13 April 2014

Cayman Islands Legislative Update

Changes to the Exempted Limited Partnership Law

The Cayman Islands legislature has approved a major overhaul of the jurisdiction’s Exempted Limited Partnership Law (“ELP Law”). The ELP Law was first introduced in 1991 and has been periodically updated to meet the changing requirements of the financial services industry. As a result, the exempted limited partnership (“ELP”) has been one of the Cayman Islands’ most successful offerings, particularly popular with the investment fund community. As at 31 December 2013, there were 14,355 active exempted limited partnerships on the register, 2,368 of which were formed during 2013 (a higher rate of formations than during the previous peak years of 2007/8). The new and improved ELP Law enhances and clarifies the law in a number of areas to promote the continued popularity of the ELP.
 
The principal changes to the ELP Law are:
 
1. Enhanced liability protection for limited partners.
 
In recent years it has become increasingly common for limited partners to serve on, or appoint representatives to, advisory boards with approval or veto rights for specific types of transaction and/or to resolve conflicts of interest in relation to the general partner. This increased involvement in the internal management of ELPs has raised concerns that limited partners or their appointees could have fiduciary duties to the other partners or even that they could be characterised as general partners in certain circumstances.
 
The ELP Law now provides that limited partners and their appointees serving on such advisory boards do not have fiduciary duties to the other partners, unless expressly stated in the ELP’s limited partnership agreement (“LPA”), and that they are not at risk of being characterised as general partners merely by serving on such advisory boards.
 
2. Greater structural flexibility.
 
A new regime has been introduced permitting overseas limited partnerships to register as foreign limited partnerships under the ELP Law, which will qualify them to act as sole general partner of an ELP. Previously, where the structure required an overseas limited partnership to act as general partner of an ELP, it was necessary for the ELP to have at least one other general partner that met the qualification requirements.
 
It is also now possible to continue an ELP out of the jurisdiction to another jurisdiction while maintaining its continuity of existence.
 
3. Increased certainty of interpretation.
 
Certain aspects of the common law had caused uncertainty about the application of particular provisions typically included in LPAs, or required additional structuring to ensure that they would be enforceable. In several key areas, this has now been resolved:
 
(a) Default provisions (such as forfeiture of interests for non-payment of capital calls) in LPAs are now enforceable, even if penal in nature.
 
(b) Appointees to advisory boards can now rely on provisions in LPAs regulating their activities, including exculpation and indemnity provisions, even when they are not party to the LPA.
 
(c) While General Partners must still act in good faith, the general requirement to act in the best interests of the ELP can now be varied by the LPA.
 
4. More financing friendly.
 
A number of clarifications in the ELP Law have made it easier for borrowers to utilise ELPs as financing vehicles and will give lenders greater confidence in lending to and taking security from ELPs:
 
(a) It is now clear that capital call rights constitute property of the ELP itself, rather than merely a personal right of the general partner, meaning that an ELP can grant security over that right without the general partner requiring a specific authority in the LPA.
 
(b) ELPs can now grant floating security over their assets. It was previously unclear if the inability for partnerships to grant floating security under the common law applied to ELPs.
 
(c) Secured creditors are now given an express right to enforce their security against an ELP even when the ELP is in winding up, without any reference to the general partner or liquidator and with no need to obtain leave of the court.
 
5. Simplified dissolution regime.
 
It is now possible for ELPs to dissolve by applying to be struck off the register where they are no longer carrying on business. This is equivalent to the strike off regime available to companies, and offers a simple dissolution option for solvent ELPs, which could hitherto only dissolve after going through a statutory winding up process equivalent to the formal liquidation of a company.

The Contracts (Rights of Third Parties) Law

A new law, The Contracts (Rights of Third Parties) Law, has been introduced that will permit contracting parties to give enforceable rights to third parties who are not themselves party to the contract. The regime under this law is “opt-in” rather than “opt-out”, so that it only applies if the contract expressly states that the particular rights may be enforced by an identified person or class of person. The new law will be particularly useful in relation to contractual indemnity and exculpation provisions, which frequently purport to benefit persons who are not party to the contract, such as the directors, officers, employees and shareholders of the contracting parties.

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