As the 2017 hurricane season bears down upon us, those doing business in the Cayman Islands may also be feeling a rise in pressure following the implementation of a host of new legal initiatives in the jurisdiction. As part of a concerted effort by the Cayman Islands government to meet global transparency and information sharing efforts, a number of important changes to the legal and regulatory environment forecast last year are now in the process of being rolled out, and include new beneficial ownership and non-profit legislation, new listing rules for the Cayman Islands Stock Exchange (CSX), and of course future guidance for compliance with, among other things, FATCA and CRS. With these developments all on the radar at the same time as the conception of a new coalition government, it is clear that the winds of change continue to prevail in Cayman.
Beneficial ownership regime
Perhaps the legislative development that has caught the most attention both locally and internationally is the introduction of new beneficial ownership legislation. This legislation, which came into force on July 1, 2017, requires certain Cayman corporate entities to maintain beneficial ownership registers at their registered offices, and for the information contained in such registers to be stored in encrypted form on a secure standalone search platform being established by the minister of Financial Services as the competent authority. The principal purpose of the legislation is to make beneficial ownership information normally held by corporate service providers readily accessible in response to proper and lawful requests from specified law enforcement agencies and not to materially expand existing requirements for such information. Importantly, the search platform will not be publicly accessible and may only be searched by the competent authority.
The legislation applies to every company incorporated or registered by way of continuation in Cayman unless it is, or is a subsidiary of one or more legal entities each of which is, listed on the CSX or another approved stock exchange, registered or licensed under a Cayman regulatory law, or managed, arranged, administered, operated or promoted by an approved person as a special purpose vehicle, private equity fund, collective investment scheme or investment fund or a general partner of such a vehicle, fund or scheme.
Each company to which the legislation applies has an obligation to create and maintain a register of its beneficial owners to be kept at its registered office and, in particular, is required to take reasonable steps to identify any individual who is a beneficial owner of the company and all relevant legal entities in relation to the company. For the purposes of identifying individuals who are beneficial owners or relevant legal entities, a company is entitled to rely, without further enquiry, on the response of a person or relevant legal entity to a notice sent in good faith by the company, unless the company has reason to believe that the response is misleading or false. The notice shall require the recipient to state, within one month of receipt, whether or not they should be included in the beneficial ownership register of the company and to confirm or correct any particulars included in the notice.
An individual will be considered a beneficial owner of a company if he or she holds, directly or indirectly, more than 25 per cent of the shares or the voting rights in the company or the right to appoint or remove a majority of the board of directors of the company. If no individual satisfies those requirements, an individual will be a beneficial owner if he or she has the legal right to exercise, or actually exercises, significant direct or indirect influence or control over the company through the ownership structure (other than solely in the capacity of a director or manager, or professional advisor/manager).
In the light of all of the above, all Cayman Islands companies should now take steps to determine their status under the legislation and, unless exempted, should proactively identify and provide notices to beneficial owners.
Registers also feature in the new Non-Profit Organisations Law 2017, which will commence on August 1, 2017. The NPO Law provides for the appointment and functions of a “Registrar of Non-Profit Organisations,” who will oversee the establishment and maintenance of a register of non-profit organizations to assist with the regulation and monitoring of NPOs operating in Cayman. The NPO Law also provides, where appropriate, for the investigation into the operations of and funds flowing through those non-profits.
An NPO is defined under the NPO Law as including a company or body of persons, whether incorporated or unincorporated, or a trust:
- established primarily for the promotion of charitable, philanthropic, religious, cultural, educational, social or fraternal purposes, or other activities or programmes for the public benefit or a section of the public within Cayman or elsewhere, and
- which solicits contributions from the public or a section of the public within the Islands or elsewhere.
This definition has a very wide scope, and it is obvious that it will capture a very significant number of NPOs throughout Cayman, regardless of their size and regardless of whether they have been established for minor short-term fundraising purposes or with a more wide-reaching and long-term charitable intent. Importantly, the only NPOs that are exempt from coverage under the Law are those which have a government entity as their principal regulator, or are established as a trust where the trusteeship of the trust includes a trust company licensed under the Banks and Trust Companies Law (2013 Revision).
Unless exempted for one of the reasons listed above, all non-profits covered by the NPO Law must apply to the registrar for registration as an NPO: NPOs are prohibited from soliciting or raising contributions from the public within Cayman or elsewhere unless they are so registered. The registration process requires the “controller” of the NPO, which could be, for example, a trustee of a trust, a director of a company, or any other person who has established the NPO, to submit an application to the registrar in a prescribed form. Once formally registered, certain information about the NPO will be recorded on the register including the name, Cayman address, and telephone number of the NPO, a description of its purposes and activities, and “such other information as the Registrar deems appropriate.” The controller must also keep proper financial statements concerning the NPO. The register will be open for public inspection “on such terms as the Registrar thinks fit”.
CRS, US FATCA, UK CDOT and EUSD
It is not just local legislation that is encouraging, and in many circumstances compelling, the production of information: the long arms of various global reporting and information sharing initiatives continue to reach into the jurisdiction, and entities that are subject to those initiatives must take all necessary steps to discharge the obligations now imposed on them.
To this end, the Department for International Tax Cooperation (DITC) has issued an industry advisory regarding CRS, U.S. FATCA, U.K. CDOT and the EUSD regime which specifies pending notification and reporting deadlines. Importantly:
- Automatic Exchange of Information (AEOI) Portal: A new AEOI Portal User Guide regarding U.S. FATCA, U.K. CDOT and CRS is now available, and the Cayman Islands government has issued an industry alert, confirming that the Automatic Exchange of Information Portal is now open.
- CRS: Revised CRS Guidance Notes version 2.0 have been issued, and the DITC has confirmed that Cayman financial institutions that are in liquidation or being wound up in 2017 are required to fulfil their reporting obligations: (i) for the year 2016, with respect to 2017 Reportable Jurisdictions; and (ii) for that part of 2017 in which they are in existence, with respect to both 2017 and 2018 Reportable Jurisdictions.
- U.S. FATCA: The FATCA notification deadlines will now be aligned with the CRS notification deadlines so that notifications for both must be completed by June 30, 2017. In order to complete notification obligations under U.S. FATCA and CRS, every Cayman financial institution is required to prepare a new letter of authorisation based on the DITC template. The FATCA reporting deadline remains at July 31, 2017.
New listing rules
The CSX has released its revised Listing Rules. Effective April 2017, the primary update is the introduction of a new Chapter 14 of the Rules, which sets out a new regime for the listing of equity and debt securities of “specialist companies.” This regime is principally aimed at SPV companies looking to raise capital for new projects, and it allows for a greater degree of flexibility with respect to companies that do not have a two-year audited financial statements track record. The prior requirement to subscribe for a minimum of US$100,000 of securities has been removed for these specialist companies.
The new rules also cater for investors with higher overall levels of participation in investments generally, subject to satisfying the new qualified purchaser/qualified investor criteria (see below). The CSX will allow the listing of an issuer without the standard track record, provided the issuer:
- satisfies the CSX that, amongst other things, the investors have access to such financial and other information deemed necessary or appropriate in order to make an informed investment decision;
- provides a detailed business plan which sets out certain specified criteria; or
- is a wholly owned subsidiary of a listed company and is included in the consolidated accounts of its listed holding company.
A “qualified purchaser” is any individual who owns not less than US$1 million in investments or any entity which in the aggregate owns not less than US$5 million in investments. A “qualified investor” is an investor who is a qualified purchaser and represents in writing to the issuer that they are particularly knowledgeable in investment matters or is a director or manager of the issuer and is particularly knowledgeable in investment matters.
Dissenting shareholders – further case law on Cayman’s statutory shareholder appraisal regime
Finally, the Grand Court has released a further, and very helpful, judgment in respect of the statutory shareholder appraisal rights regime set out in Section 238 of the Companies Law (2013 Revision). In In the matter of Shanda Games Limited (FSD 14 of 2016, 25 April 2017) (Shanda), the Justice Nicholas Segal considered a petition filed by a company, Shanda Games Limited, for an assessment, pursuant to section 238, of the fair value of the shares in the company held by three minority shareholders (collectively, the dissenting shareholders) following a merger involving the company.
In a comprehensive judgment running to well over 100 pages, Justice Segal noted that the petition raised a variety of complex issues requiring detailed expert evidence on, and extensive argument about, the valuation of the shares in question. While the parties agreed at the outset that the company should be valued using a 100 percent discounted cash flow (DCF) methodology, the complexities of the case required the parties to embark on an in-depth forensic analysis of the company’s financials, its projections and a detailed and thorough consideration of expert evidence, including in relation to the application of a minority discount, and the appropriate calculation of the dissenting shareholders’ proportion of the company. Many of the conclusions reached in the judgment are fact specific, but the approach taken by Justice Segal in reaching those conclusions provides useful guidance on matters of process and procedure to parties contemplating, involved in or objecting to a merger involving a Cayman company. The judgment also makes it clear that a company faced with a Section 238 application should not underestimate what is involved, and the appraisal process may well result, as it did in Shanda, in a valuation which is significantly higher than the fair value identified by the company, even if it may also be significantly less than the value being proposed by the dissenting shareholders.