Cayman
The Companies Law (2007) of the Cayman Islands was revised in early 2009 to provide a streamlined insolvency regime. This will specifically benefit corporate open-ended funds registered in Cayman. The new insolvency rules remove grey areas that existed between Cayman's insolvency laws and the UK Insolvency Rules (1986), which applied in Cayman, subject to any law to the contrary.
The new regime will help to reinforce Cayman's reputation as an investor- and creditor-friendly jurisdiction. For the first time, a contingent or prospective creditor will have standing to present a winding-up petition, as will a director, where permitted by the fund's constitutional documents. The new law codifies the liquidator's investigatory powers and imposes duties on former officers, employees and professional service providers to cooperate with the liquidator. It also introduces four new offences of fraud in relation to winding-up and the concept of shadow directorship.
While not adopting the United Nations Commission on International Trade Law's (Uncitral) Model Law on Cross-Border Insolvency, the new regime provides for international cooperation, for the recognition of foreign insolvency representatives, and for protocols in matters involving parallel insolvency proceedings.
Enhanced statutory regime
Amendments to the Companies Law of the Cayman Islands were enacted in early 2009 to provide an enhanced statutory regime for mergers and consolidations between Cayman companies, and between Cayman companies and non-Cayman companies, with the consent of secured creditors. This is similar in effect to the merger provisions of the UK Companies Act. Unsecured creditors are protected as the directors of the merging companies are required to make a statutory declaration that unsecured creditors will not be prejudiced by the arrangements.
Amendments to the Exempted Limited Partnership Law (2007 revision) have also been enacted during the course of 2009. This was done principally to amplify the statutory safe harbours of activities in which a limited partner may engage without risk of losing its limited-liability status in the event of the partnership's insolvency. They were also designed to bring the dissolution provisions of the current law in line with the winding up provisions of the Companies Law. In particular, a Cayman-exempted limited partnership is no longer deemed to have been dissolved by the withdrawal or retirement of the sole or last remaining general partner.
Structural developments
The Cayman Islands are home to the majority of the world's offshore hedge funds. The challenges faced by managers during 2008 gave rise to multiple restructurings of funds, both at the portfolio and share-class level, and a commensurate overhaul of the legal documentation that had been largely standardised for the previous five years. In particular, the illiquidity of 2008 was managed in three key ways.
Side pockets
Relatively illiquid investments may either form part of a fund's portfolio and be held in a side pocket, or comprise the fund's core strategy. Available evidence suggests that managers of hedge funds with side pockets tend to restrict the side pocket to between 10% and 30% of the fund's total portfolio. A side pocket, while not a separate legal entity, exhibits some of the characteristics of a traditional private equity fund, namely: a longer term investment holding period; a prohibition on withdrawals and redemptions of shares referencing the side pocket until the assets are realised; charging of management fees based on cost (although some managers may mark the assets to market), and; crystallisation of upside fees only upon realisation of assets, sometimes subject to a hurdle (around the traditional 8%) or a high watermark.
There are differences between a side pocket and a private equity fund. For example, losses on side-pocketed assets do not result in any claw back of upside fees paid to the fund, and there is no date by which the side-pocketed assets must be liquidated or otherwise exited. There are signs of a growing willingness on the part of hedge fund managers to contemplate performance fees calculated and paid only on realised gains where they find themselves managing side pocketed assets until their disposal, liquidation or exit (often with the standard performance fee continuing to apply to the liquid portfolio).
Lock-ins
Initial lock-in periods, during which newly subscribed shares cannot be redeemed, typically for 12 months, have long been a common feature of Cayman hedge funds. Now the trend is towards multi-year lock-ins, usually of around two to three years but with an increasing number of funds demanding that investor capital be locked in for five, six or seven years (the average holding period of a conventional private equity fund).
The quid pro quo for lengthier lock up periods is normally lower annual management fees, combined with higher hurdle rates. While few Cayman hedge fund managers have shown much willingness to reduce the 20% performance fee, a number have been engaged in the process of resetting their high watermarks in favour of investors. Some notable new funds have replaced the traditional marked to market performance fee with an upside fee. This is calculated periodically, or at the end of the lock-in period or the life of the fund, or on each disposal of assets, and paid only on realised gains.
Gates, suspensions and redemptions in kind
Gates, suspensions of net asset value (Nav) and dealings, and the payment of redemption proceeds in kind (or in specie), are means of keeping investor money in the fund, or at least of placing limitations on the speed and the manner in which it exits the fund. They are very much in use by managers of hedge funds experiencing liquidity problems. While not strictly means of replicating private equity-style styles, these techniques are critical to maintaining the stability of a fund's liquidity and will increasingly form part of the structural fabric of hedge and hybrid funds alike.
Guernsey
The end of 2008 saw changes to legislation at the core of Guernsey's funds industry, including the overhaul of the Guernsey Financial Services Commission's (GFSC) system for approval of investment funds.
Control of borrowing amendments
All but limited sections of the Control of Borrowing (Bailiwick of Guernsey) Ordinances, 1959 to 2003 (Cobo), which regulate borrowing and guarantees, have been abolished. So, where formerly consent under Cobo was required for the establishment of closed-ended funds (and related issues), the relevant regulations have been transferred to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (POI Law) and new rules thereunder.
Where formerly consent under Cobo was required for the distribution in Guernsey of a prospectus by a Guernsey or non-Guernsey entity, the relevant regulations have been transferred to new Prospectus Rules.
Protection of investors' amendments
New rules have been introduced under the POI Law. Closed-ended investment schemes are now included in the definition of collective investment schemes in the POI Law, and application for regulation of either open- or closed-ended schemes may now be made under the Authorised regime or the lighter touch Registered or QIF regimes.
Authorised Funds
Authorised open-ended schemes continue to be governed by either the Class A, Class B or Class Q Rules, but the Class A Rules have been updated with a 2008 version (in force November 24 2008) which reflect a movement to liberalise undertakings for collective investment in transferable securities (Ucits) in Europe.
Closed-ended schemes may now be approved under the Authorised regime with the introduction of the Authorised Closed-Ended Investment Schemes Rules 2008 (the Closed-Ended Rules) which provide for the administration and custody of a closed-ended scheme, certain ongoing compliance matters, the information required to be included in any prospectus (which mirrors the requirements of the Guernsey Financial Services Commission's (GFSC) old Form APC) and the obligations to notify the GFSC or investors in the fund.
Existing closed-ended schemes had until mid-April 2009 to elect to be treated as a Registered closed-ended scheme, deemed to have been granted a registration in accordance with the new Registered Rules (as defined below). Those closed-ended schemes that do not so elect, must revise their principal documents (articles of incorporation, limited partnership agreement or unit trust instrument and related management agreements) to comply with the Closed-Ended Rules either at the next occasion when an amendment of their principal documents is put to investors or by not later than December 2010. Most existing closed-ended funds will already comply with the Rules. Prospectuses of existing funds, if revised following commencement of the Closed-Ended Rules, must be revised to comply with them.
Registered funds
Open-ended funds can now take advantage of the fast-track application process of the Registered fund regime, which previously only dealt with closed-ended schemes. Open- and closed-ended schemes are now both included in the Registered Collective Investment Scheme Rules 2008 (the Registered Rules). The Registered Rules provide for the administration and custody of a Registered scheme, certain ongoing compliance matters, the obligations to notify the GFSC and investors in the scheme and the preparation of a prospectus. They do not deal with the content of the prospectus. The Prospectus Rules 2008 (the Prospectus Rules) have been introduced to regulate the contents of prospectuses issued by Registered open- or closed-ended schemes, including information required to be disclosed and statements to be included.
Existing Authorised open-ended schemes could elect (until mid-April 2009) to be treated as a Registered open-ended scheme and thereby to be deemed registered in accordance with the Registered Rules. Existing Registered schemes must revise their principal documents to comply with the Registered Rules either at the next occasion when an amendment of their principal documents is put to investors or by not later than December 2010. Most existing closed-ended funds will already comply. Prospectuses of existing funds, if revised following commencement of the Registered Rules must be revised to comply with them. There are no changes to the Qualifying Investor Fund, or QIF, regime.
Prospectuses
The Prospectus Rules regulate the contents of Registered fund prospectuses and also apply to offers of any controlled investment (General Securities and Derivatives) either made by a Guernsey entity or made to the public in the Bailiwick wherever the offerer is domiciled. The public is defined as an identifiable category of persons exceeding 50 in number. The Prospectus Rules do not apply to offers of investments that are listed on an exchange supervised by a member of the International Organization of Securities Commissions (Iosco), such as the London Stock Exchange or the Alternative Investment Market (Aim).
Any prospectus circulated in the Bailiwick of Guernsey or outside the Bailiwick by a Guernsey entity must meet the requirements of the Prospectus Rules and be delivered to the GFSC for registration on payment of an application fee. Any changes to the contents of the prospectus must be notified to investors.
POI licensees
In October 2008 the GFSC introduced a fast-track process for consideration of a POI Law licence application for any company domiciled in Guernsey that acts as fund manager to a Registered fund or QIF. Where the fund structure includes a Guernsey fund manager, or the fund is structured as a limited partnership and has a Guernsey general partner, the GFSC will process the application for the licence of such entity (with reliance on the certification of the administrator) under the fast-track licensee application process, and put it before the GFSC's Licensing Committee within ten business days of receipt.
The GFSC has confirmed that administrators and other service providers that are licensed to provide restricted activities to only category 2 controlled investments (General Securities and Derivatives), which previously included closed-ended funds, will, with the re-classification of closed-ended funds as collective investment schemes, automatically be deemed to hold a licence for providing the same services to category 1 controlled investments (Collective Investment Schemes).
Jersey
Unregulated funds
As investors and investment strategies in Jersey funds have become more sophisticated, the Jersey Financial Services Commission (JFSC) has introduced regimes in which the appropriate level of regulatory protection is determined by the nature and number of a fund's investors. Since the introduction of its Unregulated funds regimes in early 2008, Jersey has been able to offer a full spectrum of fund regulation. At one end is rigorous regulation of publicly offered funds targeting retail investors, but at the other a Jersey fund targeting highly sophisticated investors or which is exchange-traded can be unregulated. There are a number of regulated but fast-track regimes (such as Jersey's highly successful Expert and Listed regimes – similar to Guernsey's QIF and Registered regimes) between those two poles.
Alongside its tried and tested regulated regimes, Jersey now has two unregulated fund categories, where either (a) only eligible investors (including certain classes of very highly sophisticated investors as well as investors subscribing for interests of $1million or more) may be targeted (known as unregulated eligible investor funds), or (b) interests in the fund (if it is closed ended) are to be listed on a JFSC-approved stock exchange (known as unregulated exchange traded funds). These unregulated regimes do not require any JFSC application.
Incorporated and separate limited partnerships
Jersey already offers a wide variety of potential vehicles for use in fund structuring, including unit trusts, companies, and limited partnerships.
Since the enactment of the Limited Partnerships (Jersey) Law 1994, the Jersey limited partnership (JLP) has become a vehicle of choice for establishing private equity funds. In recent years the use of JLPs has extended beyond private equity and their inherent flexibility is employed in the formation of funds investing in diverse asset classes, including mezzanine debt and real estate.
In 2009 Jersey intends to add two new types of limited partnership: Separate Limited Partnerships (SLPs) and Incorporated Limited Partnerships (ILPs), each offering a degree of legal personality separate from its partners. Each new regime is closely modelled on, and offers much of the flexibility of, the 1994 Law, but will be contained in completely independent statutes.
The SLP regime is differerent to the JLP regime: a separate legal personality; while a general partner of an SLP will be deemed to hold any property of the partnership in its own name (as an asset of the partnership), an SLP may either own assets in its own name or in the name of the general partner(s), and; an SLP or its general partner will be able to instigate legal proceedings and legal proceedings by or against an SLP may be instigated by or against the SLP or its general partner.
The anticipated features of the ILP regime which differ from the JLP or SLP regimes are:
a separate legal personality, but will also be incorporated; will have perpetual succession until dissolved, and; dissolution will involve a more formal process than the dissolution of a JLP or SLP. Statutory winding up and dissolution provisions, similar to those applying to companies, will apply; despite having a general partner, an ILP will own its property in its own name and will contract in its own name – a general partner of an ILP will act as an "agent" of the ILP; the ILP law will impose statutory obligations on ILP general partner(s), including the duty to act honestly and in good faith with a view to the best interests of the ILP, and; an ILP will be capable of committing a criminal offence and be able to sue and be sued in its own name.
Jersey foundations
In July 2009 the Foundations (Jersey) Law was enacted, providing Jersey with an alternative financial planning vehicle to trusts and companies for the management, preservation, enhancement and distribution of wealth. A Jersey foundation blends attractive features of Jersey companies and trusts; in some senses it can be regarded as an incorporated trust. Like a company, it has its own legal personality and is able to own property and sue and be sued in its own name. It may have unlimited duration.
The constitutional documents consist of a publicly filed charter (containing certain basic items of legally required information) and inherently flexible and private regulations which, amongst other things, establish the foundation's council, identify those who are to benefit under the foundation and identify the foundation's guardian.
The objects of the foundation may be to benefit one or more persons or a class of persons, or to carry out specific charitable or non-charitable purposes. A beneficiary has no interest in the assets and is not owed a fiduciary duty by the foundation, its council or guardian. The founder of a foundation is the person that instructs a duly qualified person to incorporate the foundation, regardless of whether or not that person donates assets to the foundation. The identity of the founder need not be disclosed in the publicly available charter. The founder may be both a member of the council and the guardian.
Foundations may be used for holding family wealth for future generations and to control the cascade of that wealth and future management of underlying businesses or assets for future generations. They may also be useful wherever it is desirable to separate ownership from control of assets. For fund managers from non-trust or civil law jurisdictions, or those reluctant to transfer assets outright to the trustee of a trust, the use of a Jersey foundation to hold carried interest or similar assets, may be of real interest.
| Author biographies |
Ben Robins
Ben is a partner in Jersey, and head of the funds practice. He has broad experience in the fields of investment funds, offshore capital markets and structured finance. Ben trained with Speechly Bircham in London where he qualified as an English solicitor (currently non-practising) in 1996. He joined Mourant du Feu & Jeune in 1997, qualified as a Jersey solicitor in December 2000 and became a partner in October 2002. Ben has worked on the establishment of private equity funds domiciled or managed in Jersey for promoters such as Natexis Private Equity International, Mercapital, Alpha Associes Conseil, Cevian Capital, Scope Growth, Northzone Ventures, WL Ross and Investors in Private Equity (whose fund was one of the first private equity funds established under Jersey's new Expert Fund regulatory regime). Encompassing Mourant du Feu & Jeune's Jersey office and its newly opened office in Guernsey, Ben's practice also includes property fund and financing work for Schroder Investment Property Management Limited and Arlington Securities Limited.
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Matthew Feargrieve
Matthew leads the Cayman Islands practice in the London office of Mourant du Feu & Jeune, specialising in hedge funds, private equity funds and general corporate law. He is also a member of the firm's alternative funds group. Prior to joining Mourant, Matthew worked for 12 years in private legal practice in corporate finance, mergers and acquisitions, private equity and investment funds. Matthew is a barrister of Lincoln's Inn, a member of the Law Society of England and Wales, a solicitor (non-practising) in England and Wales, a solicitor of the Supreme Court of the Eastern Caribbean and a Cayman Islands attorney-at-law. He graduated with an MA in law from Worcester College, Oxford, in 1997.
In his current practice Matthew advises fund managers and sponsors, investors, banks, administrators, custodians, private clients, family offices and global law firms on all aspects of Cayman Islands law and regulation pertaining to investment vehicles established in the islands, and deals with the Cayman Islands Monetary Authority on points of law and regulation applying to Cayman Islands companies, limited partnerships and unit trusts.
Darren Bacon
Darren Bacon is a Guernsey funds partner who joined Mourant du Feu & Jeune in January 2006 to head its Guernsey legal practice. He specialises in investment funds and corporate transactions and was previously a partner of Carey Olsen in Guernsey. Before working in Guernsey, Darren trained in London, latterly working at Lovells in the securities and investments group. |