On 23 July 2015, the UK Treasury published a consultation paper and draft Legislation Reform (Limited Partnership) Order 2015 setting out its proposed amendments to the Limited Partnership Act 1907 (LPA 1907).
The proposals were intended to modernise the law on limited partnerships by removing unnecessary legal complexity and administrative burdens to ensure that UK limited partnerships remain the preferred structure for European private equity and venture capital funds, as well as various other types of private fund. The government has now considered, and responded to, the submissions received. It has outlined a number of changes to the initial proposals, which we discuss further below.
Following completion of the consultation process, HM Treasury confirmed in its March 2016 summary of consultation responses that it will be pressing ahead with the proposed amendments and intends to put forward draft legislative amendments in a legislation reform order (LRO) to be laid before Parliament in due course. It is intended that the changes will come into force within one year. HM Treasury has been very accommodating and has taken on board the feedback received, making several tweaks to its initial proposals.
The proposed amendments will only apply to limited partnerships that are ‘private fund limited partnerships’ (PFLPs). A limited partnership constituted by an agreement in writing and which is a ‘collective investment scheme’ under section 235 of the Financial Services and Markets Act 2000 (FSMA), as well as any limited partnership that would constitute a collective investment scheme but for the fact that the partnership falls into one of the statutory exceptions contained in section 235(5) of the FSMA, may benefit from the new regime. Given the wide definition of a PFLP (which has been expanded following the consultation), it appears to us that most, if not all, limited partnerships used for private funds, joint ventures and other forms of co-investment, will be capable of satisfying the requirements to qualify as a PFLP.
In order to benefit from the new regime, the general partner of the limited partnership will need to complete an application for the limited partnership to be registered as a PFLP. The application will contain a specific request to be so designated and a confirmation from the general partner that the limited partnership satisfies the requirements to qualify as a PFLP at the point of registration. Existing limited partnerships will also have the option of applying for PFLP status if they fulfil the required criteria. However, once a partnership becomes a PFLP, it will not be able to return to general limited partnership status. HM Treasury initially proposed to limit the time during which an existing partnership could apply for PFLP designation to 12 months from the date of the order coming into effect; however, following the consultation, the government removed this limitation and an existing limited partnership will be able to apply for designation as a PFLP at any time during its life.
Capital contributions The consultation paper proposed removing the requirement for limited partners in a PFLP to make a capital contribution to the partnership, thereby allowing limited partners to contribute their entire commitment by way of shareholder loan or, in fact, as may be the case for the general partner, to make no commitment at all.
In addition, the consultation paper also proposed allowing limited partners to withdraw their capital from the partnership and remove the liability of limited partners for capital contributions that have been so withdrawn. The government has agreed to carry through the proposal to remove the requirement for limited partners to make a capital contribution. However, the option for limited partners to contribute capital will remain. Capital contributed to a PFLP will be withdrawable and the requirement to declare capital contributions to the registrar will be removed.
For limited partnerships established prior to the LRO coming into force, any capital contributions made prior to the limited partnership transferring into the PFLP regime will be treated as under the current regime, i.e., capital contributions will not be capable of being withdrawn and, if withdrawn, the limited partner will remain liable, with all capital contributions being required to be declared to the registrar of companies. Once designated as a PFLP, any additional capital contributions will be capable of being withdrawn without liability and without declaration to the registrar.
Permitted activities of limited partners The consultation paper proposed introducing a non-exhaustive ‘white list’ of 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 list of permitted activities is extensive, and includes:
- Taking part in certain investment decisions and decisions related to partnership borrowings
- Participating in a decision about a change in the nature of the partnership’s business, disposal of the business or dissolution
- Taking part in a decision that involves an actual or potential conflict of interest relating to the partnership, its business, a partner in the partnership or a person appointed to manage or advise the partnership
- Acting as a director, member, employee, officer, shareholder (etc.) in a general partner or another person appointed to advise or manage the partnership.
- Consulting/advising the general partner or the manager about the affairs of the partnership
- Appointing/nominating a representative to a committee
The government has confirmed it will make an addition to this list so limited partners in a feeder fund can be granted the right to vote on a ‘look-through’ basis interests in the underlying fund, without running the danger of taking part in the business of the feeder fund. The government has stressed that the white list is not exhaustive and so there may be other activities not included on the list that will not constitute management activities.
The government has noted that the purpose of the white list is not to prescribe the rights of a limited partner in a PFLP, which should be set out in a limited partnership agreement, but rather to provide certainty that limited partners may undertake the activities set out in the white list without jeopardising their limited liability. It should be noted that the government has stressed that the white list should not create any adverse presumptions for limited partners of partnerships other than PFLPs. It will be interesting to see how this will be reflected in the revised draft LRO.
The proposed white list provides welcome certainty as to the actions limited partners in a PFLP can undertake without being treated as taking part in the management of the partnership business. It would bring the UK in line with other jurisdictions such as Luxembourg, Guernsey, Jersey and the Cayman Islands, which have already introduced similar lists of permitted activities for limited partners. The list of permitted activities largely mirrors the white lists of the other jurisdictions mentioned above. This will be useful for investors who will be able to negotiate contractual protections and approved rights with fund managers with a greater degree of certainty that so doing will not compromise their limited liability. For limited partnership joint ventures, the white list is unlikely to be extensive enough in most cases to give joint venture parties sufficient control. We would therefore expect the other arrangements typically used to deal with this issue to continue, for example, the parties jointly controlling and managing the general partner.
Removal of registration particulars The consultation paper proposed simplifying the registration process by removing some of the information required to be disclosed upon registration, including details of limited partner capital contributions, the partnership term, and the general nature of the business of the PFLP. The government has agreed to proceed with removing the requirement to register the general nature and term of the partnership. As discussed above, capital contributions made to the limited partnership after registration as a PFLP will not be required to be declared to the registrar.
The consultation paper also sought views on the current requirement to advertise in the London, Edinburgh or Belfast Gazette, if a general partner becomes a limited partner or a limited partner assigns its interest in a limited partnership to another person. The government has agreed to remove the requirement to advertise in the Gazette when a limited partner assigns its interest in a limited partnership. However, the requirement to advertise a notice in the case of a general partner becoming a limited partner will remain.
Exemption from statutory duties The consultation paper proposed exempting limited partners of a PFLP from the duty to disclose information/accounts to their fellow partners and the duty not to compete with the partnership which, under existing law, applies to all partners of UK limited partnerships pursuant to sections 28 and 30 of the Partnership Act 1980. The government has agreed to exempt PFLP limited partners from sections 28 and 30 of the Partnership Act, although limited partners will still be required to account for any benefit they derive from “any transaction concerning the partnership, or from any use by him of the partnership property name or business connexion”, in accordance with section 29 of the Partnership Act.
The proposed changes will be welcomed by institutional and other passive investors who may have interests in a number of funds or businesses with similar investment profiles to that of the PFLP.
Relaxation of the rules relating to the winding-up of limited partnerships Currently, where the sole general partner of a limited partnership is removed and the partnership is dissolved, the limited partners must apply for a court order confirming the affairs of the partnership will be wound up under the supervision of the court. The government has agreed to remove the requirement of a court order where the general partner has been removed and the limited partners will therefore need to make provisions to wind up the partnership without the general partner.
The government has further agreed to amend the LPA 1907 to enable limited partners to appoint a third party (but not one of their own number) to wind up the partnership on their behalf without the loss of limited liability. Given that a PFLP by definition will be a collective investment scheme under FSMA, a UK domiciled business appointed to wind up a limited partnership will need to be authorised under FSMA to establish, operate and wind up collective investment schemes.
Future considerations The consultation paper proposed the introduction of a procedure to remove PFLPs from the limited partnership register, in order to allow the register to be kept up to date with only existing limited partnerships, as well as allowing names of dissolved limited partnerships to be reused. The government has decided not to apply a strike-off procedure for PFLPs at this time, as any such procedure would need adequately to address the concerns around maintaining the limited liability of the limited partners. The government will explore wider options and consider the possibility of consequent proposals in due course, including applying the strike-off procedure to all limited partnerships, both future and existing.
The government has taken consideration of the views that some of the aforementioned proposals may be beneficial to all limited partnerships, as opposed to solely private funds structured as limited partnerships, and it has said it will consider appropriate next steps in this regard.
Client Alert 2016-185