The recent discoveries of gas off the coast of Israel have resulted in an increase in the number of gas and oil exploration limited partnerships operating in Israel. In light of this and the fact that the public has been increasingly investing in these partnerships, the Israeli parliament passed the Amendment to the Partnerships Ordinance (No. 5) Law, 2015 ("Amendment"), which generally becomes effective on April 23, 2015 (although some provisions of the Amendment come into effect at later dates) and regulates the corporate governance mechanisms relating to public limited partnerships. It should be emphasized that most of the provisions of the Amendment will apply also to public limited partnerships which are already in existence, although there is, in some cases, a short grace period to gear up for the new regime. Prior to the Amendment, there was minimal corporate governance regulation of public limited partnerships and no say for investors with regard to remuneration of the general partners ("GP") or office holders of such partnerships.
The corporate governance mechanisms introduced by the Amendment are effectively aimed at applying to public limited partnerships the regime applicable to that applying to public companies under the Companies Law, 1999 ("Companies Law"); these mechanisms, are designed, inter alia, to address the common agency problem between limited partners ("LP") and GPs in a limited partnership, whereby the GPs have management authority in the partnership but the LPs who invest in the partnership neither have any such authority nor any powers of supervision over the GPs decisions. This problem is even more acute regarding public limited partnerships as the LPs are public investors. The Amendment thus regulates the supervision of GPs, among other things, in order to protect the rights of LPs.
A public limited partnership is caught by the Amendment if it is a limited partnership whose participation units, or the participation units of LPs of such limited partnership, are listed for trading on the stock exchange or were offered to the public by way of a prospectus (or any equivalent document required in a foreign state when offering such units to the public) ("PLP"). The GP of a PLP is defined as an Israeli private company (excluding companies that offer bonds) whose sole purpose is to manage the commercial dealings of the PLP.
The Amendment sets out various provisions that regulate the management of the GP and the PLP and adopts the sections of the Companies Law that deal with the structure of public companies. Thus, GPs must, among other things, appoint external directors. In addition, the GP, PLP and its office holders have a duty of care and a fiduciary duty to the PLP. Moreover, the office holders of the GP are under an obligation to act for the benefit of the PLP, even if such actions adversely affect the interests of the GP. Also, the controlling shareholders and any significant shareholders of the GP owe a duty to the PLP to act fairly.
Similar to the provisions of the Companies Law, the Amendment also introduces supervisory mechanisms that apply to the GP such as the requirement to appoint an audit committee, a remuneration committee, a committee for the review of the PLP's financial statements and an internal auditor. Further, the GPs are required to approve special transactions such as extraordinary transactions with office holders and interested parties, and any change of the controlling shareholder in the GP is to be decided by a vote in the general meeting of the PLP. While the Amendment subjects the GP's management and operational fees to minority approval, the same does not apply to the GP's main source of income, namely, promoter's fees which are generally based on a percentage of the PLP's income rather than its profits (as set out in the PLP's articles).
Provisions that apply to a PLP include the requirement to hold annual meetings for its participation unit holders in which, among other things, a supervisor over the PLP must be elected. The supervisor shall monitor the corporate governance of the GP and is given wide powers to ensure that the GP is fulfilling its duties pursuant to the Amendment.
Overall, the purpose of the Amendment is to implement a mechanism that identifies any inefficiencies in the management of the PLP. It primarily aims to protect public investors, which were not satisfactorily protected under the previous regime. The full extent and effect of the Amendment on PLPs will only be fully known after it comes into effect and is implemented by public limited partnerships.
A cautionary note, though, is that the explanatory note to the bill for the Amendment indicates that the Government considered, in light of the requirements of the Israeli Securities Law, 1968, stipulating that investments by the public in such projects should be through the mechanism of companies only, but in the end it was decided at this stage not to change the present format of public limited partnerships. What the next stage (or next Government) will bring is not clear.