The Cayman Islands has, in recent times, proved itself an increasingly popular jurisdiction for the incorporation of companies owned or operated by parties located in Asia. There are a number of reasons for this popularity.
Cayman has no corporation tax, income tax, capital gains tax, inheritance tax, gift tax, wealth tax or any other tax applicable to a company conducting offshore business although certain documents are subject to (generally nominal) stamp duty. Tax planning for Cayman exempted companies can also be greatly enhanced through the ability of all exempted companies to receive a “Tax Exemption Undertaking”, generally granted for a period of twenty years, pursuant to which such companies are exempt from any possible future Cayman taxes.
There is no exchange control in the Cayman Islands and Cayman companies are free to acquire, hold and sell foreign currency and securities without restriction. Nor is there any restriction on the nationality of the directors or shareholders of an exempted company, meaning that responsibility for the management of a Cayman company can largely rest with its board of directors.
The Cayman Islands possesses a well-developed body of laws relating to companies and modern business practices but avoids the “over regulation” (such as Takeover Codes or offering restrictions) often found in other jurisdictions. The principal statute in the Cayman Islands in respect of companies, the Companies Law, is flexible enough to permit a Cayman company’s memorandum and articles of association to be amended to accommodate, in the case of listed companies, the regulatory requirements of the regime under which the company operates or, in the case of private companies, commercial requirements of shareholders in respect of shareholders’ rights.
The Companies (Amendment) Law 2009 introduced a much simpler and cost-effective method for the merger of Cayman and non-Cayman companies, similar to that already provided for in other offshore jurisdictions. In addition, pursuant to the Tax Information Authority (Amendment) Law, 2008, Cayman will have an enhanced ability to provide information on taxation matters not just to the government of the United States, but to other jurisdictions as well.
With its foundation in English law and English case law being persuasive, if not binding, in the Cayman Islands courts, the principles of Cayman law are familiar to those people in Asia (such as Hong Kong and Singapore) used to operating under a common law environment.
Finally, Cayman has a sophisticated professional infrastructure, with an array of professional service providers located in Cayman, Asia and across the globe able to service the needs of a range of clients as demanded.
Hong Kong stock market – the Cayman connection
An indication of the Cayman Islands’ popularity is the number of Cayman Islands companies listed on the Hong Kong Stock Exchange, the world’s tenth largest securities market. Cayman Islands companies were first permitted to list on the Hong Kong Stock Exchange in the mid 1990s and the Cayman Islands is now one of only a handful of jurisdictions that the Hong Kong Stock Exchange has generally approved as suitable for listing.
The Hong Kong securities market recovered quickly from the downturn caused by the global financial crisis and Cayman companies remained at the forefront. At the end of 2009, of the 1,145 companies listed on the Main Board in Hong Kong, 388 (over 33 per cent) were incorporated in Cayman and of the 174 companies listed on the Hong Kong GEM market, 97 (over 55 per cent) were incorporated in Cayman. The 2010 statistics indicate that Cayman Islands companies continue on an upward trend. Following the first eight months of 2010, of the 44 new listings on the Main Board in Hong Kong, 31 (over 70 per cent) were incorporated in Cayman and all of the three new listings on the Hong Kong GEM market were incorporated in Cayman.
Key advantages to listing on the Hong Kong Stock Exchange include Hong Kong’s strategic placement in a high growth region, with close trading and business links to other Asian economies, its provision of an ideal platform for issuers to achieve exposure in the rapidly growing Mainland Chinese market and the fact that the Hong Kong market is the first choice for Mainland Chinese companies seeking a listing on an international overseas market (the “home market” theory). In addition, in 2009, regulators strengthened market regulation and investor protection measures to restore investor confidence in the financial market and progress was made in respect of product development and the China dimension of the Hong Kong market.
Hong Kong’s capital market will undoubtedly play a key role in funding China’s state-owned enterprises reform, as well as its massive infrastructure development programme. It is also key to the growth of Hong Kong as an international financial centre.
The characteristics of the Cayman Islands are key to the popularity of Cayman companies as vehicles for listing purposes. The Cayman Islands Companies Law is flexible enough to permit the adoption of articles of association that comply with the Hong Kong Stock Exchange requirements. Cayman’s developed and familiar body of laws, reputable professional advisors and favourable tax system continue to sustain its reputation for quality as a leading offshore financial centre, providing comfort to investors in such companies.
The popularity of Cayman Islands companies for listing purposes has also created a knock-on demand for start up and newly established groups to have their holding company incorporated in the Cayman Islands. Founders typically look to Cayman with a view to listing the company in the future. The familiarity of investors, including private equity funds which are likely to have their own funds established in Cayman, is another reason why Cayman is chosen for such vehicles.
Conyers Dill & Pearman: The Asia – Cayman connection
Conyers’ Hong Kong office is at the forefront of advising on corporate finance and capital markets work, with a particular emphasis on capital markets, IPOs, mergers and acquisitions, corporate restructurings (including by way of scheme of arrangement, squeeze outs and mergers) and private equity transactions. Conyers also offers specialist advice on the formation and ongoing operation and administration of limited partnerships, mutual funds, trusts and other investment vehicles.
From Hong Kong, Conyers advises institutional clients and fund management houses across Asia on all types of investment fund structures, including hedge funds, private equity funds, venture capital funds, real estate funds and infrastructure funds. The office advises on a wide range of investment fund matters, from the structuring issues relating to new funds through to all aspects of the continuing operations of investment funds and other long-term business requirements.
It is not uncommon for the office to be involved in every step of a company’s growth, from establishment and initial set up; private equity investment, generally in the form of the issue of preferred shares to professional investors; pre-IPO funding in the form of high yield debt or the issue of convertible bonds; and on to the eventual IPO of the company on one of the many exchanges around the world on which Cayman entities are listed (which include Hong Kong, London, HYSE, Nasdaq, KOSDAQ and Singapore). Post IPO, the office is often asked to act generally for the listed entity in respect of ongoing matters, including share and debt issues, compliance, dispute resolutions and, where necessary, corporate restructurings.
A key aspect of this assistance is the Hong Kong office’s development of strong, enduring relationships with fun d management houses and fund sponsors across the Asian region. Historically working with fund management groups from Hong Kong, Japan, Korea, the PRC, Taiwan and Vietnam, the Hong Kong office has seen particular growth in the establishment of private equity and venture capital funds investing in the PRC, as well as funds focusing on clean technologies in Asia.
Hong Kong has also become the southern gateway for investment into China and is of increasing importance in sustaining the movement of Chinese capital into global markets. Investing in China through Hong Kong is attractive not only for the available tax concessions but also the special characteristics of Hong Kong, including political stability, stable freely convertible currency, strong financial system and infrastructure, world class legal system and excellent international communications and transport links.
Cayman has historically been an attractive jurisdiction of domicile for Asia-focused funds. It offers a neutral location, with a strength of legislation and core corporate governance principles sufficient to give an appropriate level of investor comfort. There are a number of guiding principles which weigh in Cayman’s favour as a jurisdiction for Asian investment fund business. In particular, the Cayman regulatory regime is generally designed to accommodate funds marketed to sophisticated and institutional investors and is premised on vetting a fund’s service providers in order to ensure appropriate levels of expertise and suitability of character. As a corollary, the regulatory approach is focused on protecting the investors’ interests and ensuring the operations of participants maintain the integrity of the Cayman regulatory regime.
The Cayman legislation does not prescribe the commercial terms, trading or investment strategies, or impose parameters for leverage or fee levels on investment funds. For Hong Kong, as a financial centre at the forefront of the Asian investment funds industry, the appropriate levels of regulation and investor protection in Cayman, combined with the non-prescriptive investment terms under the Cayman fund legislation, have proved to be an attractive approach.
Conyers Dill & Pearman has frequently been named Offshore Law Firm of the Year in China, Japan and South East Asia. Conyers’ Cayman lawyers are ideally suited to assist with the structuring of Cayman Islands vehicles for clients with connections in Asia.