Key Considerations When Choosing Between STAR Trusts and Foundation Companies

Why This Matters

Choosing the right vehicle to manage residual assets during a fund wind-down is more than just ticking a box; it’s a strategic decision that can shape governance, privacy, costs, and director liability. Both STAR Trusts and Foundation Companies are established Cayman options used to isolate these assets, but they aren’t interchangeable. Understanding their differences fully helps directors and fund managers decide which structure will serve their specific needs best, especially given how long and complex asset realisations can be.

Legal Personality: What It Means for Governance and Control

Foundation Companies are incorporated entities with their own legal personality. This means they can enter contracts, initiate or defend lawsuits, and exist independently of their directors or beneficiaries. They’re governed by a board of directors and sometimes a supervisory council, providing a familiar, corporate-style governance framework. This often reassures boards managing assets that might involve litigation, active enforcement, or operational complexity.

Conversely, STAR Trusts are purpose trusts created under Cayman law without beneficiaries. Governed by trustees and overseen by an independent enforcer to ensure compliance, they offer flexibility and enhanced privacy but lack legal personality. This absence means STAR Trusts must act through trustees, which can complicate contractual negotiations or legal actions, particularly where swift, direct involvement is required.

Privacy Considerations and Public Filings

If privacy is a priority, STAR Trusts provide a clear advantage. They do not require public filings or registers, meaning details about the trust and its assets remain confidential. Foundation Companies, as incorporated entities, must be registered and regularly file reports under the Companies Act, making information about directors and incorporation publicly accessible. This transparency is an important consideration depending on the sensitivity of the residual assets or parties involved.

Setup Complexity and Costs

STAR Trusts are widely regarded as reliable and efficient vehicles with straightforward setup requirements. Their constitutional documents generally demand less complex drafting, leading to lower initial legal fees and faster formation times, making them a cost-effective choice for many wind-down scenarios.

Foundation Companies, being a relatively recent introduction to the residual asset space, usually require more detailed governance documents and formal procedures at inception. This added complexity can increase initial legal and administrative costs, which directors and fund managers should factor into their planning.

Use Case Considerations

When residual assets are mainly passive such as unclaimed proceeds or illiquid securities held pending favorable market conditions, a STAR Trust often fits well, thanks to its flexibility, confidentiality, and cost efficiency.

Conversely, where residual assets involve litigation, active enforcement needs, or management of complex contractual rights, Foundation Companies typically provide the stronger framework. Its legal personality allows it to contract, litigate, and settle disputes in its own name, capabilities vital in more involved wind-down situations.

Practical Examples

Consider a venture capital fund winding down while still holding a basket of assets that cannot yet be sold. Establishing a STAR Trust could provide a quiet, confidential vehicle that limits costs and administrative burdens while these assets are realised over time.

In contrast, a private equity fund that faces ongoing regulatory rebates or litigation claims demanding active management might find a Foundation Company provides the necessary corporate status and governance to manage these complexities effectively.

Key Considerations for Directors

• Formation Timing: Arrange the appropriate vehicle prior to fund dissolution for smooth asset transfers. Ideally, complete all transfers before a liquidator is appointed; if necessary, setup and transfers can be managed during liquidation to suit timing needs.
• Governance: Use experienced, independent trustees or directors. STAR Trusts require both trustee and enforcer roles; Foundation Companies are managed by a board of directors and may include a supervisory council.
• Purpose and Mandate: Clearly define the structure’s mandate, powers, and the schedule for asset management and wind-down.
• Compliance: Coordinate closely with service providers to ensure regulatory and audit requirements (including FATCA/CRS) are met, especially where cross-border investors are involved.
• Cost Evaluation: Weigh upfront and ongoing costs for different vehicles against the risk and expense of continued fund operation.
• Small Asset Pools: For very small balances, consider alternatives such as escheatment to government or charitable donations, if permitted under fund documentation and local law.
• Support: We can assist with the setup and transition to STAR Trusts, Foundation Companies, or other SPVs at any stage of the wind-down, including during liquidation, to ensure an efficient and compliant process.

Final Thoughts

There is no one-size-fits-all solution. Directors should carefully consider the types of residual assets, governance preferences, budget constraints, confidentiality needs, and operational complexities when selecting the optimal structure. Early consultation with Cayman legal counsel remains essential to tailor the choice effectively to the fund’s individual circumstances.