UK limited partnerships are one of the most common and popular vehicles for investments in various sectors in Europe including private equity, real estate and infrastructure, offering a flexible, tax-transparent vehicle, which provides the protection of limited liability to fund investors provided that they do not take part in the management of the partnership business – if they do, they become liable for the debts and obligations of the limited partnership. Whilst fund investors are generally passive, many seek to include consultation and approval rights in partnership documentation to protect their interests. The existing UK legislation provides little guidance or clarity on when these consultation and approval rights might cross the line, and constitute management. A conservative approach is typically taken.
The new private fund limited partnership (or ‘PFLP’) would retain the flexibility of a limited partnership and limited liability for investors, whilst setting out a clearer regime in relation to the rights that investors could exercise without compromising their limited liability status. No change is proposed to the tax treatment of any form of limited partnership.
Designation of a PFLP
To be registered as a PFLP, a new limited partnership would need to apply for this designation on registration.
The designation would only be available for limited partnerships that (a) are constituted by a written agreement and (b) qualify as collective investment schemes (or partnerships that would be a collective investment scheme but for the fact that each limited partner is a body corporate in the same group as the general partner) – and the application will require a certificate signed by a solicitor to the effect that the limited partnership meets these conditions.
Existing limited partnerships meeting the relevant conditions will be able to apply for re-designation as PFLPs within 12 months from the date on which the Order creating PFLPs comes into force.
As long as the application meets the requirements, the registrar of companies will be required to issue a certificate stating that the partnership is designated as a PFLP.
Notifications to Companies House
It is proposed that PFLPs would not be required to disclose the general nature of their business, nor the term of the partnership, through their filings at Companies House. Neither would the amount of capital for the PFLP need to be registered. The requirement under the current legislation to advertise either the transfer of a limited partner’s interests to another person, or the change in status of a general partner to a limited partner, would also cease to apply to PFLPs.
The intention of these changes is to reduce the legislative burden of registering PFLPs and to protect investors’ privacy.
Typically, limited partners’ contributions to a limited partnership are structured by way of a 0.1% contribution to capital, with the balance being provided by way of debt. This split arises because there are stringent restrictions which apply on withdrawing capital from the limited partnership during its continuation – where capital is withdrawn, the limited partner becomes liable for the debts and obligations of the limited partnership up to the amount withdrawn.
The proposal is that limited partners in PFLPs would no longer be required to make any capital contribution. The liability to contribute to the debts of a partnership up to the amount of capital withdrawn would also not apply.
Permitted activities for limited partners
Limited partners often seek to agree specific rights to enable them to monitor and safeguard their investment through the partnership documentation (sometimes in the partnership agreement itself, but more often through side letters). These would typically provide enhanced consultation rights, the rights to appoint members to the investment committee, consultation/approval rights in relation to certain investments and transfers of interest, monitoring and notification rights, and other rights.
There is a difficult balance to be achieved in negotiating the terms of these rights, to avoid crossing the line between passive investment and involvement in management; and there is usually a requirement for a legal opinion to confirm the status of these rights. Many leading funds jurisdictions overcome these difficulties and uncertainties by including a “safe harbour” in their relevant legislations, confirming that specified activities do not amount to management.
The consultation paper proposes to bring the rules for PFLPs into line with other jurisdictions by specifying a non-exhaustive range of activities which a limited partner in a PFLP could undertake without being considered to be taking part in management of the partnership. These range from taking part in decisions relating to the partnership agreement and proposed investments to enforcing rights under the partnership agreement, approving accounts and valuations, and appointing representatives to the partnership’s committee(s).
Exemption from statutory duties
The consultation also proposes exempting limited partners in a PFLP from some specific duties that currently apply to all partners in the limited partnership, on the basis that these are inconsistent with the position of a largely passive investor who may be invested in a number of funds with similar objectives/investment policies.
Limited partners would be exempt from the duty to render accounts and information between partners and from the restriction on competing with the partnership (under which a partner that carries on business of the same nature and competing with that of the partnership without the consent of the other partners is liable to account for the profits made in the competing business).
Striking-off of a limited partnership
The proposals would also introduce an ability for the general partner of a PFLP (or, if more than one, all of them) or all of the limited partners if there is no general partner, to apply to the registrar to strike the PFLP off the register.
On striking-off, the partnership would cease to be a PFLP but would remain in existence as a general partnership until it was dissolved by the partners.
The registrar would also have the right to strike a PFLP off the register if he has reasonable cause to believe that it is not carrying on its business or is not in operation. The procedure would involve a prior notification process with the limited partnership (and would be similar to the striking off process that applies for companies).
Finally, there would be a procedure for the partnership, and any partner in it, to apply to the courts for an order that such provisions are made as the court thinks fit to put the partnership and any other person in the position they would have been in if the partnership had not been struck off if, following a striking-off process, the partnership continues to exist and is subsequently registered again as a limited partnership. This would be available for a period of three years starting on the day on which the partnership was struck off.
If introduced, these proposals will constitute a welcome modernisation of some aspects of the law applying to limited partnerships (which is now over 100 years old), and provide a much greater degree of certainty for limited partners without prejudicing their limited liability status.