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Limited partnerships (LPs) are a popular and common vehicle for investments in various sectors. LPs are an efficient structure for investment activity, particularly in real estate, joint ventures, private equity and infrastructure. They are popular because they offer flexibility, tax transparency and limited liability protection to investors.
An LP established in England and Wales is not a separate legal entity but instead a type of partnership with special characteristics. It is therefore unlike a limited company or limited liability partnership. An LP must have two or more partners who may be individuals, companies or other vehicles. At least one partner must be a general partner, with all the remaining partners being limited partners.
General partners and management
The general partner is responsible for the management of the LP, its business and its assets, and has unlimited liability for the debts and obligations of the LP. Often, the LP appoints a separate manager, which is authorised by the Financial Conduct Authority (FCA) to manage the LP’s investments. An LP enters into contractual commitments through its general partner. The general partner is customarily established as a special purpose vehicle such as a limited company or limited liability partnership, to guard against the possible adverse consequences of its unlimited liability.
Investors in an LP are known as limited partners. Generally, the liability of each limited partner is limited to the amount of its capital commitment to the LP. Fund investors are generally passive, however, many seek to have consultation and approval rights to be included in partnership documentation to protect their interests.
A limited partner cannot bind the partnership and must not partake in the day-to-day management of the partnership business. The distinction between taking part in the management of the business and advising in the capacity of a limited partner is based around the day-to-day running of the business. For example, with respect to making a specific investment, the general partner is responsible for researching and selecting investments, and representing the partnership in respect of dealings with the investee company. The limited partner is only able to advise the general partner but cannot be involved in the selection process or execution of the investment.
If a limited partner participates in the management, they risk losing their limited liability status and therefore become liable as if they were a general partner. Unfortunately, the existing UK legislation provides little guidance or clarity on when consultation rights might cross the boundary and constitute involvement in management. As a result, any clarification and certainty brought to this area is welcome.
LPs are governed by an amalgamation of the Partnership Act 1980, the Limited Partnerships Act 1907 (LPA) and rules of law and equity. HM Treasury has published a draft Legislative Reform (Private Fund Limited Partnerships) Order 2017 (LRO) to amend the LPA and introduce a Private Fund Limited Partnership (PFLP) structure for qualifying funds. The LRO is due to come into force on 6 April 2017.
Designation of a PFLP
A PFLP will retain the flexibility of a limited partnership and limited liability for investors, whilst setting out a clearer regime in relation to the privileges that investors could exercise without compromising their limited liability status. No change is proposed to the tax treatment of any form of limited partnership.
To be registered as a PFLP, a new limited partnership will need to apply for this designation on registration. The PFLP designation will only be available for limited partnerships that fulfill the private fund criteria, which are that the partnership is formed by a written agreement and is also a collective investment scheme. The application will entail a compliance confirmation by a general partner that the partnership satisfies the private fund conditions.
Existing limited partnerships fulfilling the private fund criteria will be able to apply for re-designation as PFLPs at any time. Though, once a partnership becomes a PFLP it will be unable to return to ordinary limited partnership status.
A PFLP cannot also be a contractual scheme under section 235A of the Financial Services and Markets Act 2000.
Limited partners capital contribution
Usually in a LP the capital of each limited partner must be registered with the Registrar of Companies. A limited partner’s capital cannot be refunded until the limited partner ceases to be a partner or the LP is dissolved. However, advances (i.e. moneys loaned) to the LP are treated differently, according to the relevant terms of the advance. Generally, limited partners’ contributions to a LP are structured by way of a nominal capital contribution, with the remainder committed as an advance, which is utilised as and when, required by the LP.
With the introduction of the LRO, limited partners in PFLPs will no longer be required to make any capital contribution. For LPs established after the LRO is in effect, the option to make capital contributions will continue and capital will be withdrawable. There will be no obligation to publicise capital contributions. Conversely, for LPs established before the LRO comes into force, capital contributions will remain to be treated under the current system, capital will be not withdrawable and, if it is removed, that limited partner will remain liable to contribute to the debts of the partnership up to the amount withdrawn. The requirement to publicise capital contributions also continues to apply.
The “White list”: permitted activities for PFLP limited partners
The most interest in the reforms has focused on the new “white list”. If a limited partner in a UK LP involves him/herself in the management of the partnership’s matters, the limited partner risks losing its limited liability for the debts and obligations of the partnership. In the absence of clear guidance on what actions constitute “taking part in the management of the partnership business”, and with increasing investor demands for approval and consultation rights, both fund managers and investors have struggled to outline clear boundaries.
The LRO therefore proposes a “white list”. The “white list” is merely a non-exhaustive list that prescribes permitted activities which a limited partner may undertake without being considered to be taking part in the management of the business of the partnership and, therefore, without losing its limited liability. The government has noted that the purpose and intention of the “white list” is to provide certainty that limited partners may undertake the activities set out in the “white list” without jeopardising their limited liability. It is not to prescribe the rights of a limited partner in a PFLP, which should be set out in a limited partnership agreement.
The government has also emphasised that the “white list” should not create any adverse presumptions for limited partners of partnerships other than PFLPs. The proposed “white list” offers welcome certainty as to the actions limited partners in PFLPs can undertake without being treated as participating in the management of the partnership business. It would bring the UK in line with other jurisdictions such as the Cayman Islands, Guernsey, Jersey, Luxembourg, which already have similar lists of acceptable undertakings for limited partners. It will be useful for investors who are able to negotiate contractual safeguards and approval rights with their fund managers with a better degree of certainty to know that in doing so they will not compromise their limited liability.
The full “white list” is not permissible by right – funds wishing to take advantage of the list must adopt it in the partnership agreement and will be able to select activities from the list.
The “white list” includes the following activities:
• taking part in decisions to vary or waive the terms of the partnership agreement, to change the general nature of the partnership, to extend its term or to admit or remove partners
• appointing a person to wind up the partnership
• approving the partnership accounts or valuations of its assets
• consulting with or advising a general partner or partnership manager or adviser about the partnership’s affairs or accounts
• taking part in decisions about changes to persons responsible for the day-to-day management of the partnership
• taking part in a decision approving or authorising an action proposed to be taken by a general partner or manager of the partnership, such as the disposal of all or part of the partnership’s
While the list will be useful ammunition for investors seeking increased control, fund managers will suggest the list is permissive rather than a set of required investor rights. Overall the intention is to provide the limited partners sufficient scope to monitor and assess the performance of investments, and to approve actions of the general partner. However, the intention is not to enable the limited partner to act on behalf of the partnership.
PFLP exemption from statutory duties
Limited partners in a PFLP will be exempted from the duty to render accounts and information between partners (in section 28 of the Partnership Act 1890) and from the restriction on competing with the partnership (in section 30 of the Partnership Act 1890).
The duty under section 29 of the Partnership Act 1890 to account to the partnership for any benefits from transactions concerning the partnership without the consent of the other partners will, however, continue to apply to limited partners in PFLPs.
Stephanie Chan and Roger Blears
RW Blears LLP
29 Lincoln’s Inn Fields
London WC2A 3EG
Contact Roger at:
T (direct) + 44 (0)203 773 5211
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