The International Comparative Legal Guide to: Private Equity 2019 5th Edition A practical cross-border insight into private equity Published by Global Legal Group, with contributions from: Aabø-Evensen & Co Dentons Proskauer Rose LLP Advokatfirman Törngren Magnell DS Avocats Samvād: Partners Ali Budiardjo, Nugroho, Reksodiputro Eversheds Sutherland Schindler Attorneys Allen & Gledhill LLP (Luxembourg) LLP Solórzano, Carvajal, González, Pérez-Correa, S.C. (SOLCARGO) Ashurst Hong Kong Faveret Lampert Advogados Udo Udoma & Belo-Osagie Avance Attorneys Ltd Garrigues Van Olmen & Wynant Bär & Karrer Ltd. HBK Partners Attorneys at Law Webber Wentzel British Private Equity & Venture Capital Houthoff Association (BVCA) Johnson Winter & Slattery Zhong Lun Law Firm Bub Memminger & Partner Maples Group Consortium Legal Matheson Davis Polk & Wardwell LLP McMillan LLP Debarliev, Dameski & Kelesoska Morais Leitão, Galvão Teles, Attorneys at Law Soares da Silva & Associados Dechert LLP Pirola Pennuto Zei & Associati chapter 11 cayman islands Julian ashworth maples group patrick rosenfeld 1 Overview legislation governing the most popular entity types; notably exempted companies, exempted limited partnerships and limited liability companies. The Cayman Islands has also enacted 1.1 What are the most common types of private equity legislation for a limited liability partnership vehicle. transactions in your jurisdiction? What is the current The global regulatory framework is evolving quickly and this is state of the market for these transactions? Have you likely to continue in the near-/mid-term future. The Cayman Islands seen any changes in the types of private equity continues to adopt and embrace international best practice transactions being implemented in the last two to approaches in multiple spheres which interact with private equity, three years? including, by way of example, the regime for anti-money laundering and combatting terrorist financing, economic substance initiatives The Cayman Islands is a popular jurisdiction in which to domicile and tax transparency reporting obligations. private equity funds in light of its legislative and regulatory framework, tax-neutral status, flexible structuring options and experienced service providers. 1.3 What trends do you anticipate seeing in (i) the next 12 months and (ii) the longer term for private equity While private equity fund establishment for acquisition purposes transactions in your jurisdiction? and co-investment opportunities are most common, Cayman Islands structures are becoming increasingly common in transactional Fund raising activity remains at strong levels and we expect this to contexts, particularly buy-out and secondary transactions. continue in the near term. Equally, dry powder levels are also high. The nature, scope and volume of matters being undertaken in the We expect deal activity to remain strong over the next 12 months as Cayman Islands across the entire funds market spectrum makes it capital is deployed. The legal, regulatory and tax environment in the difficult to identify one specific change or trend. Ultimately, there Cayman Islands remains favourable for structuring of both the are many but they are all linked together by a singular overarching raising of private equity funds and for downstream cross-border theme; the nature of offshore practice has become more complex, deal activity in the longer term. involved and multi-jurisdictional due to onshore and global developments; including US tax reform, more complicated and, at times conflicting, regulatory frameworks, bespoke structures and a 2 Structuring Matters mature funds industry. This will be documented in an appropriate manner in the governing documents adopted for Cayman Islands- domiciled vehicles, which will reflect the nature and terms of the 2.1 What are the most common acquisition structures adopted for private equity transactions in your underlying private equity transaction. jurisdiction? 1.2 What are the most significant factors encouraging or While a Cayman Islands private equity fund can also be structured inhibiting private equity transactions in your as an exempted company, limited liability company or a trust, the jurisdiction? majority of Cayman Islands private equity funds are established as limited partnerships. The Cayman Islands continues to be the leading offshore domicile The Cayman Islands fund vehicle will generally invest via other for private equity funds due to the global distribution appeal of Cayman Islands vehicles, including aggregator, or entities Cayman Islands vehicles, their ease of use, speed to market and low domiciled outside the Cayman Islands, such as in Luxembourg or cost. The Cayman Islands’ tax-neutral status ensures the fund Ireland, depending on where the ultimate operating portfolio vehicle itself does not create an additional layer of tax, creating company or target entity is located. Ultimately, net returns from the efficiencies in raising funds from a potentially global investor base. underlying company or target will be distributed to the Cayman The Cayman Islands is a well-regulated, co-operative and Islands domiciled fund vehicle, which net returns will be in turn transparent jurisdiction and continues to refine its laws and distributed to investors and sponsors and be taxable in accordance regulatory standards to respond and adapt to international standards. with the regimes of the jurisdictions where such investors and This has been most recently demonstrated by the update to primary sponsors are tax resident. 66 www.iclg.com iclg to: private equity 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London maples group cayman islands 2.2 What are the main drivers for these acquisition 3 Governance Matters structures? 3.1 What are the typical governance arrangements for These structures combine the investor familiarity, sophistication and private equity portfolio companies? Are such flexibility of Cayman Islands fund vehicles with the economic and arrangements required to be made publicly available structuring advantages of an underlying holding structure, which in your jurisdiction? satisfies onshore tax and regulatory considerations in an efficient and streamlined manner. A Cayman Islands private equity portfolio company can be formed as an exempted company, a limited liability company or a limited 2.3 How is the equity commonly structured in private partnership. equity transactions in your jurisdiction (including For an exempted company, the board of directors is responsible for cayman islands institutional, management and carried interests)? the overall management and control of the company. The composition of the board of directors of a portfolio company tends As the majority of Cayman Islands private equity funds are structured to vary depending on the nature of the private equity transaction. A as exempted limited partnerships, investors subscribe for an equity director of an exempted company is in a fiduciary relationship to the interest in the exempted limited partnership in the form of a limited company and owes various duties of a fiduciary nature, which may partnership interest. A sponsor/management will typically be broadly characterised as duties of loyalty, honesty and good faith. participate in the performance of the exempted limited partnership Every director owes these duties individually and they are owed to as a carry participant either directly as a partner or through a the company as a whole. Specifically, they are not owed to other separate vehicle. companies with which the company is associated, to the directors or to individual shareholders. In addition to the fiduciary duties, each 2.4 If a private equity investor is taking a minority director owes a duty of care, diligence and skill to the company. The position, are there different structuring Register of Directors and Officers of an exempted company is not considerations? publicly available in the Cayman Islands. A limited liability company can be member-managed or can appoint Minority investor protections, such as anti-dilution, veto or a separate board of managers. There is significant flexibility as to information rights, which transaction parties agree to accommodate governance arrangements with respect to a limited liability within a structure can be reflected in the governing documents of company, which can be agreed by the parties in the limited liability any Cayman Islands vehicle. These matters are dictated by company agreement. The default duty of care for a manager or commercial, rather than Cayman Islands legal, considerations. managing member is to act in good faith. This standard of care may be expanded or restricted (but not eliminated) by the express provisions of the limited liability company agreement. 2.5 In relation to management equity, what is the typical range of equity allocated to the management, and An exempted limited partnership is managed by its general partner. what are the typical vesting and compulsory The general partner has a duty to act in good faith and, subject to the acquisition provisions? express provisions of the limited partnership agreement, in the interests of the partnership. There can be a broad range of approaches as to how profits and other The Cayman Islands protects privacy of commercial arrangements returns are shared among a management team. This is generally left and generally information will only need to be disclosed with to the management team to determine with a sponsor and will reflect