The Foundation Companies Act (“FCA”) came into effect on 18 October 2017 and the foundation company has proven to be a sophisticated and popular vehicle for achieving a range of purposes.
A Cayman Islands foundation company is governed under the Companies Act save to the extent that it is modified by the FCA. This means that a foundation company is an incorporated structure familiar to private client and commercial practitioners alike, while fundamental modifications to the Companies Act model company mean that it is a highly flexible vehicle for achieving a wide range of private client and commercial objectives.
With the exception of the memorandum and articles of association, that have to be filed with the Registrar of Companies (the “Registrar”) on incorporation, foundation companies are private structures. While the constitution may provide for making and altering bylaws for the foundation company, bylaws do not form part of the constitution for any purpose of the Companies Act applicable to foundation companies or the FCA. Accordingly, persons dealing in good faith with a foundation company are not required to consider its bylaws or look into compliance by the directors or others with its bylaws.
The foundation company will have members, at least on incorporation. Membership can be by way of shares or by way of a guarantee up to a stated nominal value (usually limited to US$1). If the membership is by guarantee, membership will cease at death (and / or on any other specified event) and there will be no succession issue since guarantee membership is neither assignable nor heritable property. Essentially, this removes the need for probate.
Entitlement to membership will be set out in the constitution itself and may be dependent on persons satisfying certain criteria (such as reaching a certain age) before qualifying for membership. Members, in their capacity as such, will have no financial interest in the foundation company whatsoever. Persons who are members may, however, also be named as beneficiaries of the foundation company and, in that capacity, may share in the income and capital of the foundation company. Qua members will not be able to participate in the surplus of the foundation company upon liquidation unless they are also identified as the destination for surplus in the mandatory clause dealing with such matters in the constitutional documents of the foundation company.
This lack of financial interest serves to underline the real role of the members, which is to oversee and scrutinise the performance of the board of directors. As ‘interested persons’, the members will be entitled to attend and vote at general meetings when the directors will provide them with activity reports and any other information requested by the members.
The registered office of a foundation company must be at its secretary’s business address. The secretary must be a ‘qualified person’, that is, a person who is licensed or permitted by the Companies Management Act to provide company management services in the Cayman Islands to the foundation company. The role of the secretary is particularly important from a compliance perspective which is why it is a licensed role subject to regulation by the Cayman Islands Monetary Authority. It must be certified by the secretary that there is no regulatory obstruction to the acceptance of any contribution of assets to the foundation company. The secretary is under an obligation, which is subject to criminal sanction, to maintain a full and proper record of the secretary’s activities and all enquiries which the secretary has made in relation to the acceptance of assets.
Before the foundation company accepts any gift of assets, the FCA requires the directors to identify the provenance of that asset to the company secretary so that the secretary can satisfy itself that the asset clears all the AML thresholds laid down in the Cayman Islands’ compliance regime. Only when the secretary is satisfied as to the provenance of the asset, and has given its consent to the directors, will the foundation company be permitted to accept the asset in question. That exercise must be undertaken for each asset introduced into the foundation company and must be properly documented. It is for that reason that the FCA requires the company secretary to be a qualified person.
Some of the key features of a Cayman Islands foundation company are as follows:
• Incorporated vehicle – a foundation company is an incorporated vehicle that is brought into existence following the completion of a registration process.
• Legal personality – a foundation is a separate legal entity distinct from that of its members, directors, officers, supervisors and founder. Accordingly, it is able to hold property, and to sue and be sued, in its own name. It acts through its board of directors, the body charged to administer the foundation’s assets and carry out its objects.
• Objects – a foundation company can be formed for any object, as long as it is lawful and not contrary to public policy and it need not be beneficial to other persons.
• Perpetual duration – like a Cayman Islands STAR trust, a foundation company may continue in perpetuity.
• Flexibility – a foundation company is very flexible as regards its objects, management and supervision; it is expressly provided in the FCA that any right or duty may be given to any person.
• Supervisor – a foundation company can exist without members after it has been incorporated, provided this is permitted by the constitution. This provides flexibility in the governance of the foundation company so that, if the preference is to have supervisors oversee the directors and the conduct of the management of the foundation company instead of the members, then that governance model can be adopted instead. As long as there is at least one serving supervisor in place, the foundation company can dispense with members or function in their absence, without jeopardising its legal status.
– A foundation company’s constitution may grant any person the right to become a supervisor of the foundation company. That right is enforceable against the foundation company. The supervisor is an interested person for
the purposes of the FCA, and will have rights to information and rights of enforcement against the directors to enforce the terms of the foundation company’s constitution and its bylaws as well as the right to attend and vote at general meetings.
– The supervisor role carries a great deal of responsibility. It could be a trusted adviser of the founder or family, it could be an independent professional director but whoever it is, selection should be made with care.
• Bylaws – the bylaws are where the real substance of the foundation company can be set out and where the flexibility can be built in. The bylaws are confidential to the foundation company. They do not need to be filed with the Registrar on incorporation. Only interested persons have a right to see the bylaws. Beneficiaries are not automatically designated as interested persons and so unless they are so designated will have no right to receive a copy of the bylaws if they ask.
– Bylaws are most likely to be issued by the founder, but if there is no founder then they can be adopted in general meeting by the members. As such they can set out all of the founder’s or family’s wishes as to the governance of the foundation company. The constitution also provide for the amendment of the bylaws.
Foundation companies appeal to clients because their features suit their specific and individual needs. Clients are using foundation companies for a wide variety of reasons, including:
• Succession and estate planning – having built businesses and accumulated wealth for many years, many founders are now more
than ever concerned with business succession planning, thereby recognising the need to establish a structure to ensure that the business is not fragmented on their passing. The flexibility offered by a foundation company allows the founder to establish a structure that is bespoke and specific to their circumstances, including the ability to restrict the flow of information regarding the foundation company and its property to the beneficiaries. The fact that a foundation can be established where beneficiaries have no right to enforce and no rights to information may also appeal to some founders.
• Hold awkward or wasting assets – the changes in the worldwide economy have brought about a shift in trustee’s attitudes as to the assets they will hold. Assets such as yachts, artwork and aeroplanes are accepted by trustees as trust assets only with reluctance as they rarely qualify as prudent investments. A foundation company may be established specifically to hold such assets and the founder or family members can maintain a level of control as regards, for example, investment, preservation, running a business, etc.
• Hold the shares in private trust companies – families who wish to retain a level of control often establish a private trust company (“PTC”) and sit on its board to ensure that they have direct involvement in any decision concerning the trust. The shares of the PTC are usually held on the terms of a STAR trust by a Cayman Islands trust corporation. However, the foundation company offers an alternative structure, not only by allowing the founder / settlor and named family members to sit on the board, but the foundation company can hold the shares in a PTC or act as the PTC itself. The foundation company may also dispense with the need for an underlying trust.
• Charity and philanthropy – a foundation company can be created for charitable purposes, and also for purposes which are philanthropic but do not meet the strict criteria to qualify as charitable.
• Hold shares in off-balance sheet commercial vehicles – special purpose vehicles are usually established where their ownership needs to be separate from the rest of the structure. A foundation company as a vehicle that prohibits dividends or other distributions of profits or assets to its members can be established for a specific business purpose and is ideally suited to this type of planning.
• Digital assets – the foundation company has attracted considerable interest from clients wishing to establish companies to hold digital assets or to operate in this market.
The Cayman Islands foundation company is a valuable structuring tool which adds significantly to the structuring opportunities available to clients in the Cayman Islands. About the Author
Maxine Bodden is Of Counsel in the Cayman Islands Trusts & Private Client team at Maples and Calder, the Maples Group’s law firm. She specialises in advising the world’s leading banks, trust companies, family offices and private individuals on the establishment and ongoing administration of Cayman Islands trusts and foundation companies. Maxine is a leader in the use of private trust companies and all matters concerning the licensing, registration and operation of private trust companies. She also regularly advises clients on wills and the administration of estates. Maxine is the immediate past chair and now Deputy Chair of STEP Cayman and the Chair of the Cayman Islands Work Permit Board.