On the 17th April 2012, the Companies Act (Recognised Incorporated Cell Companies) Regulations (the “Regulations”) were incorporated into Maltese law by virtue of L.N. 119 of 2012. The said Regulations are supplemented by the MFSA Investment Services Rules for Recognised Incorporated Cell Companies (“RICC”) and Incorporated Cells which have been integrated into the existing MFSA investment services regulatory framework and which outline the recognition requirements and application documentation required as well as setting out the on-going requirements for RICCs (Part AIII and Part BIII).
The Regulations are consistent with the “cellular” concept developed under Maltese legislation in recent years (with the introduction of protected cell and incorporated cell company legislation for insurance companies and the extension of the concept of segregated cells to all registered organisations in terms of the Second Schedule to the Civil Code, Chapter 16, Laws of Malta) and aim, in particular, to improve on the multi-fund SICAV and ICC SICAV regimes, introduced in October 2006 and February 2011 respectively.
The key advantages brought about by the Regulations can be summarised in the following salient points which are set out in further detail below:
- Complete segregation of ICs (separate legal personality) whereby assets and liabilities of each IC are distinct and “ring fenced” from those of other ICs and the RICC itself – the key legal principle in this respect is that assets of each individual IC will not be available to the creditors of any other IC;
- Standardisation of fund documents- functionary agreements and regulatory consents in respect of standardised fund documentation will be in place upon the setting up of the RICC and accordingly a new cell can be added at a fraction of the time that would be required were the structure to be established from scratch;
- Possibility of ICs to establish segregated sub-funds;
- Cross-IC investment and intra-IC contracting permitted;
- Possibility for the RICC to generate revenue streams from a platform fee;
- Relocation/ migration provisions.
The multi-fund SICAV regime is regulated by the Companies Act (Investment Companies with Variable Share Capital) Regulations which cater for an ‘umbrella fund’ structure through the establishment of a segregated multi-fund company with one or more segregated sub-funds, each treated for all intents and purposes of law as a patrimony separate and distinct from the assets and liabilities of each other sub-fund of the company as well as from those of the SICAV itself. Whilst the popular multi-fund SICAV model has generated, and continues to generate, significant interest in Malta, legal debate surrounding the structure has been focussed on two perceived short-comings: (i) the inability of one sub-fund to contract with another sub-fund (due to the fact that they are the same legal person) and (b) the anxiety that a foreign jurisdiction might as a matter of private international law not recognise the statutory segregation between sub-funds under Maltese law.
The legislator sought to do away with these concerns through the promulgation of the Companies Act (SICAV Incorporated Cell Companies) Regulations which introduced the ICC SICAV regime into Maltese law creating a structure whereby each incorporated cell (“IC”) of an incorporated cell company (“ICC”) is set up as a limited liability company with separate legal personality. However, in terms of the said Regulations, the ICC itself as well as each IC established thereunder must each be structured as a SICAV licensed as a collective investment scheme in its own right. Accordingly, despite generating significant interest across the fund sector generally, the model was found to be limited in that much of the interest in such a structure was geared towards a ‘fund platform’ model which was not possible in light of the requirement for the ICC to be licensed as a CIS in its own right and carry on activity as such.
Accordingly, the new RICC regime seeks to (i) retain the concept of separate legal personality of ICs developed by the novel ICC SICAV legislation; and (ii) accommodate popular international demand by introducing a ‘platform’ type of model comprising an incorporated cell company providing standardised administrative services to any number of incorporated cells, each duly licensed as a collective investment scheme, which administrative services largely consist of routine contractual matters and start-up support. Specifically, in terms of the Schedule to the said Regulations, RICCs may carry out any one or more of the following services:
- Provision of administrative services related to the establishment of incorporated cells;
- Procurement of external service providers and approval of any changes thereto;
- Negotiation of service provision agreements and changes thereto;
- Submission of any model agreements to be used by incorporated cells;
- Submission to the MFSA of any changes or amendments to model agreements and submission of any new model agreements negotiated with service providers for the approval of the MFSA;
- Signature of tripartite agreements between service providers, the RICC and an incorporated cell based on the model agreements;
- Standardisation of any other documentation to be used by incorporated cells;
- Approval and joint signature of any applications for licences (including variations, extensions thereof) to be submitted by or on behalf of incorporated cells which are in the course of being formed;
- Provision of written declarations identifying any changes to model agreements already submitted to the MFSA, including a NIL declaration confirming that no changes have been made;
- Provision of ancillary services as may be approved by the MFSA.
Whereas the SICAV ICC structure requires the incorporated cell company to qualify as a collective investment scheme in its own right, the new RICC regime provides promoters with a more flexible ICC structure that may be used as a vehicle to achieve various objectives including the setting up of a fund platform. Accordingly, the RICC will not operate under a CIS Licence but under a Recognition Certificate.
Regulation 3 of the Regulations provides that in order to provide ICs with any of the above-mentioned administrative services, a RICC shall require recognition by the MFSA in terms of article 9A of the Investment Services Act, which requires any person who in Malta or from Malta provides to licence holders in Malta, or to equivalent authorised persons and schemes overseas, administrative services which do not themselves constitute licensable activity in terms of the Investment Services Act, to apply for recognition by the MFSA.
Whilst the above reference to the “provision of ancillary services as may be approved by the MFSA” seems to allow for some leeway to the otherwise exhaustive list of RICC permitted activities, it would not appear to cover fund administration services such as fund accounting, processing of subscriptions and redemptions, valuation, preparation of net asset value and registrar and transfer agency services. As a general observation, the express inclusion of the entire range of fund administration services, thereby effectively allowing the RICC to act as a fully fledged fund administration company, would have lent further efficiency/ flexibility to the model as a whole.
Consistent with licence holders’ general obligation to appoint a compliance officer, the RICC is required to have at all times a fit and proper person acting as its ‘Sponsoring Agent’ with responsibility for all aspects of compliance and for acting as the RICC’s main point of contact with the MFSA.
Interestingly, the RICC, in applying for recognition as such, must select the type of scheme which it will set up (as ICs) and service (Retail UCITS, Retail Non-UCITS or Professional Investor Funds) and the RICC will be restricted to incorporating and servicing the type of scheme so selected. The legislator’s intention in working this restriction into the regime is somewhat unclear as there would not appear to be any legal impediment to allowing an RICC to incorporate ICs falling within any or all of the said categories of schemes.
In terms of the Regulations, a RICC must be established as a limited liability company and may not carry out any licensable activity that may require a licence under the Investment Services Act or other legislation. A RICC may establish an IC by virtue of a resolution of its board of directors as set out hereunder. An IC of a RICC is constituted as a collective investment scheme in its own right and requires a licence to operate as such from the MFSA. An IC is endowed with separate legal personality and is not a subsidiary of its RICC solely by virtue of the fact of it being an incorporated cell of its RICC. A RICC shall have no power, by virtue of its position as such, to enter into transactions on behalf of any of its ICs and, likewise, an IC shall have no power to enter into transactions on behalf of its RICC.
The RICC Regulations have also done away with the restriction introduced by the ICC SICAV Regime which prohibited ICs from establishing segregated sub-funds.
The RICC framework is structured to allow ICs to migrate in and out of the RICC they share with other ICs and either relocate to another R/ICC (by means of a relocation agreement setting out the terms upon which the said relocation is to take place) or establish themselves as separate independent schemes.
Furthermore, subject in all cases to the prior written approval of the MFSA and to the provisions of the Companies Act (Continuation of Companies) Regulations:
- a body corporate registered, incorporated or constituted under the laws of an approved country or jurisdiction outside Malta, which carries out similar activities to those of a RICC, may be continued as a RICC in Malta together with its IC/s:
- a body corporate registered, incorporated or constituted under the laws of an approved country or jurisdiction outside Malta and carrying on the activity of a collective investment scheme which is similar in nature to a cellular or non-cellular company as known under the laws of Malta, may be continued as an IC of a RICC;
- a RICC may be continued as a body corporate similar in nature to a RICC as known under the laws of Malta under the laws of a country outside Malta;
- an IC may be continued as a body corporate under the laws of a country outside Malta.
Setting up an IC
An IC is a limited liability company with separate legal personality and may be set up as an investment company with variable share capital (SICAV) or an investment company with fixed share capital (INVCO). A RICC may establish an IC by virtue of a resolution of the board of directors (“cell resolution”) which:
- approves the name of the IC being established;
- approves the terms of the memorandum and articles of association of the IC and resolves that the said memorandum and articles of association are to be entered into by the RICC; and
- authorises, if applicable, the subscription by the RICC of a share or shares in the incorporated cell.
The memorandum and articles of association of an IC must be entered into by its RICC, whether the same is subscribing to a share or shares in the IC or not, together with such persons, other than the RICC, as may be subscribing to shares in the incorporated cell.
Unless expressly prohibited by any applicable rules or regulations or by its articles of association, an IC is permitted to own shares in any other IC of its RICC subject to any conditions that may apply in terms of the licence issued to it by the regulator.
Subject to approval by the MFSA an IC may be ‘expelled’ by its RICC if (a) the affairs of the IC are being or have been conducted in a manner which is unfairly prejudicial to its RICC or any other IC thereof; (b) the IC is being or has been used for fraudulent purposes; or (c) to fail to do so would have a serious adverse effect upon the members of the IC or on the RICC.
Despite the efficiency inherent in the RICC model through centralisation and standardisation of documents, the separate legal personality afforded to each IC comes at a cost.
As separate, stand-alone companies, each IC must comply relative provisions of the Companies Act relating to payment of annual return fees, filing of accounts, tax returns and, of course, must have its own board of directors (though one or more directors may be supplied by the RICC). Also, each IC must bear the licensing and supervisory fees applicable to collective investment schemes in terms of the Investment Services Act.
Whilst it is only time that will tell to what extent the introduction of the Companies Act (Recognised Incorporated Cell Companies) Regulations will be the structure of choice for fund operators and to gauge the level of interest generated by the RICC model, it is clear that the introduction of this regime demonstrates the Maltese legislator’s continued efforts in the further development of a modern and coherent legal framework designed to accommodate a range of various fund structures and should serve to bolster Malta’s position as a European financial services hub.