By Tony Pursall and Richard Grasby, Maples & Calder From Trusts & trustees Vol 20 No. 6 July 2014

You can download the whole article at: http://tandt.oxfordjournals.org/content/20/6/561.full.pdf?keytype=ref&ijkey=HKjwOifd1pqRzaI

Abstract

The Cayman Islands plan to introduce the foundation as a new type of non-profit company. It will share many of its features with regular companies   and   fit seamlessly into the Islands’ legal regime. Foundations may be established for commercial, charitable, philanthropic or private purposes, or any combination of them. It is anticipated that foundations will have a wide range of uses such as special purpose vehicles in finance transactions, as private trust companies, as succession planning vehicles and for any purpose for which a trust is currently used.

The Foundations Law will create a new type of non- profit company. It has two features that distinguish it from non-profit companies that may currently be incorporated under the Companies Law: it need not have members and amendments may only be made to its constitution if expressly provided. This has important advantages over the introduction of an entirely new legal construct; in particular, there is no need to provide for a comprehensive set of rules to cover every eventuality and the foundation will have the benefit, where relevant, of a considerable body of case law on companies.

The approach is to provide a structure that can function like a civil law foundation without involving a trust

The approach is to provide a structure that can function like a civil law foundation without involving a trust. The constitution can provide for the grant of rights, powers, and duties of any kind to members, directors, officers, supervisors, founders, and others.

A Cayman foundation can therefore include the features of a typical civil law foundation; or it can include key features of a common law trust; or it can retain the key features of a company; or other bespoke rights and obligations can be created. Regulations under the Foundations Law dealing with model articles, transfer by way of continuation, and merger and consolidation6 will follow the enactment of the

Foundations Law.

Foundations may be established for any lawful purpose or purposes. A Foundation may (but need not) have beneficiaries. The anticipated uses include special purpose vehicles in finance transactions, use as private trust companies, protectors or enforcers (in relation to other trusts or fiduciary structures), as vehicles for philanthropic objects, as succession planning vehicles and for any purpose for which a trust is currently used.

Setting up a foundation

The Companies Law (2013 Revision) will apply to foundations except as expressly provided in the Foundations Law. A Cayman Islands foundation will therefore be a type of company and can be incorporated in the same way as a standard Cayman Islands exempted company. All the jurisprudence on companies will apply to foundations, to the extent it is relevant.

The Companies Law (2013 Revision) will apply to foundations except as expressly provided in the Foundations Law

Foundations are incorporated with one or more members in the same way as an exempted company but permit the foundation, once formed, to cease to have members.

Required documentation and filings

As for exempted companies, certain registers and information must be kept by the foundation at the registered office and information must be provided to the Registrar of Companies. A minute book should also be maintained. The registered office service provider is also required to maintain copies of certain records for anti-money laundering purposes.

A private foundation is free to engage in any trading or commercial activities (subject as otherwise pro- vided in the constitution). Third parties will have the same protections as they will when dealing with any other company. In particular, when a foundation encounters financial difficulties, is insolvent or is of doubtful solvency, the directors must consider the creditors’ interests as part of their duty to act in the interests of the foundation itself.

Bringing a foundation to an end

The provisions for winding up a company apply to foundations (with consequential amendments).

A foundation cannot be revoked as such, although a founder can be given powers that have a similar effect, such as a power to appoint foundation property to him or herself. The memorandum of association can be altered if and to the extent provided in its memorandum, but not otherwise. The power to make or consent to alterations to the memorandum of association may be given to any persons (whether or not interested persons). Alterations to the articles of association may be made by special resolution.

Specific roles

A foundation does not require anyone to have a formal role as a founder as such. It is incorporated on the instructions of the persons promoting it in the same way as any other company. A founder does not have any automatic rights in relation to a foundation but may reserve rights if he wishes, including, for example, the power to appoint and remove directors, to appoint and remove supervisors, to designate beneficiaries, to call for reports, accounts, and information from the directors and to cause the foundation to be wound up. The founder may be given a power to amend any of the provisions of the foundation’s constitution but only if expressly provided in the constitution. The constitution of a foundation may provide for any types of beneficiaries and for any types of beneficial provisions as may be included in a trust. Non-charitable purposes are also permitted provided they are legal and not contrary to public policy.

It is possible to provide for any duties, powers or rights to be vested in beneficiaries. A beneficiary can therefore be given direct enforceable rights against the directors. Unless the constitution provides otherwise, the duties of the directors and any duties imposed on others by or pursuant to the constitution, are owed to the foundation only.

A foundation is managed by a board of directors. Any individual of full capacity and any company may be a director.

A foundation must at all times have a secretary who is a qualified person

A foundation must at all times have a secretary who is a qualified person. The secretary’s office is the registered office of the foundation where the statutory

records are kept and the secretary is entitled to receive from the foundation, its directors and officers and any interested person, such information, accounts, and documents concerning the foundation as the secretary may reasonably require for the purpose of complying with the Proceeds of Crime Law, the Terrorism

Law and the Regulations.

The directors of a foundation owe the same duties to the foundation as the directors of any other company owe to that company. The standard of care applicable to directors of a foundation is the same as that owed by the directors to any other company and so includes a duty of care, diligence, and skill. There is no residency requirement for directors and there are no other restrictions as to who may act as a

director of a foundation.

The directors of a foundation owe the same duties to the foundation as the directors of any other company owe to that company

Governance

The constitution may provide for supervisors and may provide for the grant of any rights, powers, or duties of any kind to those supervisors. A supervisor is a person, other than a member, who under the constitution has any voting rights at general meetings or rights of access to some or all of the accounts, records or information of the foundation, whether or not such person has supervisory or other duties.

If a foundation ceases to have members or supervisors or sufficient of them to supervise the management of the foundation in accordance with the constitution or they are not doing so, and there is no power in the constitution to resolve the difficulty or such power has not been exercised, then any member, supervisor, director or officer, may apply to the court for an order and the court may (i) appoint or remove supervisors, (ii) alter the powers, duties and other terms of appointment of supervisors, (iii) alter the constitution with regard to the appointment or removal of supervisors, (iv) make any order that could be made under section

95(3) of the Companies Law, or (v) wind up the foundation. Similar provisions apply in respect of directors.

The court has jurisdiction (on the application of the foundation, any interested person or the liquidator) to alter the memorandum of association of a foundation if the provisions of the memorandum setting out the objects or the provisions of the constitution for disposing of surplus assets on winding up become, in whole or in part, impossible, impracticable, unlawful or obsolete. If the court is of the opinion that the difficulty cannot be resolved in that way, the foundation will be wound up. The drafters of foundation constitutions may also include their own mechanisms for dealing with changing circumstances.

Assets and investment

There is no minimum capital requirement for a foundation. A founder or any other person may add assets to a foundation, subject to the foundation’s acceptance. As with any other non-profit company, assets of the foundation may be applied in the furtherance of its objects. For those purposes, there is no distinction between capital and income, unless the constitution provides otherwise.

There are no regulations concerning the investments of foundations and no restrictions on the types of investments a foundation may make, unless the constitution provides otherwise.

Conclusion

The addition of foundations to the common law system of the Cayman Islands has been carefully thought through so as to be consistent with such legal heritage

As can be seen from this basic summary, the addition of foundations to the common law system of the Cayman Islands has been carefully thought through so as to be consistent with such legal heritage. At the same time, the Islands have recognized the possible uses of foundations as outlined above and also more generally the attraction to persons from territories where the Anglo-Saxon trust is little known and not easily understood. Quite how popular foundations will prove to be and what they will be used for remains to be seen but this is a key development of the Cayman Islands as a leading financial centre.

Tony Pursall advises global and institutional trustees and substantial private clients on a variety of commercial and private trusts, charity and estate planning issues. Tony joined Maples and Calder in 2001 and was made partner in 2007. He is included in the honours section of Citywealth Leaders List and is recommended in PLC Which Lawyer? Tony is also named as a leading private client lawyer in The International Who’s Who of Private Client Lawyers. E-mail: [email protected]

Richard Grasby advises institutional trustees and private individuals on all areas of trust law and related private client issues. Richard joined Maples and Calder in 2008 and was made partner in 2014. He is also a member of the STEP Hong Kong Executive Committee and was named as a leading lawyer on Citywealth’s Leaders List. E-mail: richard.grasby@maplesandca