The Cayman Foundation Company (the “Foundation Company“) is governed by the Companies Law (2020 Revision) (the “Law“) of the Cayman Islands except as specified in The Foundation Companies Law, 2017. The Foundation Company is a not for profit body corporate having separate legal personality and may be established for any lawful purpose including commercial and charitable purposes. While having the features of a company, the Foundation Company also has properties customarily attributed to the common law trust and the civil law foundation.
The following is a summary of the key features of the Foundation Company.
- Registration Requirements
A Foundation Company must:
- be limited by shares or by guarantee, with or without share capital;
- have a memorandum of association (the “Memorandum“) that:
- states that it is a Foundation Company;
- describes its objects;
- provides for the disposal of any surplus assets on winding-up; and
(iv) prohibits dividends or other distributions of profits or assets to members; and
(c) have adopted articles of association (the “Articles“)
The directors and members of an existing company incorporated under the Law (a “Cayman Company“) or the incorporators of a new Cayman Company may apply to the Registrar of Companies (the “Registrar“) for a Cayman Company to be registered as a Foundation Company.[1] Where the registration requirements are met, the Registrar will issue a certificate declaring that the Cayman Company is a Foundation Company. There is no minimum capital requirement for a Foundation Company.
- Constitution
The Memorandum and the Articles of the Foundation Company (the “Constitution”) must be registered with the Registrar but are not open to public inspection.
The Constitution describes how the Foundation Company will be managed and may be tailored to meet the specific requirements of its founders. The Constitution may be amended during the life of the Foundation Company and the power to amend the Constitution may be given to any person. Where there is no amendment process stated in the Constitution[2], it may be amended by a special resolution signed by the persons entitled to vote at a general meeting of the Foundation Company.[3]
The Constitution may confer duties, powers and rights on founders, directors and members and include provisions governing the admission of members as well as the appointment or removal of directors and officers. Additionally, the Constitution may authorize the appointment of one or more supervisors. Supervisors may be given duties of any description and while there is no requirement for them to have supervisory powers, they can be given responsibility to oversee directors.
Supervisors are granted an unconditional right to vote at general meetings. If permitted under the Constitution, the Foundation Company can cease to have members and become an “ownerless vehicle” as long as it continues to have one or more supervisors. Where it ceases to have members, the Foundation Company’s existence, capacity or powers will not be affected, however any subsequent admission of members must be expressly authorized by the Constitution.
- By-Laws
The Foundation Company may adopt confidential Bylaws, which would be similar to a letter of wishes for a trust in that the Founder’s wishes may be demonstrated in the Bylaws. The Foundation Company must appoint at least one director and its directors and officers are required to comply with the Bylaws, to the extent that they do not contravene applicable law and the Constitution and provided that the Foundation Company is able to meet any liabilities relating to such compliance. Matters which can be set out in the Bylaws include the manner in which amendments are made, the obligations of the founders and the delegation powers to the directors and supervisors. The Bylaws do not form part of the Constitution and can remain private.
- Directors and Interested Persons
Directors of the Foundation Company must ensure that:
- the objects as set out in the Constitution and any By-Laws are achieved;
- liabilities can be met; and
- there is no contravention of applicable laws.
Directors may also be required to provide accounts and other material information concerning the Foundation Company’s business and affairs to assigned persons (“Interested Persons”) on request or in the manner determined by an ordinary resolution. Interested Persons may be any of the following:
- members or supervisors;
- persons with the right to be members or supervisors; or
(c) persons declared under the Constitution to be Interested Persons.
Interested Persons will have many of the rights, powers and duties which may be exercised by a member of a Cayman company that is not a Foundation Company. Interested Persons also have the authority to bring an action in the name of the Foundation Company for the enforcement of the duties and liabilities of the directors.
- Secretary
The directors of the Foundation Company must appoint a “qualified person” as the secretary. “Qualified person”, for a Foundation Company means a person who is licensed or permitted by the Companies Management Law (2018 Revision) to provide company management services in the Cayman Islands.[4] The secretary of the Foundation Company has a duty to ensure that the Foundation Company complies with applicable Cayman Islands legislation governing anti-money laundering and counter-terrorism financing (“AML Laws”).[5] The secretary must therefore be provided with all information necessary for the fulfilment of that duty. A Foundation Company is generally prohibited from accepting an asset contribution that is gratuitous or is in consideration of a share issue, unless its secretary has provided notice that there appears to be no restrictions on such acceptance under the AML Laws.[6]
- Registered Office and Registers
The Foundation Company’s registered office must be located at its secretary’s business address and the Registrar is to be notified of its location and in the event that the location changes. Where supervisors are appointed, a register of supervisors containing their names, addresses and dates of their appointment and resignation must be maintained at the registered office.[7]
- Beneficiaries
If required, the Foundation Company may be structured to provide for beneficiaries who benefit from the carrying out of its objects. Beneficiaries do not have any powers or rights relating to the Foundation Company, its management or its assets unless such rights are expressly granted by the Constitution.
- Limitations on disposal of assets
A Foundation Company is not permitted to dispose of its assets, if it is unable to pay its debts immediately following the date of such disposition. Payments to members of dividends or other distributions of profits or assets are prohibited. [8] A member may however receive payment from the Foundation Company as a consequence of that member being :
- a beneficiary and receiving benefits as such;
- entitled to remuneration as a director or other person having a duty under the Constitution;
- indemnified for liabilities or reimbursed for expenses incurred;
- party to a loan or other transaction or relationship entered into with the Foundation Company on terms no more favourable than if they had been negotiated at arm’s length; or
(e) able to receive benefits from the disposal of surplus assets on winding-up.
- Dispute Resolution and Applications to the Court
The Constitution may include instructions for the resolution of disputes arising among the directors, officers, Interested Persons and beneficiaries (if they are granted rights).
Applications may be made to the Cayman Court for advice, opinions, orders, directions or other forms of resolution where:
- there is a breakdown in the appointment of directors or supervisors i.e. there is either an insufficient number or they are not dealing with the Foundation Company’s business;
- there are insufficient numbers of members, or interested persons or they have not been performing their roles;
- there is either no power under the Constitution to resolve the difficulties faced in paragraphs (a) or (b) above or the power is not being exercised; or
- where the provisions in the Constitution governing the distribution of surplus assets on winding up become impracticable.
10. Firewall
Protections afforded under sections 92 and 93 of the Trusts Law (2020 Revision) of the Cayman Islands, will apply to property contributed to a Foundation Company. Accordingly, heirship rights conferred by a foreign law will not be enforced in relation to assets contributed to a Foundation Company.
- Uses
The Foundation Company may be utilized for a wide range of purposes including:
- owning all or part of a family business or the establishment of a family office;
- serving as a holding entity for underlying for-profit companies;
- achieving wealth management or succession planning objectives including asset protection and avoidance of probate;
- realizing philanthropic goals and managing assets maintained for benevolent activities;
- owning the shares of a private trust company or acting as corporate protector;
- effecting corporate investments in shares, bonds, mutual funds, bank deposits or other assets;
- owning real estate, artwork or other high value assets where direct control is beneficial;
- operating as, or owning the management shares of, an investment fund; or
- the ownership of high-risk assets such as digital assets.
12. Comparison to Trusts
A key feature of the Foundation Company is the flexibility of its application and structuring when compared to a trust. Unlike a trust, the Foundation Company:
- does not require professional trustees or transfer of assets for its establishment;
- may hold assets contributed by third parties; and
- has the capacity to directly conduct investment activity, engage in commercial operations, purchase or hold title to its assets and enter into agreements.
It is to be noted that there is certainty as to a Foundation Company’s proper establishment once it complies with the formation requirements as a legal entity and is registered. On the basis of its incorporation, the Foundation Company is incapable of being set aside as a “sham” and may be less susceptible than a trust to challenges to its validity.
This note is intended to be a general guide only and should not be relied upon as a substitute for specific legal advice. If you would like further information on any aspect of this note or on any other Cayman Islands legal issue please contact:
Janet Francis
Corporate & Commercial Practice Group
Email: [email protected]
Tel.: 1 345 815 2807
[1] The fee payable in respect of an application to become a Foundation Company is US$609.70 exclusive of incorporation fees.
[2] The amendment of the Articles must be authorized by the Constitution.
[3] This may the founder, members and / or the supervisors as set out in the Constitution.
[4] An entity which is licensed as a corporate services provider is not permitted to act as secretary of a Foundation Company. An assistant secretary is not required to be a “qualified person”.
[5] The applicable laws and regulations are the Proceeds of Crime Law (2019 Revision); the Terrorism Law (2018 Revision) and the Anti-Money Laundering Regulations (2018 Revision).
[6] Contravention of this requirement is an offence and the Foundation Company, its directors and managers or anyone one else acting in such roles may be liable on conviction to a maximum fine of US$18,292.60 and to imprisonment for five (5) years or both.
[7] This register must be updated within sixty (60) days of any change to the supervisors failing which the Foundation Company and its directors or managers may be liable to pay a fine of US$609.70 for each day during which the contravention continues.
[8] Where a director or manager of a Foundation Company knowingly and wilfully authorizes or permits a prohibited distribution, the Foundation Company and the director or manager commit an offence and may be liable to a maximum fine of US$18,293 or to imprisonment for five (5) years, or both.
