Legal Structures of Funds

Funds are typically structured as either companies, unit trusts or limited partnerships. The principal features of these are laid out below:

Companies

Companies are incorporated under the provisions of the Companies (Guernsey) Law, 2008 (“Companies Law”) and can be established as open-ended or closed-ended collective investment schemes and the process may be carried out while the terms of the draft offering documents are being reviewed by the GFSC. All companies formed under the Companies Law, have a separate legal personality and are capable of suing and being sued in their own names. Management and control is vested in a board of directors although, particularly in the case of open-ended companies, it is often the case that the investment management will be delegated to a management company. Companies may make distributions to shareholders provided that they are solvent and comply with any other provision of its constitutional documents.

There are no authorised share capital or minimum issued share capital requirements imposed on a Guernsey company. Share capital may be denominated in any convertible currency and the issue of fractional shares is permitted and shares may be issued at a premium. Investment companies may have any appropriate share structure from one class to many classes having different rights.

Guernsey law also provides for the incorporation of protected cell companies. The relevant legislation provides that each class of shares is ring-fenced from the insolvency of the other classes. From this has developed the incorporated cell company – an arrangement which entails similar ring-fencing but provides that each cell is to be treated as a separate legal person.

Unit Trusts

In contrast to an investment company, a unit trust is not a separate legal entity as such but a trust arrangement whereby legal ownership of the fund’s assets is vested in a trustee, who holds the assets of the fund on trust for the benefit of the unitholders. The trust concept has been recognised in Guernsey for over one hundred years and trusts generally are now governed by the provisions of The Trusts (Guernsey) Law, 2007.

The unit trust will be constituted by means of a trust instrument made between a Guernsey trustee company and an independent Guernsey management company.

Typically the management company will be a Guernsey subsidiary of one of the international fund management groups, which will undertake promotion of the scheme by means of publication of an explanatory memorandum relating to the offer of units in the trust. The management group will typically also undertake the management and general administration of the trust. The manager may also appoint one or more investment managers or advisers to assist it.

The subscription proceeds will be paid to the trustee which, thereafter, will act as the custodian of the investment assets of the fund. In addition, the trustee will generally supervise compliance by the manager with its obligations under the trust instrument.

It is usual for the trust instrument to contain, for example, provisions regulating the issue, redemption and valuation of units as would, in the case of shares of an open-ended investment company, be found in its articles of incorporation.

In order to obtain regulatory authorisation or registration, the explanatory memorandum in connection with the offer of units and the trust instrument and other constitutive documents of the fund must be approved by the GFSC. The trust instrument will also contain provisions for the appointment and removal of the trustee and the manager, their duties and remuneration, borrowing powers, investment restrictions and provisions for the winding-up of the trust.

For most practical purposes a unit trust scheme will operate and be regulated in the same manner as a corporate investment fund.

Limited Partnerships

Limited partnerships are registered under the provisions of the Limited Partnerships (Guernsey) Law, 1995. A limited partnership can only be created by a written partnership agreement and cannot come into existence until it has been registered on the Register of Limited Partnerships. The general partner may make an election at the time of registration as to whether or not the partnership is to have separate legal personality. A limited partnership consists of (i) one or more general partners who are admitted to the partnership as general partners in accordance with the partnership agreement who are jointly and severally liable for all debts of the partnership without limitation and (ii) one or more limited partners who are admitted to the partnership as limited partners in accordance with the partnership agreement who upon entering the partnership, contribute or agree to contribute capital of a specified sum and who are not liable for any debts of the partnership beyond the amounts contributed or agreed to be contributed. Among the features which make a Guernsey limited partnership attractive to fund promoters are the following:

  • There is no limit on the number of limited partners who may be members of a limited partnership.
  • A person may be both a general partner and a limited partner and a body corporate or a partnership may be a general partner or a limited partner.
  • The general partner is not required to be resident in Guernsey.
  • Although the partnership is registered in a public register which is open to inspection the names of the limited partners do not appear on it and there is no requirement to file an annual return.
  • A limited partnership can distribute both capital and profit without formality provided that the partnership is solvent before and after the distribution.

A limited partnership may be an appropriate structure for a number of different purposes. A principal use will be to provide an additional form of investment vehicle for mutual funds, in particular for the venture capital industry. A limited partnership will also be an attractive structure for various tax planning purposes. In recent years the limited partnership has been particularly favoured for use in private equity and venture capital projects, as the partnership is generally treated as being fiscally transparent.

A Guernsey registered limited partnership may elect to have separate legal personality. For the purposes of Guernsey’s Income Tax Law, a Guernsey registered limited partnership (meaning a limited partnership either with or without legal personality) is neither a ‘person’ nor a ‘company’. Therefore, the partners (whether limited or general) fall to be examined for tax purposes in their own right whether or not the partnership has elected to have separate legal personality.