From Solomon Harris

The Cayman Islands Exempted Limited Partnership Law, 2014 came into force last week following its gazettal on Wednesday, 2 July 2014. The new law (the ‘Law’) is the result of years of consultation with the financial services industry and is designed to make the already popular Exempted Limited Partnership (‘ELP’) investment vehicle more flexible, easier to establish and to run.

The Law brings Cayman Islands (‘Cayman’) ELP law in line with changes the Cayman Islands Government made to the Companies Law in 2013 and addresses some practical issues which had become apparent with the old law (for example, there are now simple statutory procedures for existing funds to be re-domiciled to the Cayman Islands) . The changes should help Cayman ELPs dovetail better with Delaware fund structures, and particularly benefit those managers and investors who use Cayman vehicles in parallel fund structures with Delaware investment vehicles. Other changes give partners greater control over their commercial arrangements, including more flexibility on how they structure their partnership (for example a non-Cayman Islands partnership can now be a General Partner).

For a more detailed assessment of the benefits the Law brings to fund managers, lenders, investors and creditors see article below:

Cayman’s ELP law just got better

Posted on Thursday, 17 April 2014 From Solomon Harris

Cayman Islands Exempted Limited Partnership Law, 2014

This week the Cayman Islands Legislative Assembly has approved the anticipated

new Exempted Limited Partnership (‘ELP’) law, designed to make the already popular investment vehicle more flexible, easier to establish and to run. The legislation is the result of years of consultation with the financial services industry and the changes will benefit fund managers, lenders, investors and creditors. Here we look at how each group can expect to benefit from some of the changes.

How does an ELP work?

In simple terms, an ELP is a created by a Partnership Agreement (‘PA’) under which a General Partner (‘GP’) holds all the partnership assets, conducts all the partnership business, and takes on all the partnership’s liabilities. The remaining partners are only liable for partnership debts up to the amount of their original investment, and so are known as limited partners (‘LP’s). As a private contractual arrangement the vehicle is more flexible than a corporate structure and more adaptable to specific investment strategies. In practice the ELP’s GP is generally a professional fund manager and the LPs are institutional or private investors. ELPs have always been popular with private equity funds but are increasingly the vehicle of choice for open ended funds.

Why change?

The new law (‘the Law’) brings Cayman Islands (‘Cayman’) ELP law in line with changes the CIG made to the Companies Law (‘CosLaw’) in 2013 and addresses some practical issues which had become apparent with the old law. Some of the changes should also help the Cayman ELP dovetail better with Delaware fund structures, and particularly benefit those managers and investors who use Cayman vehicles in parallel fund structures with Delaware investment vehicles.

So how does the Law benefit Fund Managers?

It extends the type of entity which can be a General Partner (‘GP’), allows a GP to limit its fiduciary duties to an extent, and assists a GP to enforce agreed remedies against a defaulting LP. In addition, there are now statutory mechanisms by which a foreign partnership can relocate to Cayman.

Fiduciary duties and conflicts – GPs and LPs are given more flexibility to agree and to set out in the PA the scope of the GP’s fiduciary duties and how they consider conflicts of interests will be addressed. The parties cannot agree to limit core fiduciary duties of the GP ( i.e. to act in good faith) but the Law returns to the parties a greater control over their commercial arrangements, which will make it easier for fund manager GPs to deal with conflicts of interest where they manage other funds with competing interests.

GP structures – The Law lifts restrictions on the types of entity which can act as a GP to an ELP (for example, a non-Cayman Islands partnership can now be a GP). This gives fund managers greater flexibility in how they structure their funds.

Enforcement –GPs should find it easier enforce the contractual remedies in the PA which they have available against defaulting LPs, even where such remedies would otherwise be considered penalties and so usually unenforceable under Cayman law.

Register as foreign partnership – There are new simple statutory mechanisms for Non-Cayman partnerships to register in Cayman as foreign partnerships (much as foreign companies are able to be registered as foreign companies under the CosLaw).

Re- domicile – The Law introduces simple statutory procedures for existing funds to be re-domiciled to the Cayman Islands (similar to those in the CosLaw which allow a foreign fund company to re-domicile in Cayman).

Striking off dormant funds –A new strike off provision gives fund managers a quick, simple and cost effective way to save registrar fees on a dormant fund (bringing ELP laws into line with the CosLaw which allows companies to be struck off the Cayman register).

Privacy – GPs now have greater control over access to the ELP’s records. The registers no longer need to be held at the Registered Office (‘RO’) and can be held anywhere at the GP’s discretion, even overseas. Only the name and address of a LP needs to be recorded in the “main” register (which is open to view by all LPs and those who the GP allows to see it). Information on the levels of contributions and/or distributions shall be held in a separate register, which is not open to all LPs, and to which access is controlled by the GP. This means that fund manager GPs should split their existing registers (or to ask their RO service provider to do it for them).

How will it benefit Investors?

The principal benefits for investors are that the Law helps clarify the duties owed by LPs to the ELP and to one another, even where they sit on advisory boards or committees of the ELP. The Law makes it easier for LPs to understand what actions might compromise their limited liability status and allows for them to be awarded costs if they need to bring an action on behalf of the ELP against a third party.

LP duties – The Law specifically states that LPs do not owe one another or the ELP any fiduciary duties except as provided by the PA. Investors can now feel confident that they know where they stand as until now the position was less certain. This position on fiduciary duties is also extended to LPs and those who serve on any board or committee of the ELP: unless the PA says otherwise, they do not owe any fiduciary duty to each other or to the ELP for their work on that board or committee.

Indemnities –Investors can now enforce provisions in the PA granting them a right to an indemnity from the assets of the ELP for serving on boards or committees of the ELP, even where they are not a party to the PA. This brings matters into line with the CosLaw and puts LPs who serve on boards or committees of ELPs on the same footing as members of the board, or committees of the board, of Cayman companies.

Confidentiality – As outlined above, the new provisions help protect investor confidentiality regarding commercially sensitive data. Only the name and address of an LP will be recorded in the “main” register open to all LPs, and details of any investor contributions or of any distributions will be kept on a separate register which is not open to inspection by all LPs but only to those persons to whom the GP allows access.

LP lawsuits on behalf of the ELP – Where LPs successfully bring an action on behalf of an ELP, where the GP has without cause not done so, there is now a statutory provision that allows the Court to order that the LPs be reimbursed for their reasonable expenses in so doing, including legal costs.

Clarity on how to lose limited liability – The Law expands the already extensive list of LP safe harbours against losing limited liability status.

What is in it for lenders?

The Law recognises secured creditor status, and simplifies procedures for establishing priority of security.

Secured creditors – The Law formally recognises the position of a secured creditor of an ELP, and reduces the burden of proof for secured lenders, making it easier for them to establish the priority of their security interest when taking security over an LP interest. For example, under the Law, a secured lender only needs to provide a summary of the details of its security, including the parties, the date and the asset subject to the charge, instead of having to file a copy of the security document itself at the fund’s RO.

Floating Charges –New provisions make it easier for lenders to take a floating charge over all of the ELP’s assets, even where some, or all, of the partners may be companies, overseas companies or bodies corporate.

What is in it for the secondary market?

The Law specifically recognises that the whole, or part, of a partnership interest can be transferred, and provides detail on ways to effect a transfer. It also simplifies the process, which will make it easier for investors to buy and sell ELP interests on the secondary market.

More on the way

The CIG and Cayman financial services industry have been discussing the changes brought about by the Law for a number of years. There are proposals to make further changes to improve Cayman ELP law, but the CIG and the industry need more time to hammer out the detail. Rather than have these negotiations delay changes, which both recognised as necessary, the CIG has taken the pragmatic and pro-active step of implementing the new Law.

For an additional article on the benefits of the law go to the Solomon Harris Website for: Upcoming Changes To The Cayman Exempted Limited Partnership Law Are Imminent – Something in it for everyone?

For more information go to: www.SolomonHarris.com

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