[guest author: Georgina Pullinger]*
As we move further into the realm of fundraising 2.0 and the rise of the NAV function, there has been much written about taking security on the actions of various types of Cayman entities, in particular Cayman Exempt Limited Partnerships and Cayman Exempt Corporations (“CayCos”). Here we discuss additional considerations when taking security over shares of a CayCo (“Cayco Security”) in cases where the register of members (“ROM”) is maintained in a jurisdiction other than the Cayman Islands or the United States (a “Third-Party Jurisdiction”).
What is the relevance of the location of the ROM?
To set the scene:
- A quirk of Cayman law is that the ROM is (in most cases) definitive of share ownership.
- Another quirk is that the ROM does not need to be maintained in the Cayman Islands. Most often, the ROM is (i) managed by the head office or an administrator in Cayman or (ii) managed by an administrator in the United States (we will refer to any entity that manages a ROM as an “administrator” for the purpose of disclosure). ‘article). However, with the continued growth of the fund funding market and the diversification of fund structures and borrowers, we are seeing more and more ROMs managed by administrators in third-party jurisdictions (a “TPJA”).
- Cayco Security is generally governed either by Cayman law or in the context of a broader US law transaction, applicable US law (usually New York).
- In an execution situation, to effect a share transfer, the ROM must be updated by the administrator to reflect the secured party (or its nominee) as a shareholder.
The combination of the above points means that a secured party could find themselves in a situation where they have a Cayco security governed by Cayman or United States law, but must bring that security to a TPJA for the ROM to be updated to do a share transfer at runtime. . The question then arises: can the secured creditor be sure that the transfer of the shares will take place on time? Will the TPJA respect and follow stock transfer instructions as part of an enforcement action?
In addition to the practicalities of enforcing Cayco security in a third jurisdiction, there is a fundamental legal question as to the law applicable to security in the case of Cayman shares when the ROM is held in a third jurisdiction. Generally, the law of a company’s place of incorporation (in this case, Cayman) decides how shares of a company can be transferred; since the shares of a CayCo can only be transferred by registration on the ROM, such shares will generally be considered to be located at the place where the ROM is maintained. Why is the situs important? Although the position is not entirely free from doubt, the prevailing view is that the situs determines the proprietary aspects of a security interest (i.e. the steps necessary to perfect a security interest in Cayman shares) . We could go into a much longer analysis of the law applicable to CayCo shares when we have a TPJA, but for the purposes of this article, it should simply be noted that, from a legal and applicable law perspective, the Third The jurisdiction of the ROM should always be considered and that in some cases additional local law actions may be required in the third jurisdiction (e.g. additional local law compliance steps).
The different approaches of a TPJA
Whether additional steps need to be taken when a ROM is maintained by a TPJA will depend on a number of factors, including third-party jurisdiction, the relationship between the parties involved (that’s to say, the lender, the borrower and the pledged entity), the TPJA’s understanding of Cayman security and familiarity with the jurisdiction, and the commercial agreement between the parties as to the risk analysis in the event where the parties would find themselves in an enforcement situation. We have seen varying levels of additional protections for lenders, ranging from no additional steps to additional perfection steps in the third jurisdiction and even additional local law safeguards taken in the third jurisdiction.
There is no one-size-fits-all approach to address these considerations, and we are certainly not suggesting that a TPJA will necessarily cause problems for a transaction or may not work from the secured party’s perspective. But it’s something to be aware of, especially as we see an increasing number of more unusual fund structures. We recommend that you seek the advice of a local attorney in the third-party jurisdiction, in particular as to whether additional perfection steps might be required.
Cayman security is generally a well-trodden path, but there are certainly quirks and considerations that will come to the fore as borrowers and fund structures continue to diversify and also as new lenders enter the market. the market with fresh eyes and often new approaches to risk profiles. . We look forward to providing ongoing updates on new business trends and considerations we see as the market continues to develop.
 Just to point out that we are generally not concerned with a combination of Cayman/US law governed by CayCo Security and Cayman or US administrators – these jurisdictions work well together, know each other well and there is a history of these structures actually being applied. between jurisdictions.
*Partner | Appleby