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Cayman Islands Corporate Considerations
We live in unprecedented times. The outbreak of COVID-19 has adversely impacted commercial activity and contributed to significant declines and volatility in financial markets around the world. There has been disruption in global supply chains and many industries have been adversely affected. There are new and unforeseen challenges we are all experiencing. Cayman Islands entities will be materially affected by and as a result of COVID-19. Cayman Islands entities and their operators (directors and general partners and managers) should not be caught flat-footed and should be taking proactive steps now.
Given the fluid nature of the current environment, directors, general partners and managers of companies/ partnerships/LLCs/funds affected by COVID-19 should ensure they are fulfilling their corporate governance obligations. As a general matter, entities should be holding regular board meetings, reviewing the financial health and general operations of their entities, reviewing and updating policies and procedures, updating offering materials, seeking regular updates from their service providers and managing risk. Corporate Governance should not be taken as a rubber stamp approach and must be carefully tailored to each entity.
Directors/general partners of regulated mutual funds should be mindful of both their general obligations as well as their obligations prescribed by the Cayman Islands Monetary Authority (“CIMA”) as set out The Statement of Guidance for Regulated Mutual Funds. The Statement of Guidance is CIMA’s minimum expectations for the sound and prudent governance of a regulated mutual fund and operators of funds should ensure these expectations are currently met (and indeed exceeded) and updated as necessary. The governance framework established by the operator of a fund should be reviewed and updated as needed. Risk management issues including the management of conflicts of interest should be reviewed and updated especially in the current environment.
Directors owe both fiduciary duties and common law duties to the company for whom he or she acts. In essence, this means that directors, operating and making decisions as a board, are required to: (a) act in good faith in the best interests of the company; (b) use powers conferred on them for their proper purpose; and (c) exercise whatever skill they possess and reasonable care when acting in the company's interests. Where a director breaches any of his or her common law or fiduciary duties, the company can take action to recover its property or to obtain payment of damages from the director as compensation for any loss incurred. Companies may be facing unexpected and novel issues and directors may have difficult decisions to make now and in the coming months. When making these decisions, directors should be prudent and must ensure they exercise caution and continue to fulfil their duties. See our Client Guide on Director Duties.
Pressure on cash flow may develop in this environment and certain companies may fall into doubtful solvency. The general test for solvency for Cayman Islands companies under the Companies Law (2020 Revision) is the ability of a company ‘to meet its debts as they fall due in the ordinary course of business’ noting that in certain circumstances the balance sheet test may also be relevant. While directors owe their fiduciary duties to the shareholders as a whole when a company is solvent this duty shifts towards creditors in an insolvency situation. Directors must ensure that they are kept apprised of the financial health of their company/ies especially in the present fluid environment that changes from day to day. If you are in any doubt over the solvency of your Cayman Islands company you should seek appropriate legal advice and contact your regular contact at Stuarts.
Funds - Updates to Offering Documents
Funds with active securities offerings should consider the potential need for additional disclosures related to the COVID-19 pandemic. Operators of mutual funds have ongoing obligations to disclose all “material information” regarding the securities offered and to also ensure the information provided is not misleading. Unregulated funds should also consider including an appropriate disclosure to investors.
Given the present uncertainty regarding how long COVID-19 will continue to impact society and the economy, an accurate disclosure regarding the total impact COVID-19 will have on your offering is likely not possible at this time. Nonetheless, if the performance data and other information included in your current offering memorandum or other disclosure document predates the COVID-19 crisis, a COVID-19 disclosure is material information and may be necessary to avoid disseminating misleading information to potential investors.
For this reason, we are advising clients to include a supplemental disclosure in their offering document describing any known impacts related to COVID-19 and the potential for continued economic disruption as uncertainty with respect to the virus persists. Otherwise, a short one-page supplement can generally be prepared.
Funds - Liquidity Measures
In this environment investors may be seeking to redeem their positions. There are several options (subject to the offering terms of the fund) available including utilizing gates, suspending NAVS, suspending redemptions, side pocketing, redemptions in-kind and restructuring. If you are considering implementing any liquidity measures you should seek appropriate legal advice and contact your regular contact at Stuarts.
Indemnity Provisions and D&O Insurance
It may be prudent for directors, officers and service providers (including investment managers) to review the various indemnity provisions currently in place as well as their current director and officer liability insurance. These provisions and policies should be updated/renewed where appropriate.
The current pandemic may give rise to parties seeking to enforce force majeure clauses in contracts. As a general matter of Cayman Islands law force majeure clauses are governed by the freedom of contract principle and so purely contractual in nature. The use/applicability of these clauses in the current environment will depend on their respective drafting.
Funds should also consider whether the force majeure clause in their offering document should be updated at this point to include the COVID-19 pandemic. Please contact your regular contact at Stuarts to assist as needed.
Extension of Filing Deadlines
Please see our Article on Cayman Islands General Update and New Filing Deadlines
Please reach out to Chris Humphries or Jonathan McLean should you have any enquiries regarding your Cayman Islands entities.