HM Treasury has published a summary of responses to its consultation proposing changes to partnership legislation for private equity investments, including the government's responses to the comments received.
The government published its consultation Proposal on using Legislative Reform Order to change partnership legislation for private equity investments in July last year (and was the subject of a previous Equity Issues published at the time). The consultation set out its proposed changes to the Limited Partnerships Act 1907, which were intended to ensure that the limited partnership remains the market standard structure for European private equity and venture capital funds, as well as many other types of private fund in an increasingly competitive global market.
The UK limited partnership is the most commonly used structure for European private equity and venture capital funds, as well as various other types of private fund. The main benefits of the limited partnership structure are its flexibility, its transparency for UK tax purposes and the limited liability protection that it offers to investors. The UK limited partnership structure is governed principally by the Partnership Act 1890, the Limited Partnerships Act 1907 and the rules of equity and common law and have remained largely unchanged.
Following widespread acknowledgement amongst respondents that reform to the Limited Partnerships Act 1907 would be beneficial, the government has decided to proceed with its proposal to establish a scheme for private funds structured as a limited partnership. It notes that some of the proposals may be beneficial if applied to all limited partnerships, not only private funds, but that wider ranging proposals would require further consideration and consultation, so it will consider appropriate next steps.
Private fund limited partnership (PFLP)
As a result of the responses to its consultation, HM Treasury intends to make certain changes to its initial proposals, which include the following:
- replacing the requirement for a solicitor's certificate with a requirement for the general partner to confirm that the partnership fulfils the requirements to qualify as a PFLP at the point of registration;
- removing the one year transition period, so that a limited partnership will always be able to apply for PFLP status if it fulfils the criteria. However, when a partnership becomes a PFLP, it will not be able to return to limited partnership status;
- amending the definition of collective investment scheme to determine which funds are covered by the PFLP regime, to ignore section 235(5) of FSMA 2000, thereby allowing limited partnerships which would meet the definition but for one of the exceptions to fall under the PFLP structure;
- not to apply a strike off procedure for PFLPs. It states any such procedure would need to address concerns around maintaining the limited liability of limited partners and would need to apply to all limited partnerships, both future and existing. It proposes to explore wider options and consider consequent proposals in due course;
- amending the white list of activities that a limited partner may undertake without being considered to take part in the management of the business to clarify that a limited partner is able to exercise its rights in relation to an underlying fund within a feeder fund structure
- ensuring that the white list is not exhaustive;
- ensuring that the creation of the white list does not mean that activities on the list are permissible for limited partners by right;
- clarifying that the white list does not create any adverse presumptions for limited partners in other limited partnerships;
- amending its proposals on capital contributions to carve out limited partnerships established prior to the implementation of the Legislative Reform Order, in which case capital contributions made prior to the limited partnership transferring into the PFLP regime will be treated as under the former regime (i.e. not withdrawable and if withdrawn the partner will remain liable, and the capital contributions will continue to be declared). Capital contributed after the designation as a PFLP will be permitted to be withdrawn without liability and without the declaration requirement. However, for limited partnerships registered after the enactment of the Legislative Reform Order, if the partnership transfers to PFLP status, all capital (whether contributed before or after designation as a PFLP) will not need to be declared and will be withdrawable;
- changing its proposed amendments to section 6 of the Limited Partnerships Act to enable limited partners to appoint a third party to wind up the partnership on their behalf (but not to do so on their own accounts) and to ensure that proposed activity (g) in the white list enables this without loss of limited liability;
- retaining the requirement to advertise a notice in the case of a general partner becoming a limited partner, but removing the delaying of the effect of the change until advertisement; and
- disapplying section 36 of the Partnership Act 1890 (Rights of persons dealing with firm against apparent members of firm) with respect to PFLPs.
The government proposes to put forward draft legislative amendments in a Legislative Reform Order to be laid before Parliament in due course, with the changes to be fully operational within a year.