Navigating a return of funds to shareholders of a Cayman Islands exempted company

The process of returning funds to shareholders of a Cayman Islands exempted company (a Company) can be relatively straightforward, so long as it is implemented in accordance with the laws of the Cayman Islands. Care must be taken, as the consequences of getting it wrong can be significant and include the possibility of personal liability for directors in certain circumstances.

This guide sets out at a high level the general framework enabling a return of funds to shareholders. However, every scenario is unique, and requires consideration and application of the particular facts in play. This guide is not a substitute for case-specific Cayman Islands legal advice.

Dividends

A Company may only pay dividends out of its profits or share premium. It falls primarily to the directors of the Company to determine if the financial position of the Company enables it to pay a dividend to its shareholders. Depending on the terms of the Company’s articles of association, shareholder approval may also be required.

Any Company paying a dividend must be solvent. In the Cayman Islands context, this means the Company is able to pay its debts as they fall due in the ordinary course of business. This cash flow solvency test involves having some regard to debts which fall due for payment in the reasonably near future as well as debts which have already fallen due.

Which future debts fall due in the ‘reasonably near future’ is a question to be determined on a case-by-case basis depending on all of the circumstances, and with reference to the underlying business of the Company.

Profit

There is no Cayman Islands statutory definition of profit and there is limited authority of the Cayman Islands courts as to what constitutes profit. Accordingly, what constitutes profit will depend upon the circumstances of a Company at a given time.

Share premium

Share premium is the amount paid by shareholders on the shares of a Company in excess of the nominal or par value of those shares. The Companies Act (as amended) of the Cayman Islands provides that where a Company issues shares at a premium, whether for cash or otherwise, an amount equal to the premium on those shares over the nominal or par value of the shares is to be transferred to an account called the share premium account. The share premium account may be applied to pay dividends to shareholders in certain circumstances.

Redemption or repurchase of shares

If authorised by its articles of association, a Company may redeem or repurchase its shares (or redeem fractions of shares) out of its profits, its share premium or the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase. Unlike dividends, a Company may also redeem or repurchase its shares (or fractions of shares) out of share capital in certain circumstances.

A Company may only redeem or repurchase its shares if they are fully paid up to their nominal or par value. A Company may not redeem or repurchase its shares if, as a result of the redemption or repurchase, there would no longer be any issued shares. Note that, as discussed below, treasury shares do not meet the criteria for this purpose.

The ability of a Company to redeem or repurchase its shares is subject to any restrictions in the Company’s articles of association. To be redeemable, shares must either have been issued as redeemable shares or, subject to the Company’s articles of association, the rights attaching to the issued shares must have been varied to make them redeemable.

As with paying a dividend, any Company repurchasing or redeeming its shares must be solvent, in accordance with the cash flow solvency test outlined above.

Cancellation of redeemed or purchased shares

Subject to a Company holding shares that have been redeemed or repurchased as treasury shares, shares redeemed or repurchased by a Company are treated as cancelled on redemption or repurchase and the Company’s issued share capital is reduced accordingly. Those shares are then available to be re-issued by the Company. The redemption or repurchase of shares by a Company does not reduce the amount of the Company’s authorised share capital.

Treasury shares

Treasury shares are permitted under Cayman Islands law and, subject to any restrictions in the Company’s articles of association, it is possible for a Company to acquire and hold its own shares, rather than cancel shares which have been redeemed, repurchased or surrendered for no consideration.

A Company that holds treasury shares may at any time cancel those shares or transfer them to any person, whether or not for valuable consideration, including at a discount to the nominal or par value of those shares.

So long as a Company holds treasury shares, the Company will be listed in the register of members as holding those shares but is not treated as a member for any purpose. A treasury share held by the Company cannot be voted at any meeting of the Company and will not be counted in determining the total number of issued shares at any given time. No dividend may be paid to the Company in respect of a treasury share.

Reduction of share capital supported by solvency statement or sanctioned by the court

A Company can also reduce its share capital in any way if authorised by special resolution of its shareholders and either confirmed by the Grand Court or supported by a solvency statement in accordance with the Companies Act (as amended). This includes paying off any paid-up share capital which is in excess of the needs of the Company.

Please see our separate guide ‘Reducing a Cayman Islands company’s share capital without going to court’ for further details.

Contacts

A full list of contacts specialising in Cayman Islands corporate law can be found here.