21 December 2015

Cayman Islands Quarterly Update - December 2015

AIFMD

AIFMD ‘opt in’ regime

In September 2015, the Cayman Islands amended its Mutual Funds Law and Securities Investment Business Law, introducing an ‘opt in’ regulatory framework for purposes of the EU’s Alternative Investment Fund Managers Directive (AIFMD). This regulatory regime would enable Cayman Islands investment funds and managers to market in the EU under the AIFMD passport system once the Cayman Islands are approved by the European Securities and Markets Authority (ESMA) (and should assist in obtaining that approval). Full details of the regime are to be contained in regulations that are expected to be issued shortly.

The opt in regime will be available to:

a)    EU-Connected Funds: meaning any type of Cayman Islands investment fund managed from or marketed in the EU; and
b)    EU-Connected Managers: meaning any person managing, marketing or acting as depositary for an EU-Connected Fund.

Significantly, this will give closed-ended funds the opportunity to obtain regulated status in the Cayman Islands for AIFMD purposes, which is currently not possible.

ESMA assessment of the Cayman Islands

In October 2015, ESMA confirmed it will shortly begin its assessment of the Cayman Islands for inclusion in the AIFMD Passport regime. ESMA chairman Steven Maijoor, confirmed to the European Parliament on 13 October that the Cayman Islands will be one of the next group of six non-EU countries to be considered. With the introduction of the new ‘opt in’ AIFMD regulatory regime referred to above, the Cayman Islands fund industry is confident of a positive outcome. 

Tax Transparency Reporting

Implementing its 2014 commitments under the OECD’s Multilateral Convention of Mutual Administrative Assistance in Tax Matters and its Multilateral Competent Authority Agreement (MCAA), the Cayman Islands Government introduced a legal framework in October 2015 for reporting under the OECD’s Common Reporting Standard (CRS). The framework is contained in the Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, which provide for the reporting of accounts connected with a specified list of jurisdictions. The Cayman Islands Tax Information Authority is expected to publish that list of participating jurisdictions shortly. Reporting under the CRS will commence in 2017 in respect of the 2016 financial year.

Companies Law

Extension of period for filing director and officer changes

Amendments to the Companies Law have extended the filing period for notification of director and officer changes from 30 days to 60 days. Penalties for breaches of the filing requirement have also been reduced and capped in respect of multiple breaches.

Dispute Resolution & Litigation

Integra Group

In this decision Justice Jones considered for the first time the meaning of the “fair value” of shares, where a shareholder has dissented to a statutory merger pursuant to section 238 of the Companies Law (2013 Revision). The Judge took into account guidance concerning similar statutory processes from Delaware and Canada. It was held that assessing “fair value” means the dissenting shareholder’s proportionate share of the business as a going concern without any minority discount or premium for the forcible taking of their shares. The Judge held that the date for ascertaining fair value is the date on which the merger decision is made. Further, the Judge ruled that there is no prescribed valuation methodology, publicly traded share prices are not necessarily the most reliable, and fair value should be proved by any methods which are generally considered acceptable in the financial community and are otherwise admissible in Court. The Judge ruled in favour of the value proposed by the dissenting shareholder and also awarded 4.95% interest on the amount. 

Rhone Holdings LP

In this decision Justice Mangatal struck out a just and equitable petition to wind up an exempted limited partnership for abuse of process, in circumstances where the petitioner was contractually precluded from petitioning by a term of the limited partnership agreement. The Judge held that the parties’ contractual agreement not to pursue winding up relief was enforceable despite the terms of the Exempted Limited Partnership Law, 2014. The Judge held that the parties entered into an agreement which expressly forbade the presentation of a winding up petition, there had been a clear agreement not to issue winding up proceedings and, as such, if such a petition was presented in contravention of such an agreement the Court was required to dismiss it pursuant to section 95(2) of the Companies Law. 

China Shanshui Cement Group Limited 

In a very recent ruling Justice Mangatal declined to follow Justice Jones’s decision in China Milk [2011] (2) CILR. In China Milk, Justice Jones decided that, pursuant to s.94(1)(a) of the Companies Law (2009 Revision), directors of an insolvent company are entitled to present a winding up petition on behalf of and in the name of the same company without reference to the shareholders and irrespective of whether the Articles permitted them to. In China Shanshui, Justice Mangatal held that China Milk was wrongly decided as the changes in the Companies Law in 2007 did not permit Justice Jones to reach the decision that he made in China Milk. Instead she followed Chief Justice Smellie’s decision in Banco Economico v Allied Leasing [1998] CILR 102, which followed the English decision of Emmadart [1979] 1 Ch 540 (which has since been legislated away in England through the Insolvency Act 1986) and held that the directors must be permitted in the Articles to present a winding up petition without a shareholder vote. If they are not so permitted, there must be a shareholder vote on the presentation of the petition. 

Aircraft Financing

The Convention on International Interests in Mobile Equipment and the Protocol thereto on matters specific to aircraft equipment (together, the Cape Town Convention) came into effect in the Cayman Islands on 1 November (the same date it came into force in the UK). Implementation of the Cape Town Convention in the Cayman Islands provides greater certainty to creditors taking security over aircraft registered in the Cayman Islands by providing access to the international registration system operated by parties to the Cape Town Convention.

Hedge Fund Growth

The number of hedge funds domiciled in the Cayman Islands increased steadily throughout 2015, reflecting growth in the North American asset management sector and continued confidence of institutional clients in the Cayman Islands as the hedge fund jurisdiction of choice. Third quarter statistics from CIMA show a total number of regulated funds of 11,215 on the register at the end of September 2015. That number increased from 11,061 at the end of June 2015 and from 10,755 at the end of March 2015, representing a particularly active past six months. 

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