In recent decades, corporate laws in general and partnership laws in particular have undergone significant changes throughout the world, including expansion of the model of limited liability applicable to companies to partnerships as well.
Many countries have recognized the importance of limited liability partnerships, which combine the managerial flexibility characteristic of a general partnership with a limitation on liability, which enables the partners to limit the extent of their exposure to the partnership’s debts.
In order to improve the Israeli partnership market and in order to bridge the wide gap that exists between partnership laws in Israel and the partnership laws in other countries, in December 2016, the Ministry of Justice published a draft Memorandum of Law – Partnerships, 5777 – 2016 (“the Memorandum”) for public comments, which is expected to replace the Partnership Ordinance [New Version], 5735 – 1975, and create a suitable statutory framework for limited liability partnerships.
The Memorandum defines arrangements currently included in the Companies Law, 5759 – 1999, as default arrangements that may be efficient for partnerships to adopt during decision-making by the partners. Consequently, the Memorandum will not restrain the market, but rather, will provide relief to the market by proposing a default model that is compatible for activities of partnerships in the modern business world.
The objectives of this Memorandum are to bridge the existing gap between the partnership laws in Israel and the modern partnership laws elsewhere in the world, to make Israeli limited partnerships more attractive and competitive and to encourage investment funds (private equity and venture capital funds) to register in Israel.
Following is a summary of some of the significant innovations proposed in the Memorandum concerning the activities of investment funds incorporated as Israeli partnerships:
- Expansion of the various types of partnerships – the Memorandum proposes enabling the formation and registration of a “Limited Liability Partnership” having a corporate structure similar to that of a limited liability company (LLC.); i.e., in essence, a general partnership in which the liability of all of its partners is limited;
- Limiting the liability of the general partners – the Memorandum proposes allowing a partnership to limit the liability of the general partners (Limited Liability Limited Partnership), which will eliminate the need for managers of the partnership to incorporate as a limited liability company (LLC.);
- Reduction of the bureaucratic burden – the Memorandum proposes eliminating the obligation to register the general partnership, eliminating the requirements relating to the approval and publication of the limited partnership agreement, eliminating the obligation to publish in Reshumot (the official gazette), eliminating the penal provisions for breach of the registration obligation and switching to a model of administrative enforcement;
- Elimination of the restriction on the number of partners and allowing dual qualification of partners – the Memorandum proposes eliminating the restriction on the number of general partners in a limited partnership (currently 20 partners), and enabling dual qualification of a partner in a limited partnership (so that a general partner can also be a limited partner);
- Tempering the arrangements relating to the partners’ liability for the partnership’s debts – currently, the general partners in a limited partnership are exposed to unlimited liability for the partnership’s debts. The Memorandum proposes severing the status of a partner in a partnership from its liability for the partnership’s debts (currently, general partners are, for the most part, incorporated as limited liability companies; this amendment will eliminate the need for general partners to incorporate as a limited liability company, without fear of exposure to the debts of the partnership, as managers of companies are).
- Right to indemnity – the Memorandum proposes that every partner will be entitled to indemnity from the partnership for expenses incurred during the ordinary course of business of the partnership or for financial liabilities imposed on the partner due to an action it performed in its capacity as a partner, unless the partner had acted with mala fides, negligently, or had breached its fiduciary duty to the partnership.
- Duties of care, trust and bona fides – the Memorandum proposes imposing the duties of bona fides, care and trust on the partnership in relation to all matters pertaining to the partnership’s activities (similar to those imposed on corporate officers).
- Profit distributions – the Memorandum proposes that a distribution of the partnership’s profits in a limited liability partnership and in a limited partnership shall be done according to the profit and solvency tests prescribed in the Companies Law.
- Transitional provisions if the Memorandum is adopted
- Relating to partnerships incorporated subsequent to its promulgation – on the promulgation date of the Memorandum;
- Relating to partnerships incorporated prior to its promulgation – two years after its promulgation.
If the Memorandum has indeed come into effect, it is expected to constitute a legal foundation enabling investment funds to adapt their format of incorporation and operate efficiently in Israel according to Israeli law.
Furthermore, the provisions of the Memorandum and its inception date (if enacted) will have a substantial impact on investment funds incorporated through Israeli partnerships.