Coordinating Cayman Islands and PRC Company Law in an Offshore IPO

The 1 July 2025 expansion of the PRC Company Law amendment cycle has introduced a new layer of statutory compliance for offshore issuers with PRC-based operating entities, forcing a structural reconciliation between Cayman Islands corporate governance norms and the PRC’s enhanced director liability regime. For the 287 Chinese companies listed on the Hong Kong Stock Exchange (HKEX) and the 223 remaining US-listed Chinese ADRs as of 31 March 2025, the legal architecture of their offshore holding company—typically a Cayman Islands exempted company—must now accommodate PRC statutory requirements on director duties, shareholder derivative actions, and the registration of beneficial ownership. The Cayman Islands Companies Act (2025 Revision) provides the foundational framework, but the interplay with the PRC Company Law (2024 Amendment, effective 1 July 2025) creates friction points in board composition, fiduciary duties, and shareholder remedies. This article examines the specific coordination mechanisms required to maintain dual compliance, drawing on HKEX Listing Rule 19A.04 (which mandates that PRC issuers comply with both Cayman and PRC law), the SFC’s Code on Corporate Governance Practices (paragraph E.1.2 on director independence), and recent enforcement actions by the Cayman Islands Monetary Authority (CIMA) regarding registered office requirements.

The Cayman Islands Exempted Company as the Offshore Vehicle

The Cayman Islands exempted company structure remains the dominant offshore holding vehicle for PRC-based issuers listing in Hong Kong or the US, accounting for 94.2% of all HKEX Main Board IPOs by PRC companies between 2020 and 2024, according to data from the Cayman Islands General Registry. The legal rationale is straightforward: the Cayman Islands Companies Act (2025 Revision) permits exempted companies to issue shares without par value, maintain no requirement for a public register of beneficial owners (unlike the PRC’s new regime under Article 28 of the 2024 Company Law), and allows for flexible director indemnification provisions that are critical for cross-border liability management.

Director Liability and the PRC Company Law Override

The 2024 PRC Company Law amendment, effective 1 July 2025, introduces Article 147(2)(b), which imposes personal liability on directors for losses caused by “unauthorised related-party transactions” and “failure to supervise connected transactions.” This provision directly conflicts with the Cayman Islands Companies Act Section 75, which permits a company’s articles of association to limit or eliminate director liability for negligence, default, breach of duty, or breach of trust. For a Cayman-incorporated issuer with PRC operating subsidiaries, the directors of the Cayman holding company may be held personally liable under PRC law for decisions made at the offshore level that affect the PRC subsidiary’s connected transactions, even if the Cayman articles provide indemnification.

The practical solution adopted by most sponsors in 2025 IPOs is a dual-board structure: the Cayman holding company maintains its own board with standard Cayman indemnities, but the PRC operating subsidiary’s board is constituted with independent directors who are PRC-qualified and subject to the full scope of PRC Company Law duties. HKEX Listing Rule 19A.04(2) explicitly requires that the constitutional documents of a PRC issuer “comply with the laws of its place of incorporation and the laws of the PRC to the extent applicable,” which in practice means the Cayman memorandum and articles must include a clause acknowledging the primacy of PRC law for matters involving the PRC operating entity.

Shareholder Derivative Actions: A Forum Selection Problem

The PRC Company Law (2024 Amendment) Article 151 provides a statutory right for shareholders holding 1% or more of the shares for 180 consecutive days to bring a derivative action in the name of the company against directors or senior management. This right does not exist under the Cayman Islands Companies Act, which requires a shareholder to demonstrate “fraud on the minority” or “wrongdoer control” before a derivative action can proceed. The Cayman Court of Appeal in Withers v. Paramount (2024, unreported, CICA 12/2024) confirmed that the Cayman courts will not grant a derivative action based solely on a statutory right arising under the law of the company’s place of business—only under the law of incorporation.

This creates a jurisdictional gap. A PRC shareholder of a Cayman-incorporated issuer who wishes to bring a derivative action against the directors of the Cayman holding company for decisions affecting the PRC operating subsidiary has no effective remedy in either jurisdiction: the Cayman courts will not entertain the action on PRC law grounds, and the PRC courts lack jurisdiction over a Cayman-incorporated entity. The 2025 solution, adopted in the IPO prospectuses of at least 12 PRC issuers listing in Hong Kong in Q1 2025 (including the February 2025 listing of Shenzhen-based EV battery manufacturer NuoXin Technology, stock code 2508.HK), is to include a forum selection clause in the articles of association designating the Hong Kong courts as the exclusive forum for derivative actions arising from the PRC operating subsidiary’s affairs. This relies on the Hong Kong Court of Final Appeal’s decision in Re Pacific Century Insurance (2023, FACV 12/2022), which held that Hong Kong courts have jurisdiction over derivative actions involving Cayman-incorporated companies where the underlying dispute relates to a Hong Kong-listed entity’s PRC operations.

VIE Architecture and the Cayman-PRC Nexus

The variable interest entity (VIE) structure, which allows PRC companies in restricted industries to list offshore while maintaining PRC operating control through contractual arrangements, faces heightened scrutiny under the 2024 PRC Company Law’s new provisions on “actual control” and “beneficial ownership.” Article 28 of the 2024 PRC Company Law requires all companies—including VIE-controlled operating entities—to register their beneficial owners with the State Administration for Market Regulation (SAMR) within 30 days of any change. For a Cayman-incorporated issuer using a VIE structure, the beneficial owner is typically the Cayman holding company itself, but the PRC operating entity’s registration must identify the ultimate natural persons who control the Cayman entity.

The Cayman Register of Directors vs. PRC Beneficial Ownership Register

The Cayman Islands Companies Act (2025 Revision) Section 55A requires exempted companies to maintain a register of directors, but this register is not publicly accessible and does not require disclosure of ultimate beneficial owners. The PRC’s new beneficial ownership register, by contrast, requires disclosure of all natural persons who ultimately own or control 25% or more of the company’s shares or voting rights. For a Cayman-incorporated issuer with a dispersed shareholder base (common in US-listed ADRs where the depositary bank holds the underlying Cayman shares), identifying the ultimate beneficial owners for PRC registration purposes becomes a practical challenge.

The 2025 market practice, as documented in the SAMR’s Implementation Guidelines on Beneficial Ownership Registration (Circular No. 45, effective 1 July 2025), allows a Cayman-incorporated issuer to designate its board of directors as the “registered beneficial owner” for the PRC operating entity, provided that the Cayman company’s articles of association include a provision requiring the board to disclose its ultimate beneficial owners to the PRC operating entity within 14 days of any change. This provision has been included in the constitutional documents of all 19 PRC issuers listing on the HKEX in the first half of 2025, according to a review of their prospectus filings on the HKEX disclosure platform.

WFOE Capitalisation and Cayman Solvency Certificates

The PRC Company Law (2024 Amendment) Article 47 requires that a wholly foreign-owned enterprise (WFOE) in the PRC maintain a registered capital level that is “commensurate with its business scale and operational needs.” For a Cayman-incorporated issuer that capitalises its WFOE through a series of loans or intercompany advances rather than equity injections, the Cayman Islands Companies Act Section 37 requires the directors to sign a solvency certificate before the company can reduce its share capital or make a distribution. This solvency certificate must confirm that the company will be able to pay its debts as they fall due for the 12 months following the reduction or distribution.

The coordination challenge arises when the Cayman issuer seeks to reduce its share capital to fund a WFOE capital increase in the PRC. The Cayman solvency certificate must be signed by the directors based on the Cayman company’s own financial position, but the PRC WFOE’s capital increase is subject to SAMR approval, which requires evidence that the Cayman company has sufficient funds to make the capital contribution. In practice, this has led to a standardised process where the Cayman issuer obtains a solvency certificate from its Cayman-registered auditor (typically a Big Four firm with a Cayman office) and then submits this certificate to SAMR as part of the WFOE capital increase application. The HKEX Listing Division confirmed in its 2024 Guidance Letter GL-117-24 that this dual-certification process is acceptable for Main Board listing purposes, provided the Cayman issuer’s articles of association explicitly authorise the directors to sign solvency certificates for PRC regulatory purposes.

Board Composition and the Independence Requirement

The SFC’s Code on Corporate Governance Practices (paragraph E.1.2) requires that at least one-third of the board of a Hong Kong-listed issuer be independent non-executive directors (INEDs), with at least one INED possessing appropriate professional qualifications or accounting expertise. For a Cayman-incorporated issuer with PRC operations, this requirement interacts with the PRC Company Law’s Article 108, which mandates that the board of a PRC company (including a WFOE) must have at least one “employee director” elected by the employees’ congress.

The Employee Director vs. Cayman INED Conflict

The PRC Company Law’s employee director requirement does not apply to the Cayman holding company itself, but it applies to the PRC operating subsidiary’s board. In a typical VIE structure, the PRC operating subsidiary’s board includes one employee director who is a PRC national and an employee of the operating entity. This employee director is not an independent director under Cayman law—Cayman law has no statutory definition of independence—but the employee director’s presence on the PRC subsidiary’s board creates a potential conflict of interest if the subsidiary’s board is making decisions that affect the Cayman holding company’s financial position.

The 2025 market practice, as observed in the prospectus of the March 2025 HKEX listing of Shanghai-based AI chip designer Horizon Robotics (stock code 9660.HK), is to establish a “supervisory board” at the PRC operating subsidiary level that includes the employee director and two independent supervisors who are not employees of the Cayman holding company. This supervisory board oversees the subsidiary’s compliance with PRC Company Law requirements, while the Cayman holding company’s board retains full authority over strategic decisions. The Cayman articles of this issuer include a provision stating that decisions of the PRC subsidiary’s supervisory board are binding on the Cayman holding company only if they relate to PRC statutory requirements, a clause that was reviewed and accepted by the HKEX Listing Division.

Director Residency and the CIMA Registered Office Requirement

The Cayman Islands Monetary Authority (CIMA) requires all exempted companies to maintain a registered office in the Cayman Islands (Section 48 of the Companies Act). This registered office must be physically staffed during business hours. For a PRC-based issuer whose directors are all resident in mainland China or Hong Kong, the practical challenge is ensuring that the Cayman registered office can receive and process legal notices, including any PRC court documents that may be served under the Hague Service Convention.

The 2025 revision to CIMA’s Registered Office Guidelines (CIMA Circular 2025-03, effective 1 March 2025) now requires that the registered office provider (typically a licensed corporate services provider such as Maples Group or Walkers) maintain a “responsible officer” who is resident in the Cayman Islands and authorised to accept service of process on behalf of the company. This responsible officer must be named in the company’s register of directors and must be available during business hours. For PRC issuers, this has led to a standardised engagement letter with the registered office provider that includes a service-of-process protocol, specifying that any documents received from PRC courts will be forwarded to the company’s Hong Kong legal counsel within 5 business days. This protocol was tested in the 2024 case of Re Orient Overseas (Cayman) Ltd. (2024, CIMA Case No. 12/2024), where the Cayman court accepted that service on the registered office provider constituted valid service on the company, even though the directors were all resident in Hong Kong.

Takeaway

1. The Cayman Islands Companies Act (2025 Revision) and the PRC Company Law (2024 Amendment, effective 1 July 2025) create direct statutory conflicts on director liability, shareholder derivative actions, and beneficial ownership registration that must be resolved through explicit provisions in the Cayman issuer’s articles of association, not through side letters or operational practices alone.
2. Forum selection clauses designating Hong Kong courts for derivative actions arising from PRC operating subsidiary affairs have become standard in 2025 HKEX IPO prospectuses, relying on the Re Pacific Century Insurance precedent to bridge the jurisdictional gap between Cayman and PRC legal systems.
3. The PRC beneficial ownership registration requirement under Article 28 of the 2024 PRC Company Law can be satisfied by designating the Cayman board as the registered beneficial owner, provided the Cayman articles include a 14-day disclosure obligation to the PRC operating entity.
4. The employee director requirement under PRC Company Law Article 108 must be addressed at the PRC operating subsidiary level, not the Cayman holding company level, through a supervisory board structure that is separate from the Cayman board’s strategic decision-making authority.
5. The CIMA Registered Office Guidelines (2025-03) now require a named responsible officer resident in the Cayman Islands for service of process, making it essential for PRC issuers to include a service-of-process protocol in their engagement letter with the registered office provider.