The Cayman Islands are known for their efficient and adaptable legal framework, making them a favorable location for secured financing transactions. A common practice in these transactions is securing shares in Cayman Islands exempted companies. This article provides an overview of the process and considerations involved in this practice.
Nature of Exempted Company Shares
Shares in an exempted company in the Cayman Islands are registered property, and their ownership is derived from their entry in the company's register of members. The company's constitutional documents, namely its memorandum and articles of association, usually recognize only the interests of the registered holder as both the legal and beneficial owner.
Security Mechanisms
Security over shares can be achieved through either a legal charge or an equitable charge. However, the Cayman Islands do not have a specific statutory framework for creating, perfecting, or enforcing security overshares. Instead, these processes are largely guided by English common law principles.
Legal Charge
A legal charge involves transferring shares into the name of the secured party or its nominee, with the party being registered as the holder.This method, however, is less preferred due to potential issues like the mortgagee being perceived as a parent company or consolidating the company on to its balance sheet.
Equitable Charge
An equitable charge or mortgage is more commonly used. This mechanism does not involve the transfer of shares but creates a security interest over them. Key documents provided in this scenario include original share certificates, a signed blank share transfer form, an irrevocable proxy, director resignation letters, and company resolutions.
Governing Law of Security Documents
The security document can be governed by either Cayman Islands law or foreign law, with a preference often leaning towards the former. The document should clearly state the intention to create security over the shares and outline the circumstances constituting default, the powers and remedies of the mortgagee, and include a power of attorney.
Stamp Duty and Formality Requirements
Creating security over shares or their transfer during the enforcement of security does not attract stamp duty unless the pertinent documents are executed in or brought into the Cayman Islands. Notarization or apostille of the security document is not a requisite under Cayman Islands law.
Enforcement and Remedies
Upon default, various out-of-court remedies are available underCayman Islands law, such as selling the shares, appointing a receiver, or seeking foreclosure through court intervention in the case of an equitable mortgage. The proceeds from enforcing the security are typically allocated first to enforcement costs, then to satisfying the secured sums, with any surplus returned to the mortgagor.
Additional Considerations
Preliminary Steps: It's crucial to review the company's Articles ofAssociation and its register of members to assess any existing security interests, restrictions on share transfer, and the status of the shares as fully paid.
Registration Notations and Filings: While the Cayman Islands do not have a public filing system, internal registration of the security interest in the company's register of mortgages and charges is essential.
Stop Notices: To mitigate risks of unauthorized share transfers, a stop notice can be filed with the Grand Court of the Cayman Islands.
Conclusion
Securing shares in a Cayman Islands company involves understanding various legal nuances, including types of security interests, additional protections for lenders, and specific local requirements. This article is only intended to give a general overview and summary of the subject matter. It is not, nor is it intended to be comprehensive and it does not constitute, and should not be taken to be, legal advice. If you would like legal advice or further information on any issue of any kind raised by this guide, please get in touch with one of your usual contacts.
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