Taking security over Cayman LLC interests: key considerations for secured parties and borrowers

Since its introduction nearly a decade ago, the Cayman Islands limited liability company has become a versatile and increasingly popular entity type, particularly in private equity transactions and as a holding vehicle. 

In this briefing, our fund finance experts in Cayman explain the practicalities of limited liability company (LLC) membership interests forming part of a security package in net asset value (NAV) facilities.

What is a Cayman LLC?

Limited liabilities companies have been part of Cayman Islands law for nearly ten years. Similar to its Delaware counterpart, an LLC is a corporate entity with separate legal personality and limited liability of its members.

Compared to a limited company, an LLC has greater flexibility around its management and organisation and can allocate profits and losses in a manner similar to a partnership. For a detailed overview, see our briefing: Cayman Islands Limited Liability Companies. 

We have seen LLCs used for a wide range of uses in investment funds and private equity transactions. Often an LLC can form the vehicle of choice for a fund's investments or holding or intermediate holding vehicle for the fund's investments.

In the context of the fund finance market, we see membership interests in LLCs form part of the security package in NAV facilities, which continue to grow in popularity. A NAV facility is a facility which is extended by a lender to a fund against the value of the fund's investments. They are typically entered into during the mid to late stages of a fund's lifecycle.

Limited liability company interests

Membership interests in an LLC are listed in its register of members. The LLC maintains this register and it is not publicly accessible unless provided otherwise in the LLC agreement, or as otherwise permitted by a manager of the LLC. Each LLC interest comprises both rights and obligations under the LLC agreement and the Limited Liability Companies Act (Revised) (LLC Act).

Security over LLC interests

The most common way of securing interests in an LLC is by an equitable charge, which does not involve the transfer of ownership of the secured assets.

It is possible to take a legal charge (rather than an equitable charge) over LLC interests. However, legal charges are rarely utilised in practice as secured parties are typically not comfortable taking an absolute transfer of the LLC interest and becoming registered as a member of the LLC.

Reviewing the LLC agreement – consent to grant of security over LLC interests

The LLC agreement may require written consent from the manager(s) and / or the other members before a member can grant security over, or transfer, the whole or any part of its LLC interest. It is essential to review the relevant LLC agreement to confirm the requirements and obtain the necessary consents (for example from the manager(s) and / or other members) as a condition precedent to granting security.

Notice of security interest

Any security interest over the whole or part of an LLC interest has priority in accordance with the time that written notice of the security interest, signed by each of the secured party and the relevant member, is validly served at the LLC's registered office under section 11(5) of the LLC Act.

Under section 11(5) of the LLC Act, a notice of security is not valid unless:

1. it is executed by both the secured party and the relevant member, and
2. the notice specifies:
   1. the agreement under which the security interest is granted
   2. the date of the agreement
   3. the parties to the agreement
   4. the grantor and grantee of the security interest
   5. the LLC interest or part thereof that is subject to that security interest

Secured parties typically require that the LLC acknowledges the notice. In this acknowledgment, the LLC will typically confirm and undertake, among other items, it will register any and all transfers relating to the LLC interest submitted by the secured party, that it has received no notice of security interest over the LLC interest other than pursuant to the foregoing notice and that the register of security interests will be updated to include reference to the charge over LLC interest.

Register of security interests

Section 11(6) of the LLC Act requires LLCs to maintain a register of security interests registered against its members. This register contains the time and date of receipt of any notices validly served at the registered office and it must be updated within 21 days of receiving a validly served notice. The register of security interests may be inspected by any person expressly provided for in the LLC agreement or as permitted by the manager(s). 

After closing, the secured party will typically require an updated copy of the register of security interests to reflect the security granted in its favour over the charged LLC interest.

Closing deliverables

As mentioned above, it is essential that all parties involved review the relevant LLC agreement to confirm the requirements and secure appropriate consents (for example from the manager(s) and / or other members) as a condition precedent to granting security.

Another common closing deliverable in charges over LLC interests is an executed but undated assignment of the LLC interests. This assignment may only be dated and completed upon enforcement by the secured party. This operates in a similar manner to an executed but undated share transfer form for share security, as the assignment may only be dated upon enforcement. Where the LLC agreement requires additional consents to transfer of the LLC interests (for example from the manager(s) and / or the other members), the secured party may wish to consider requesting that the parties who need to approve the transfer are party to the assignment and / or expressly provide consent to transfers pursuant to the completed assignment upon enforcement.

Secured parties will typically also require the grantor of security to provide an irrevocable proxy to vote the LLC interests following an event of default, along with signed but undated letters of resignation and dated letters of authority from the managers of the LLC to expedite the replacement of the managers following an event of default.

Governing law

It is not strictly necessary to have a Cayman law governed security agreement to document security over LLC interests. Where security over LLC interests is granted under a US law governed security document, such security should include the Cayman specific provisions set out above.

How Ogier can help

Whether you are a lender or a borrower, Ogier has the knowledge and experience to support you with all Cayman Islands aspects of your transactions.

We advise leading global financial institutions, private equity sponsors, hedge funds and alternative investment vehicles on a range of financing structures, including subscription and capital call credit facilities, NAV and hybrid facilities, GP and management lines of credit and fund of fund facilities.

Contact our team to find out more. 

About Ogier

Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.

Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice