6 May 2008
In light of the disruption in the debt and equity markets of the past six months there has been much talk of 2008 seeing a significant rise in restructuring activities, both solvent and insolvent. Although in the context of an insolvent restructuring there may be limited prospects for making use of offshore vehicles where the insolvency is centred onshore, it is not unprecedented. This was demonstrated in the Enron restructuring, which used Cayman Islands companies. However, the demand for the use of offshore vehicles in solvent restructurings and distressed M&A transactions is certainly on the rise.
Whether or not there is a role for offshore vehicles in a transaction will depend on a number of factors and, where there is such a demand, the items on the jurisdiction shopping list are often familiar and the reasons for making use of Cayman companies compelling.
An obvious starting point, but nonetheless important in any structuring analysis, is whether or not there is a need for the structure to be offshore. This is frequently determined by reference to tax considerations and there is often scope for using vehicles from more than one jurisdiction within the structure. Commonly quasi-offshore vehicles are seen in the middle of the structure with a Cayman company at the top of the structure to ensure that the structure is taken offshore. This dual jurisdiction structure commonly involves Luxembourg entities within the chain to take advantage of hybrid financial instruments and double tax treaties which Luxembourg maintains.
Tax-driven structuresIt is impossible to divorce the offshore aspects of a Cayman-exempted company from its tax status. Under current legislation, there is no income, capital gains or corporation taxes payable in Cayman and an exempted company may obtain a guarantee that, for a stated period of up to 30 years, the company will be free of taxation notwithstanding legislative changes.
This is of significant benefit in a tax-driven structure where gains are generated and favourable treatment can be gained at the Cayman company level, but to stop the analysis at that point would be to pull up short: debt and equity providers will also have taxation concerns to be satisfied and it is not uncommon for them to come into the structure at different levels, making use of different instruments depending on their respective tax positions.
Cayman-exempted companies not only offer significant tax benefits, they are also tremendously flexible, and it is this flexibility that enables their use at different levels of tax-driven structures and with different roles to play. From the outset the proposition of a Cayman-exempted company is easy as they are quick and straightforward to incorporate and their constitutive documents can be amended similarly quickly, thereby facilitating transactions to be effected in a matter of days as opposed to weeks if vehicles incorporated or organised in other favourable jurisdictions were to be used.
The exempted company can accommodate the equity finance provider as readily as the debt finance provider (senior or mezzanine) as it can issue debt ('straight' debt or debt which is convertible into securities) as well as equity securities (including ordinary and preferred shares and warrants).
A light touchCayman-exempted companies benefit from a light regulatory touch which reinforces their flexibility and ease of operation and, crucially, enables actions to be taken by and in respect of such companies very quickly. The reporting requirements of the Companies Law are light and require only the filing of a statement that the company has conducted its operations mainly outside Cayman and has complied with the Cayman Companies Law. Also of potential benefit is that details of shareholders and directors are confidential as a matter of Cayman law and not generally available to the public.
Also of great significance in the context of building a corporate structure is the ease of transferring shares in an exempted company, which can be done without the requirement for shareholder or regulatory consent and without a lengthy registration process, and so any fluidity within the structure is achieved easily. This can be achieved without the penalty of stamp duty, which is not payable in Cayman on the transfer of shares of an exempted company.
Not all of the foregoing considerations and benefits of a Cayman-exempted company will be relevant in constructing a workable and saleable structure, although often they combine to make a compelling case for the inclusion of exempted companies in many offshore structuring solutions.n
Robert Duggan is a partner at Walkers