Last month HM Treasury published an update on the proposals to changelimited partnership legislation for private funds. Back in July 2015, HM Treasury consulted on a range of proposed changes which are designed to modernise the UK limited partnership model used by private equity and other funds. We reported on the proposals in our September bulletin.
The proposals were warmly welcomed by many in the UK funds industry, as they will simplify administration and make clearer the activities that limited partners can undertake without being seen to participate in the partnership's management.
The good news is that the vast majority of the proposals will be adopted with many of the improvements suggested by stakeholders, although they are not expected to be operational for another year.
The proposals will amend the Limited Partnerships Act 1907 for "private fund limited partnerships" or "PFLPs" only. Any limited partnership that qualifies as a "collective investment scheme" under the Financial Services and Markets Act 2000 ("FSMA"), as well as any limited partnership that would qualify were it not for one of the statutory exceptions made under section 235(5) of FSMA, will be able to benefit from the new regime. For new limited partnerships, once the new rules are in force, in order to benefit from them the general partner will need to confirm on the Form LP5 registering the limited partnership that it meets the conditions for a PFLP. This marks an improvement from the original consultation proposals, which required a potentially costly solicitor's certificate. Existing limited partnerships can also opt in to PFLP status at any time (rather than the original transition period of one year), though having done so they will not be able to return to ordinary limited partnership status.
Probably the most interest in the reforms has focussed on the new "white list", which will be implemented largely as proposed. If a limited partner in a UK limited partnership participates in the management of the partnership's affairs, it risks losing its limited liability for the debts and obligations of the partnership. With increasing investor demands for approval and consultation rights, in the absence of clear guidance on what constitutes management both fund managers and investors have struggled to define clear boundaries comfortably. The new PFLP rules will bring in a non-exhaustive "white list" of activities that a limited partner can undertake, without jeopardising its status. The list in some respects goes further in terms of what limited partners can do than most fund managers would want to concede, so while the list will be useful ammunition for investors seeking increased control, fund managers will point out that the list is permissive rather than a set of required investor rights.
On the administrative side, the requirement to make a capital contribution will be removed for new PFLPs set up after the rules come into force and there will be no need to declare capital contributions at Companies House. If any optional capital contributions are made to these new PFLPs, they will be capable of withdrawal. However, the current law will continue to apply to capital contributions that were made to existing limited partnerships before they opted into the PFLP rules. This means that although such capital contributions can be withdrawn, the limited partners may be required to return them.
Other administrative improvements include removal of the requirement to file a Gazette notice when a limited partner assigns its interest, and the deletion of some of the information on the Form LP5 for registration.
The original proposals aimed to deal with problems surrounding the striking off of limited partnerships from the Companies House register, since at the moment a dissolved limited partnership will remain there permanently. In view of concerns that the proposed measures might lead to limited partners inadvertently losing their limited liability status, the government has decided not to proceed with these changes for now.