Foundations for Cayman?

Should Cayman follow Jersey’s lead and enact legislation to allow the creation of foundations? This is not quite as simple a question as it may sound. STEP Cayman is giving it consideration, but the views in this article are mine. STEP should not be blamed.

In these uncertain times it is particularly important that we do make sure that we are offering the legal structures that the world market wants. At the risk of stating the obvious, the main business of our financial centre is supplying the world with legal structures and the necessary accoutrements, including:

  • laws providing clear principles and rules for the structures and of course the desired features,
  • expertise in creating the structures and tailoring them to needs,
  • administrative, management, investment, accounting and legal services required for their operation,
  • effective regulation to ensure high standards and prevent abuse,
  • prompt and reliable enforcement of the obligations which are the ties and sinews of every structure,
  • winding up and insolvency mechanisms and services.

As this list indicates, it is a joint endeavour. The private sector plays a large part in supplying these things, but so too does government, the judiciary and the regulator. Naturally enough, it falls to the private sector to identify the changing requirements of the world market and propose additions or modifications to what we offer.
 
Legal structures are required for a great variety of purposes: to conduct businesses, to carry out joint ventures, to provide finance, to hold investments, to manage risks, to create investment products, to raise capital, to share the benefit of property, to undertake public or philanthropic projects, to pass on property to families, to care for those who cannot care for themselves – the list could go on and on. There is not much done in business, finance or the handling of property that is done without some sort of legal structure.
 
Cayman has inherited from England a useful array of legal structures – contract, agency, trust, partnership, corporation – and over the years we have developed a good many variants and improvements. We have been quite successful in meeting the requirements of the world market and staying ahead of the competition. But this is no time for resting on laurels.
 
Indeed, we need to pay close attention not only to the structures we offer, but also to our marketing efforts. Some of our competitors are gaining great kudos for frequent improvements to their structures when, in truth, they are doing little more than catch up with the improvements we made years ago. We need to do a better job of shouting our wares.
 
The first point about foundations is that they can be created, are being created, under our existing laws. Here as in the United Kingdom and the US and most other common law countries, the word ‘foundation’ usually signifies a large charitable or philanthropic entity. It might be structured as a trust or it might be structured as a company.
 
Those who like the trust format are given a great deal of additional scope and flexibility by our STAR legislation, which is still unequalled for versatility and usefulness. Any lawful task can be given to trustees; and the creator of the foundation has a free hand in establishing whatever arrangements he thinks best to ensure that the foundation does achieve its goals.
 
For those who prefer the corporate format we have several types of company to choose from. However, the key is not the type of company but its constitution. The constitution of a company intended as a foundation will have provisions that set out its objects, prohibit distributions to members, require all the company’s assets to be used for its objects and provide for the disposal of any remaining assets on liquidation.
 
In other words, in this kind of company the members are not investors hoping to make money out of their shareholdings; they are the controllers of an enterprise devoted to stated objects. Such a company is often known as a ‘non profit’. That is not a very good label because it suggests that the company must not make a profit. It may make profits, but they must be used for its objects. It does not make profits for its members.
 
Although we usually think of ‘foundation’ and ‘non profit’ in terms of charitable or philanthropic objects, the same structure and the same name may be used for other objects. So, for example, we can create family foundations to look after the financial needs of a family, commercial foundations to carry out some commercial project or public foundations to carry out a public function. The distinguishing feature of the structure in each case is that the assets (and profits) of the foundation are used for the stated objects and are not distributed to members.
 
In the United States the ‘non profit’ corporation has received more legislative attention than here or in England. The Model Non Profit Corporation Act adopted by the American Bar Association (third edition adopted August 2009) contains a number of interesting features. One is that shares are optional. Another is that members are optional. We can match the first, but not the second. We have guarantee companies that have no shares; but we presently have no type of company that can be member-less.
 
This last point is important because the principal defect of the ‘non profit’ company as a foundation is the possibility that its members may get together and change its constitution. Here and in most common law countries the members can change the objects and can even get rid of the ‘non profit’ clause and distribute the assets to themselves, unless they were charitable contributions. The risk of members doing that can be reduced greatly but, under our present law, the risk can be eliminated only by sticking a trust on top of the company, putting members under an obligation to support the foundation’s objects. If the client is not a fan of trusts, that may not be an agreeable solution.
 
So it seems to me that we should have special legislation to apply to ‘non profit’ companies, and by all means let the legislation refer to such companies as ‘foundations’. These foundations would be useful for a whole range of purposes – public, private and commercial – much depending on their tax treatment abroad.
 
Taking our lead from the US, we should make members optional. Even if the foundation has members, they should be prevented from changing the objects or the ‘non profit’ clause, unless the constitution authorises that. Various other modifications should be included to make the Cayman foundation useful and attractive. But, apart from these specific modifications, the Companies Law should apply both the legislation and all the learning developed by the courts over the years here and in England.
 
In my opinion this approach would be preferable to following Jersey and the other offshore centres that have been enacting foundation legislation in recent years. They have bravely created brand new legal structures with the name ‘foundation’. These structures are like a company in the sense that they are formed by registration and have their own legal personality, but they have been given their own entirely different sets of rules governing every aspect from creation to dissolution and everything in between. The legislation is voluminous and complex. Is this necessary? Is it wise?
 
Time will tell how successful they have been and how much statutory modification or clarification will be required in the coming years. I gather that the Jersey foundation, in particular, is being strongly marketed and well received, and Jersey’s legislation is certainly the clearest of all those I have read so far; but I can already identify a number of important questions and concerns, and I think it will not be long before the market recognises the risk.

Why did Jersey and the other offshore centres choose this brave but risky approach? The answer is that they wanted their foundations to look like civil law foundations, so as to be attractive to users in civil law countries. As I understand it, the essence of the civil law foundation is that the law recognises a fund as a separate patrimony endowed with legal personality. In many countries these foundations can be created only for public purposes; in some, such as Liechtenstein and Panama, they can be created for private purposes.
 
Jersey wanted to emulate the civil law foundation, to create a structure that would be seen as being the same thing. But my impression is that they are not the same thing. There is still a significant and probably unavoidable difference between a Jersey foundation and, say, a Liechtenstein foundation or a Panama foundation – both in their fundamentals and in their details.
 
The difference between common law systems and civil law systems is not merely historical. It should come as no surprise that transplanting a structure from one system to the other was found to be problematic.
 
So I question whether people from civil law countries will really find the Jersey foundation a more familiar and reassuring structure than, say, a Jersey company. They may well find it more familiar and reassuring than a Jersey trust because, of course, the trust is an invention of the common law, with which lawyers in civil law countries have some difficulty.
 
It looks as though this is what Jersey had in mind, a structure to be offered as an alternative to the trust. I do not know whether Jersey gave thought to the company, with suitable modifications, to cater for those who are uncomfortable with trusts.
 
I am not suggesting that we ignore the legislation in Jersey and the other offshore centres. We need to take a close look, to see if there are features that might be incorporated to advantage in our legislation. For example, I think we can learn from their anti-money laundering mechanisms. There are variations, but the theme seems to be that a licensed service provider must be involved in some way in the administration of the foundation and must keep essential records and information within the jurisdiction.
 
We should also look closely at the supervisory aspect. Solutions vary but in Jersey a ‘guardian’ is obligatory. His duty is to ensure that the governing body of the foundation carries out its functions, and he is supplied with various statutory powers. This may fit well with the views of some users of Jersey foundations, but I cannot help thinking that some may prefer to establish different supervisory arrangements, and some may feel that the governing body needs no supervision. I do not presently see any reason why users should not be allowed to set up whatever supervisory arrangements they want.
 
Another important aspect is the treatment of the beneficiaries (if any), ie those who are intended to benefit from the operations of the foundation. The solutions in the other offshore centres vary. Most seem to feel that beneficiaries should have specified rights, but that the relationship between the foundation and its beneficiaries must not be a trust relationship. That, I suppose, stems from their basic idea that their foundation should be an alternative to the trust.
 
In Jersey a beneficiary can sue for any benefit that he is supposed to have received but has not received, and he is one of those who has access to the court to secure the due administration of the foundation. But it is declared that the beneficiary “has no interest in the foundation’s assets” and “is not owed a duty that is or is analogous to a fiduciary duty”. No doubt the Jersey court will make sense of this, but I cannot help thinking that foreign courts and tax authorities may conclude that the beneficiary of a Jersey foundation is in essentially the same position as the beneficiary of a trust. The only significant difference, a surprising one, is that the beneficiary of a Jersey foundation has no right of access to information about the operations of the foundation.
 
It seems to me that, here again, we should beware of imposing arrangements that may not suit some users. Surely it ought to be up to the user to say in the constitution of the foundation whether those who are intended to benefit are to have rights and, if so, what rights? Apart from anything else, this would let users make their decisions in light of the applicable tax rules.
 
The role of the court must be considered very carefully. Jersey gives the court a role similar to its role in relation to trusts (quite different to its role in relation to companies); and access is given to a long list of persons, not just the beneficiaries, to ask the court to exercise any of its considerable powers.

The list includes the founder, anyone holding founder’s rights, anyone who has contributed to the foundation, any member of the governing body, the guardian, anyone else who has a function under the foundation’s constitution, any beneficiary, any creditor, anyone who the court thinks can speak on behalf of the foundation’s purposes, and finally the attorney general.

I am troubled by this. It suggests to me that once the founder ceases to have control, foundation litigation may be even more frequent and expensive than trust litigation. I wonder, for example, why the creditors of a solvent foundation should have a say in its administration and why the Attorney General should be heard by the court whenever the governing body applies for directions or a beneficiary complains that he is not receiving what he is due. How long will it take the court to hear the submissions of all these “persons with standing”? How will it reconcile their interests? And who will pay for it?
 
In sum, I say yes, let us have foundation legislation; but no, let us not follow what Jersey or the other offshore centres have done. I think we must do better.

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Antony Duckworth

Antony Duckworth was admitted as an English solicitor in 1971 and as a Cayman Islands attorney-at-law in 1974. He has been an associate with Allen & Overy in London and a partner of Maples and Calder. He practises principally in the commercial and trust areas, with occasional forays into court. He has contributed to various publications and has assisted the Cayman Islands government with various pieces of legislation.

Antony Duckworth
Partner
Charles Adams Ritchie & Duckworth
Attorneys at Law
Zephyr House, 122 Mary Street
PO Box 709 Grand Cayman KY1-1107
Cayman Islands

T. +1 (345) 949 4544
Eantony.duckworth@card.com.ky
W. www.card.com.ky 

CARD

Charles Adams Ritchie & Duckworth (“CARD”) was founded in 1991 and operates from offices in George Town, Grand Cayman. We have a reputation for providing high quality and innovative legal advice to a primarily international clientele, including major financial institutions and law firms.

We offer a full range of legal services, with emphasis on corporate, commercial, banking and finance, restructuring and insolvency, trust and property work and commercial and trust litigation.

CARD also provides for the formation of Cayman Islands companies, trusts and partnerships and offers registered office and secretarial facilities through our wholly owned and licensed corporate management company, CARD Corporate Services Ltd.

CARD is a listing agent for the Cayman Islands Stock Exchange. 

Charles Adams Ritchie & Duckworth
Zephyr House, 122 Mary Street
P.O. Box 709
Grand Cayman
Cayman Islands
KY1-1107


T. +1 (345) 949 4544
Eantony.duckworth@card.com.ky
W. www.card.com.ky