The new beneficial ownership regime of the Cayman Islands (the “New BO Regime”), which aims to streamline the Cayman Islands’ beneficial ownership framework and to enhance transparency and access to adequate, accurate and current beneficial ownership particulars, became effective on 31 July 2024 when the Beneficial Ownership Transparency Act, 2023 (the “Act”) came into force. The Act, together with the Beneficial Ownership Transparency Regulations, 2024 and the Guidance on Complying with Beneficial Ownership Obligations in the Cayman Islands published by the Cayman Islands’ Ministry of Financial Services & Commerce (the “Ministry”), form part of the New BO Regime.

We had provided a brief overview of the principal proposed changes or additions to be introduced by the Beneficial Ownership Transparency Bill, 2023 through our legal briefing “Cayman Islands: Proposed Legislation to expand Cayman Islands’ beneficial ownership framework” published on 20 October 2023. Such principal changes or additions have been adopted in the New BO Regime and we shall repeat such principal changes or additions below as a refresher for all stakeholders affected by the New BO Regime.

Expansion of scope 

• The scope of entities covered by the New BO Regime has been significantly expanded by:

1. 1. including limited partnerships and exempted limited partnerships into the definition of “legal person”, hence bringing these partnerships into the scope of the New BO Regime; and
   2. removing certain exemptions under the previous beneficial ownership framework, including removal of the exemption for any legal entity registered under a regulatory law such as the Mutual Funds Act (As Revised), the Private Funds Act (As Revised), the Securities Investment Business Act (As Revised) and the Virtual Asset (Service Providers) Act (As Revised).

• For an investment fund registered under the Mutual Funds Act (As Revised) or registered under the Private Funds Act (As Revised), however, the New BO Regime provides that such fund does not have to supply the full required particulars of beneficial owners as mandated in other cases, and instead such fund will only need to provide its corporate services provider with the contact details of a licensed fund administrator or another contact person licensed or registered under a Cayman Islands regulatory law for providing beneficial ownership information located within the Cayman Islands. Within 24 hours of a request being made by the Minister responsible for financial services (the “Minister”) (or at any other time as the Minister may reasonably stipulate), such licensed fund administrator or contact person of the fund shall provide the Minister with the requested beneficial ownership information.
• In light of the above, Cayman entities are suggested to review whether they fall within the expanded scope of the New BO Regime and whether the exemptions which they previously relied upon may no longer be applicable.

Revision of “beneficial owner” definition 

• The definition of “beneficial owner” has been revised under the New BO Regime in order to align with the concepts and wordings used in that of the Cayman Islands Anti-Money Laundering Regulations (As Revised) (the “AML Regs”), such revisions include but are not limited to:

1. 1. replacing “hold” with “ultimately owns or controls” when describing the 25% threshold in shares, voting rights or partnership interests; and
   2. categorising an individual who “otherwise exercises ultimate effective control over the management” of a legal person as its beneficial owner.

• By making the definition of “beneficial owner” in the New BO Regime and the AML Regs more consistent with each other to certain extent, it should now be easier for relevant stakeholders to interpret and apply these laws and regulations.

Additional beneficial ownership information required  

• The New BO Regime expands the scope of required particulars of the relevant beneficial owner by requesting for the nationality and/or the nature of ownership or exercise of control of the relevant beneficial owner. These types of information were not required to be provided in the previous beneficial ownership framework.
• Through expanding the scope of required particulars, the New BO Regime allows for the Minister (and certain specified Cayman Islands authorities and regulated bodies) to access more transparent beneficial ownership information, which may facilitate their identification of money laundering and/or terrorist financing risks.

Provision of leeway to create a public beneficial ownership register 

• Currently, the beneficial ownership information provided to the Minister is not available to the public.
• Noting that the Cayman Islands Government made a commitment to the UK Government in 2019 to introduce a public register of beneficial ownership, the New BO Regime grants the Cayman Islands Cabinet the power to, subject to the affirmative resolution by the Cayman Islands Parliament, make regulations empowering the Minister to provide access of certain beneficial ownership information to the public. However, in light of the November 2022 judgment made by the European Court of Justice which held that indiscriminate public access to information on beneficial ownership of legal persons was a disproportionate and serious interference with the fundamental rights to respect for private life and to the protection of personal data, the Ministry emphasised that the Cayman Islands Parliament would only approve any such regulations to be made by the Cayman Islands Cabinet after discussions with the UK and its other overseas territories, as well as Crown Dependencies, relating to “the necessary privacy safeguards” have been concluded.
• As such, so long as the relevant regulations have not been approved by the Cayman Islands Parliament, there will not be a public register of beneficial ownership information under the New BO Regime.

Current status  

Though being brought into force on 31 July 2024, the Ministry of Financial Services and Commerce has confirmed that the New BO Regime will not attract any enforcement action against non-compliance until early next year. In addition, until the Ministry notifies that filings under the New BO Regime shall re-commence, the requirement to file beneficial ownership information under the previous beneficial ownership framework has been suspended for the time being.

Conclusion 

As we have commented in our previous legal briefing, the New BO Regime is a welcomed and keen effort by the Cayman Islands to bring itself in line with the FATF international standards in combating money laundering and terrorist financing, which it is believed will continue to solidify its status as a globally-recognised offshore financial centre. Relevant Cayman entities are encouraged to actively review changes made by the New BO Regime and evaluate its applicability to them before the relevant Cayman authorities carry out any enforcement action early next year.

Prior to the Act coming into effect, Loeb Smith has been providing guidance and advice to clients on how to implement changes to facilitate compliance with the requirements under the New BO Regime. We are fully equipped to assist clients in navigating and ensuring full compliance with the requirements of the New BO Regime, so please do not hesitate to reach out if such needs arise.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the New BO Regime, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: ivy.wong@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: cesare.bandini@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

In the prevailing economic conditions, shareholders in offshore companies registered in the British Virgin Islands (BVI) are increasingly being forced to consider their rights against directors who may have been responsible for mismanagement of company affairs. Minority shareholders are keen to understand the availability of remedies that allow them to overcome “wrongdoer control”, i.e., where the composition and direction of the board is controlled by majority shareholders.

 Scope of duties

The BVI Business Companies Act, 2004 (as amended) sets out the law governing the “duties of directors and conflicts”. This includes:

• The duty to “act honestly and in good faith” and in what the director believes to be in the company’s best interests; and
• A requirement that directors, after becoming aware they are “interested in a transaction entered into or to be entered into by a company”, shall “disclose the interest” to the company’s board.

What is the standard of care that a director owes? The act provides that a director “when exercising powers or performing duties as a director, shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances, taking into account but without limitation:

1. The nature of the company;
2. The nature of the decision; and
3. The position of the director and the nature of the responsibilities undertaken by him.

This duty is qualified to the extent that the director is entitled to rely on the register of members, books, records, financial statements and other information prepared or supplied, and on professional or expert advice given by, for example:

Requiring the company or any other person to pay compensation to the member; and

Appointing a receiver or liquidator of the company.

The summary set out above was first published in Asia Business Law Journal and you can find it at the following link:
https://law.asia/bvi-shareholder-remedies/

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Loeb Smith Attorneys is pleased to announce that our team has been recognized for outstanding client service at HFM Asia Services Awards 2024 after being shortlisted for the second year in a row

“Best offshore law firm – client service” accolade highlights Loeb Smith Attorneys’ demonstrated exceptional client service, innovative product development, and strong and sustainable business growth over the past 12 months. The judging panel was made up of leading hedge fund COS, CFOs, CCOs, GCs and CTOs to ensure that the Awards recognized those driving up service standards across the hedge funds service providers sector.

With offices in the British Virgin Islands, the Cayman Islands and Hong Kong, Loeb Smith Attorneys has been nominated for numerous awards over the years and has achieved high rankings in legal directories.

Special thanks to our much-valued clients and partners as their continuous support and trust in us are the key reasons for our achievement. This achievement is another testament to our team’s expertise and Loeb Smith Attorneys’ commitment in Asia.

About Loeb Smith Attorneys

Loeb Smith Attorneys is one of the leading offshore corporate law firms considered one of the most active and knowledgeable firms for advising on offshore investment funds formation and launch of all asset classes including public securities, private equity, venture capital, real estate, and virtual assets. Other areas of strength and growth are advising on M&A, Finance, Corporate Restructurings, Capital Markets, Regulatory Compliance, Investments, Logistics, Shipping and Aviation.

Considered a leading law firm in the Fintech and Blockchain Technology space, Loeb Smith also advises on token issuances, application for VASP licences for Web 3.0 businesses, Metaverse infrastructure and other virtual asset service providers, and utilising Cayman and BVI structures to develop virtual asset platforms for DAOs. Loeb Smith’s clients are investment managers, financial institutions, onshore counsels, and HNWIs who the firm advises on day-to-day legal issues and complex, strategic matters.

Some of our firm’s recent accolades are: winning Leading Firm in Client Satisfaction 2024 award by Legal 500; ranked in Investment Funds category and listed as one of the Firms To Watch for Corporate & Commercial by Legal 500 in 2024; named as Recommended Firm by IFLR 1000 from 2021 to 2024; named in Offshore Client Choice List by Asian Legal Business from 2021 to 2023; ranked amongst Top 30 Asia’s Fastest Growing Law Firms by Asian Legal Business in 2023 and 2024; ranked in The A-List: Top Offshore Lawyers by Asia Business Law Journal in 2022 and 2024; named as one of the ALB Hong Kong Firms to Watch 2024; winning Best Law Firm – Fund Domicile at Hedgeweek US Emerging Manager Awards 2023 and 2024; winning Best Law Firm – Fund Domicile at Private Equity Wire US Emerging Manager Awards 2023 and 2024; winning Best Law Firm – Fund Domicile at Private Equity Wire US Awards 2023; and winning The Best Offshore Law Firm – Client Service at With Intelligence HFM Asia Services Awards 2024.

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BRITISH VIRGIN ISLANDS | CAYMAN ISLANDS | HONG KONG

Loeb Smith Attorneys is pleased to announce that Gary Smith has been recognized again as one of the top-rated practising offshore lawyers by the prestigious Asia Business Law Journal’s A-List of top offshore lawyers.

The A-List: Top Offshore Lawyers is based on interviews with thousands of in-house counsels in Asia and partners at international and onshore law firms in the region.

Gary Smith is Head of the Firm’s Investment Funds Group and is known for his ability to deliver pragmatic and well-thought-through solutions to complex technical issues. He advises on Cayman Islands & BVI investment funds, private equity investments, M&A, fintech, blockchain & virtual assets transactions, corporate, and corporate finance and is regularly praised by clients in international legal directories for his “strong client-relationships and is highly regarded by sources in North America and Asia” and “his knowledge impresses me and his creativity is very good. He is also very patient and intelligent”.

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The Foundation Companies Act 2017 introduced a new corporate vehicle to the Cayman Islands – the “foundation company”. This company structure has several applications and is growing in popularity.

Foundation companies are governed primarily by the above-mentioned act together with certain provisions of the Companies Act (as revised) of the Cayman Islands, which apply to all types of company.

A foundation company is a legal person that is entirely distinct from that of its directors, members (where relevant), beneficiaries and founders. This means that a foundation company can own assets, and can sue and be sued.

The constitution

A foundation company is incorporated with a memorandum of association and articles of association (the “constitutional documents”), which set out the rights and responsibilities of the various parties who manage and who benefit from the foundation company.

A foundation company may also adopt bylaws that expand on the matters dealt with in the constitutional documents, and can even be used to confer specific rights on individuals or groups of beneficiaries. These bylaws may be kept private as they are not required to be filed with the Registrar of Companies.

Foundation companies therefore provide the functionality and flexibility of a trust but without any of the complexities associated with trust administration.

The following classes of person will be involved in the management of a foundation company:

• Directors. A foundation company will typically be managed by its board of directors, who owe fiduciary duties to the company.
• Secretary. A foundation company must have a secretary who is licensed or permitted to provide company management services in the Cayman Islands. The foundation company’s registered office must be at the secretary’s business address.
• Supervisor. If a foundation company either chooses not to have any members, or at any time ceases to have any members, it is required to appoint a supervisor, who oversees its management but crucially has no ownership rights or financial entitlement. In the absence of any members, this provides necessary checks and balances on the board of directors to ensure that the foundation company is being properly managed, and is conducting its business in accordance with its constitutional documents, the requirements of any bylaws, and applicable law.
• Founder. The founder is similar to a settlor in the context of a trust. Founders have no specific rights or powers in respect of the foundation company unless such rights and powers are specified in the constitutional documents and/or in the bylaws. It is common for the constitutional documents to grant the founder the power to appoint or remove directors and beneficiaries.

In addition, the following classes of person can be associated with foundation companies:

• Members. Members are not automatically entitled to participate financially in the success of the foundation company unless the constitutional documents or bylaws provide otherwise.
• Beneficiaries. Beneficiaries are, subject to the constitutional documents and bylaws, able to participate financially in the foundation company.

The Companies (Amendment) Bill, 2024 (“Bill”) of the Cayman Islands was published in the Cayman Islands in January 2024, and proposed to make a number of amendments to the Companies Act (2023 Revision) (the “Act”). In consideration of the changing market dynamics, the Bill, if passed into law as it was drafted, would have provided a more flexible approach in a number of areas to enhance the Cayman Islands’ financial services and to improve efficiency in a number of well-trodden processes.

The Companies (Amendment) Act, 2024 was published on 11 March 2024 (the “Amendment Act”). Whilst the Amendment Act will, when it comes into force, enact a number of the very useful proposals that were contained in the Bill, there are a number of amendments that were proposed in the Bill but which do not feature in the Amendment Act.

A summary of the key amendments contained in the Amendment Act are set out below, whilst we also briefly consider amendments that were proposed in the Bill and which did not make the final cut.

Reduction in share capital

The Amendment Act, when in force, will simplify the process for a solvent company limited by shares or a solvent company limited by guarantee (with a share capital) to reduce its share capital. Whilst the traditional method by special resolution and confirmation by the Court will remain available, the process is simplified by the introduction of a new method which includes a special resolution supported by a solvency statement, consequently removing the need for Court confirmation.

To be accepted, the solvency statement (which is to be made by the directors of the company) must be made no more than 30 days before the date on which the special resolution approving a reduction of share capital is passed. A copy of the solvency statement must be sent or submitted to every member of the company at the same time or before the special resolution is provided to them.¹

The solvency statement will need to be provided to the Registrar within fifteen days after the special resolution is passed along with the minutes of the company reflecting (i) the amount of share capital of the company, (ii) the number of shares into which the share capital is to be divided and the amount of each share; and (iii) the amount deemed to be paid up on each share (if applicable).²

Failure to notify the Registrar within the 15-day allowance will require the company to apply to the Court by way of petition for an order confirming the reduction of share capital.³

This is a welcome development which will inevitably increase the efficiency of reductions in share capital.

Issuance of fractions of shares

The Amendment Act will empower companies limited by shares or companies limited by guarantee (with a share capital) to redeem or repurchase fractions of shares.

Re-registrations

The Amendment Act will make several changes to the provisions which relate to transfers by way of continuation and re-registration, as follows:

•  companies with or without a share capital will be able to apply to be registered by way of continuation as an exempted company limited by shares in the Cayman Islands. Currently, this is only available to companies with a share capital⁴;
• exempted companies, which currently must conduct business mainly outside of the Cayman Islands, may re-register as an ordinary resident company by passing a special resolution and applying to the Registrar for re-registration. Previously, this was not possible. However, when such re-registration takes effect, any tax undertaking given to the company by the Cayman Islands Government under the Tax Concessions Act will cease to apply⁵;
• a limited liability company incorporated under the Limited Liability Companies Act may, with the written consent of (subject to the terms of its LLC Agreement) at least two-third of its members convert to an exempted company⁶; and
• a foundation company incorporated under the Foundation Companies Act may, upon the passing of a special resolution to this effect, convert to an exempted company⁷.

Missed opportunities?

Finally, the Bill had also proposed the following amendments to the Act which will not take effect, as they do not feature in the Amendment Act:

• a change to the procedure for shareholder to dissent from a proposed merger or consolidation. Under the current Act, the requirement is for shareholders to give written notice of their dissent prior to the vote on the proposal taking place. The company is then required to give notice of the authorisation of the proposed merger or consolidation to each shareholder who dissented. The Bill suggested a new “objection deadline” which would require a dissenting shareholder to give notice to the company within twenty days of the notice to propose a resolution authorising a plan of merger or consolidation. The company is then only required to give notice of the authorisation of the proposed merger or consolidation to those dissenting shareholders who gave notice of their dissent prior to the objection deadline; and
• a change to the requirements for passing a special resolution in writing (i.e. other than in a general meeting of the company. Under the Act, such a written resolution must be passed unanimously, whereas the Bill proposed to reduce this to a two-thirds majority to match the threshold that must be reached in a general meeting.

These changes have not been reflected in the Amendment Act. It isn’t clear why these changes were left out of the Amendment Act, but they may be revisited in future amendments.

When do the changes take effect?

The date that the amendments set out in the Amendment Act will become law will be such date as may be appointed by Order made by the Cabinet . The Cabinet has yet to publish such an order and so the enactment date is unknown for the time being.

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1. Companies (Amendment) Act, 2024 cl 5, 14A(1)
2. Companies (Amendment) Act, 2024 cl 5, 14B
3. Companies (Amendment) Act, 2024 cl 5, 14B(6)
4. Companies (Amendment) Act, 2024 cl 10
5. Companies (Amendment) Act, 2024 cl 12
6. Companies (Amendment) Act, 2024 cl 15, 233A
7. Companies (Amendment) Act, 2024 cl 15, 233B

Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Legal Update, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: ivy.wong@loebsmith.com
E: cesare.bandini@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: frost.wu@loebsmith.com
E: max.lee@loebsmith.com

Loeb Smith Attorneys is pleased to announce that our Investment Funds team has won the “Best Law Firm – Fund Domicile” category at the Hedgeweek US Emerging Manager Awards 2024 for the second year in a row.

The awards recognise fund performance and service provider excellence within hedge fund emerging managers and were presented at an exclusive ceremony and networking event today, 6 June, at Convene 101 Park Avenue, New York. The pre-selection data for the fund manager shortlist was provided by Bloomberg. Congratulations to all winners: https://www.hedgeweek.com/hedgeweek-announces-winners-of-us-emerging-manager-awards-2024/

With offices in British Virgin Islands, Cayman Islands and Hong Kong, Loeb Smith advises on a comprehensive set of investment fund areas including Hedge Funds, Private Equity Funds, Venture Capital, Infrastructure Project Funds, Tokenized Funds, Real Estate Funds, Distressed Funds as well as other asset classes. Contact us to find more about our services.

Loeb Smith Attorneys is pleased to share that our team has been shortlisted in the “Best offshore law firm” and “Best offshore law firm client service” categories for the With Intelligence HFM Asia Services Awards 2024 for the second year in a row.

The shortlisting is a strong industry recognition of our leadership and expertise in the offshore law space and our commitment to delivering outstanding client service and comes less than a month after winning the “Best Law Firm – Fund Domicile” at the Private Equity Wire US Emerging Manager Awards 2024.

With offices in Hong Kong, British Virgin Islands and Cayman Islands, our integrated business model combined with our far-reaching approach to innovation and client service, enables us to meet the ever- evolving needs of clients and grow alongside them through sustainable partnerships.

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