specifically reserved to the shareholders either under the Act or under the articles of association.

The Act sets out a number of more material decisions (e.g. amending the articles of association or winding up the company) which must be passed by a resolution of the shareholders. Some such decisions must be passed by a special resolution of the shareholders (unless varied by the articles, this is resolution passed by a two thirds majority of shareholders present in person or by proxy at a general meeting or a unanimous written resolution of the shareholders).

A director may also hold an office with the company (e.g. president or vice president). However, under Cayman Islands law, such office does not confer any particular authority.

A company must notify the RoC of any change in its directors or officers, including a change of the name of such directors or officers, within 30 days of any such change.

Directors meetings

The Act does not prescribe the frequency with which board meetings must be held. The company’s articles of association may specify the notice that must be given of a board meeting. In the absence of any provision in the articles, reasonable notice must be given.

Subject to the company’s articles of association, board meetings can be held over the telephone or by video conference or can be replaced by written resolutions signed by all directors.

Subject to the articles, voting at a directors meeting will be on the basis of one vote for each director present. If the company’s articles of association provide for it, the chairman may have a casting vote where the voting on any item of business is tied.

Subject to the company’s articles of association, a director may appoint a proxy or alternate to attend a board meeting in his place. Typically, a proxy would be appointed to represent a director at one meeting or at meetings held during a limited time period whereas an alternate would be appointed on a more long-term basis (e.g. if a director was sick). Depending on the terms of the appointment of the proxy or alternate, it may be necessary to notify the RoC of the appointment of an alternate director.

It is always important to check that any board meeting is quorate in accordance with the provisions of the company’s articles of association.

A director stands in a fiduciary position, under the general law.  He or she must avoid any conflict of interest when carrying out his duties as a director. However, as a practical matter conflicts of interest will arise, and generally the articles of association will usually permit a director who has a conflict of interest to nevertheless attend a board meeting, be counted in the quorum and to vote provided that he has fully disclosed his conflict of interest to the board. Minutes of each board meeting must be prepared, signed by the Chairman and kept on the minute book.  Similarly copies of any unanimous written resolutions must be kept on the minute book.

Indemnification of directors and insurance

It is usual for the articles of association to indemnify the directors out of the assets of the company in respect of any personal liability that they may incur in acting as a director of the company. Generally under the articles of association, a director will be indemnified for all losses other than those arising from his or her actual fraud or wilful default.

It is increasingly common these days for directors and officers liability insurance to be provided for directors. The cost of such coverage is generally not prohibitive.

Shareholders meetings

The Act does not prescribe the frequency with which shareholders meetings of an exempted company must be held. Shareholders meetings held between annual general meetings to deal with any special business are known as extraordinary general meetings. How much notice must be given of a shareholders meeting and the contents of the notice will be specified in the company’s articles of association.

Shareholders are 'members' of the company.

Voting at a shareholders meeting is usually on a show of hands (subject to the articles, one vote per share held) unless a poll is demanded, generally by the chairman, in which case, votes are determined by numbers of shares held.

Proxies can be appointed for shareholders meetings.

It is always important to check that any shareholders meeting is quorate in accordance with the provisions of the company’s articles of association.

Minutes of each shareholders meeting must be kept on the company's minute book (unanimous written resolutions of shareholders (where permitted by the articles of association) must also be kept on the minute book).

It is important to remember that most articles provide that a shareholders meeting is called by the directors and therefore the holding of board meeting would generally be the first step in calling any shareholders meeting.

Where the shares of an exempted company are divided into different classes, it may be necessary to hold separate class meetings in addition to a full shareholders meeting depending upon the nature of the business to be considered.

Subject to the company’s articles of association, shareholders meetings can be held over the telephone or by video conference or can be replaced by written resolutions signed by all shareholders.

Execution of documents

As mentioned above, generally, any document to be executed by the company must be first approved by the board at a board meeting or by written resolution signed by all directors. Deeds will generally be executed by a director (in accordance with the provisions of the Act) and the articles of association will need to also be followed if they contain relevant provisions. An exempted company does not have to use a seal for executing documents as a deed but may do so if it prefers.

Registered office

Exempted companies must have a registered office in the Cayman Islands to which communications and notices may be addressed, such services must be provided by a service provider who is licenced to do so.

Government fees and annual filing obligations

There are incorporation and annual fees which are due and payable to the Cayman Islands Government for the incorporation and ongoing maintenance of exempted companies.  As mentioned above, the fee amount is based on the authorised share capital.  Additionally, in January of each year, every exempted company has an obligation to file an annual return and pay annual exempt company fees to RoC.  The annual return filing and related fees to be sent to RoC is usually dealt with by the company's registered office.

Books of accounts and audit

Exempted companies are required to keep proper books of account with respect to all sums of money received, expenses, all sales and purchases and the assets and liabilities.  The Act does not require exempted companies to file or audit their books of account.  The memorandum and articles of association and the directors determine how and to what extent the accounts and books shall be open to inspection by the shareholders.

Beneficial ownership

Unless exempted by one or more of the available exemptions under the Cayman Islands Beneficial Ownership Transparency Act (As Revised) of the Cayman Islands ("BO Act"), an exempted company has an obligation to maintain a register of beneficial owners.  The provisions with respect to the BO Act are beyond the scope of this note, we can provide a separate note with respect to these matters, if required.

Economic substance

The International Tax Co-operation (Economic Substance) Act (As Revised) of the Cayman Islands ("ES Act") was introduced in the Cayman Islands and applies to certain classes of entities which include exempted companies. Under the ES Act any 'relevant entity' conducting a 'relevant activity' and receiving income must establish and maintain economic substance in the Cayman Islands, unless they are (i) tax resident outside the Cayman Islands, (ii) an investment fund or (iii) a not-for-profit company.  The provisions with respect to the ES Act are beyond the scope of this note, we can provide a separate note with respect to these matters, if required.

Winding up

There are extensive provisions in the Act which set out the steps involved in winding up an exempted company. Those provisions are beyond the scope of this note. Expert advice should always be sought whenever a winding up is contemplated.

If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.