Summary: This briefing sets out some of the key themes and main changes of the new private fund limited partnership (PFLP) model expected to be introduced to UK limited partnership law on 6 April 2017. We also take a look at the areas of discussion thrown up by the BEIS call for evidence to review limited partnership law more generally.
HM Treasury has published draft legislation, due to come into force on 6 April 2017, to modernise, simplify and amend UK limited partnership (UKLP) legislation. These proposals were the subject of a July 2015 consultation and broadly track HM Treasury’s March 2016 response (which itself took on board many of the comments received from industry participants during the consultation).
Once adopted, the private funds industry will be able to take advantage of a new, more flexible and streamlined vehicle, the ‘private fund limited partnership’ (PFLP), for both existing and new UKLPs that meet the PFLP conditions. The existing UKLP regime will remain, for those vehicles that choose not to have (or are not eligible for) PFLP status.
Three changes stand out for private fund vehicles. First, the inclusion of a list of explicit safe harbours for limited partner involvement in decision-making will bring welcome clarity to the extent to which limited partners can be involved in PFLP decisions without losing their limited liability status. Second, PFLPs will have flexibility in how they are funded and how capital is returned. Third, the criteria for being a PFLP are simpler and clearer than originally proposed, which means that the majority of UKLPs used in fund and joint venture structures will be eligible to be designated as PFLPs.
However, the industry’s enthusiasm for the PFLP reforms may be more muted than expected, pending the outcome of a BEIS call for evidence. Launched at the same time as HM Treasury published the final legislative package for PFLPs, the call for evidence turns the spotlight on UKLP transparency, reporting, registration and accounting requirements, as well as possibly their legal characteristics. There is a chance that the reduction in the compliance and administrative burden under the new PFLP regime may be short-lived and in due course replaced by other initiatives to increase accountability for UKLPs more generally.
We have set out below some of the key themes and main changes of the PFLP model, as well as some overview points on the BEIS review of UKLP law.
PFLP with fund characteristics
To qualify as a PFLP the UKLP must be constituted by written agreement and be a ‘collective investment scheme’ (as per the s235 Financial Services and Markets Act 2000 definition, but disregarding any exceptions). In other words, UKLPs that are essentially fund vehicles will qualify as PFLPs, whether or not they are caught by one of the exceptions.
Registration process more streamlined
When applying for registration as a PFLP, confirmation that the UKLP meets the PFLP conditions will be provided by the general partner and not (as was originally proposed) by way of a solicitor’s certificate.
The regime will be available at any time during the life of the UKLP (including for existing UKLPs) so that firms that are not structured as PFLPs at the outset can choose to opt in a later date. However, when a UKLP becomes a PFLP it will not be able to return to its ordinary limited partnership status.
A white list of actions that a limited partner in a PFLP may undertake
A limited partner in a PFLP may undertake any actions on the so-called ‘white list’ without being considered to be taking part in the management of the business and therefore without losing its limited liability status. The final legislation contains some requested confirmations that came up in the consultation process: that this list is not exhaustive; that it is not prescriptive (it will be a matter of commercial agreement between the partners as to whether limited partners may carry on any white list activity), and that it does not create any adverse presumptions for limited partners in other UKLPs (in other words, does not give rise to any inference that carrying on these activities in relation to a limited partnership that is not a PFLP would constitute taking part in management).
The list is broad and gives certainty to limited partners that they are able to carry on activities which are usual for investors in private investment funds without losing their limited liability status. Thus a limited partner can act as a director, member, employee, officer or agent, or a shareholder or a partner in the general partner or the PFLP’s manager or adviser, and it can appoint or nominate a person to represent it on a committee (provided in both cases that that person is not taking part in management of the partnership business). This should allow common directors on limited partner and general partner/manager boards without jeopardising limited liability status. The amendments also confirm that the fact that a decision involves an actual or potential conflict of interest does not in itself mean that a limited partner is involved in management of the partnership business for the purposes of any white list activities. HM Treasury has also added a provision to allow limited partners in feeder structures to exercise “look-through” voting in respect of an underlying fund, provided this does not extend the PFLP’s liability in the master fund beyond its contribution.
In this respect PFLPs will be more aligned to some competitor jurisdictions which already provide explicit safe harbours for limited partner involvement in decision-making (including Jersey, Guernsey, the Cayman Islands, Delaware and Luxembourg).
Relaxation of capital requirements
The proposals around capital contributions for new PFLPs are unchanged from those set out in HM Treasury’s March 2016 response document: removing the requirements for limited partners in PFLPs to make registrable capital contributions and providing that limited partners are not liable for partnership debts to the extent of any capital contributions that have been withdrawn. Alongside this, the existing regime in respect of withdrawal of capital contributions will continue to apply for limited partners’ capital contributions to PFLPs that were registered as limited partnerships before 6 April 2017 (prior to the implementation of the new PFLP regime). In these cases, limited partners cannot withdraw their capital contributions (made before the partnership became designated as a PFLP) during the term of the partnership; and the contingent liability will remain, as will a filing requirement. Capital which limited partners contribute to a PFLP after its designation will fall under the new PFLP regime.
This approach has been adopted to avoid prejudicing any creditors who have taken comfort from the existing legal position (prior to a partnership’s designation as a PFLP), for instance where historically substantial capital contributions were made.
Simplification of filing requirements
The registration process for PFLP applications and for notification of changes to the Registrar have been simplified and there will no longer be a requirement for a Gazette Notice to be published when a general partner becomes a limited partner, or a limited partner retires or assigns its interest in a PFLP to another person.
However, the requirement to advertise in the Gazette will remain for when a general partner in the PFLP retires, and notice to third parties of a general partner’s retirement is only effective when published.
More flexibility in winding up a PFLP
Partners in a PFLP can agree among themselves that someone other than the general partner can wind up the partnership, without having to obtain a court order. Further, in the absence of a general partner (where, for instance, it has been removed at the time of dissolution), the limited partners can together appoint someone to wind up the PFLP. There is welcome confirmation in the safe harbour list that this will not comprise ‘management’ by the limited partners.
Removal of some statutory duties
As set out in the original proposals, some of the statutory burdens will be removed from limited partners in PFLPs (whilst allowing partners to agree otherwise): limited partners will not be subject to the duties to render accounts and other information to other partners and to account for profits made in competing businesses. HM Treasury noted that these duties are not consistent with the role of an investor in an investment fund.
The statutory duty of accountability of partners for profits derived from transactions concerning the partnership or the property of the partnership (i.e. private profits) remains.
Being struck off the Companies House PFLP register – further consideration needed
Currently, there is no procedure to remove a UKLP from the register maintained by the Registrar of Companies and the original proposals introduced a procedure to enable a PFLP to be struck off the Companies House PFLP register (either voluntarily on application, or by the registrar).
However, the government has decided to explore and consult at a later date on further options on striking off. Concerns were raised in the consultation around maintaining the limited liability of the limited partners during the period between striking off and dissolution (the original proposals would have rendered the limited partners in a PFLP liable for all the debts of the partnership during this period and would have put the PFLP at a disadvantage to other structures). The BEIS call for evidence raises some questions on this issue.
BEIS call for evidence
The genesis of this call for evidence is that Scottish limited partnerships (SLPs) are reportedly being used for criminal activity, which has raised the possibility of reforming UKLPs more generally. An SLP, unlike an English limited partnership, has legal personality: it can therefore contract and hold property itself, and can be a partner in another firm/partnership. BEIS want to probe the use of SLPs, the reasons for their increased popularity, as well as wider UKLP issues on levels of transparency and regulatory requirements. Areas of discussion include the following:
- Whether or not limited partnerships registered in the UK should be required to have a registered office or principal place of business in the UK (or a requirement for partners to maintain a presence in the UK). At the moment a UKLP's place of business can be relocated outside the UK after initial registration without affecting its registration status. This proposal may relate more to English limited partnerships, as there are often reasons for preserving an SLP’s place of business in Scotland.
- Extending the UK’s new public register of persons with significant control (PSC) to SLPs, so that they have to create, maintain, publish and update a register of those who, alone or jointly with others, have ‘significant control’ over them. This is already in train as part of the UK’s implementation of the Fourth Anti-Money Laundering Directive (by 26 June 2017).
- Enhancing the UKLP registration requirements and introducing a new requirement for information to be updated on an annual basis.
- Considering partnership accounting requirements and whether or not all UKLP accounts (whether or not they are subject to the Partnership (Accounts) Regulations 2008 (as amended)) should be published on a public register.
- The role and regulation of formation agents in registering SLPs.
- Further views (following on from the points raised in the PFLP consultation) on the impact of striking off UKLPs from the Companies House register.
Views and evidence are requested by 17 March 2017. We have some comments and some reservations about some of the proposals, and will be submitting a joint response with other law firms working in the investment management space. We would be happy to assist our clients and contacts in discussing with you any thoughts you may have on the proposals.