Limited Partnerships set to become a little less Limited
The societates publicanorum which arose in Rome in the third century BC is arguably the earliest form of limited partnership and the legislation governing UK limited partnerships ("LPs") can sometimes seem almost as ancient. Enacted in 1907 the Limited Partnerships Act (the "Act") has remained largely unchanged whilst in the 1980s LPs have developed as the standard vehicle for establishing private equity and venture capital funds, exploiting their tax transparent status. The UK private equity and venture capital industry continues to be the largest in Europe with around 35% of all assets managed in Europe managed out of the UK.
Whereas other major funds jurisdictions have implemented or sought reform of their legislation to ensure that they are attractive jurisdictions for fund managers, the UK has not. Following much industry lobbying, the government published a consultation in July 2015 setting out proposals to amend UK limited partnership law (the "Consultation") with a draft legislation reform order (the "LRO"). The Consultation was published with the aim of ensuring that LPs remain the market standard structure for European private equity and venture capital funds in an increasingly global market and was met with an overwhelmingly positive reception. March 2016 saw the long awaited publication of the responses to the Consultation and the final decision on policy design (the "Response"). Below is a quick round up of the most important changes to look out for.
Designation as Private Fund Limited Partnership ("PFLP")
It is important to note that the reforms will apply only to those LPs which are private fund vehicles. An LP will be capable of becoming a PFLP if it is subject to a written agreement and it qualifies as a collective investment scheme ("CIS") for the purposes of the Financial Securities and Markets Act 2000 ("FSMA") or would do so but for the fact that the LP falls within an exception under section 235(5) of FSMA. This allows funds which might fall within one of the exceptions and not be categorised as a CIS for FSMA purposes to benefit from being a PFLP. Although a number of respondents to the Consultation criticised this distinction between LPs and PFLPs on the grounds that some of the changes would be beneficial to all LPs the Response confirmed that the legislation will currently only apply to funds designated as PFLPs.
In order to register as a PFLP the general partner will be required to confirm that the LP fulfils the necessary requirements. The government had initially proposed that confirmation would be provided by way of a solicitor's certificate. However, the government acknowledged in the Response that this would serve only to create further administration and that the general partner would be best placed to make this confirmation.
Currently, an application for registration must contain certain details about the LP, including the general nature of the LP's business and the term of the LP. The Response confirmed the government's intention to remove these details from the registration requirements which is another welcome reduction in administration and a move to protect investors' privacy.
The government also conceded on a proposed twelve-month window for LPs to apply for PFLP status meaning LPs will now always have the option of converting to a PFLP. It should however be noted that once an LP becomes a PFLP it will not be able to switch back.
Under the Act there is no procedure for dissolved partnerships to be removed from the register at Companies House. This is highly unsatisfactory, private equity and venture capital funds often have fixed life cycles but even after being wound down remain on the register indefinitely. The Consultation outlined a proposal for the strike off of PFLPs, but the government has concluded that further consultation should be taken following concerns raised that limited partners may unknowingly lose their limited liability status.
The White List
Under the Act a limited partner may not take part in the management of the partnership business. There is much confusion as to exactly what this means. Nervousness around this point is understandable given that a limited partner "crossing this line" will be liable for all debts and obligations of the LP incurred while it takes part in the management as though it were a general partner.
A welcomed reform, bringing much clarity, is the creation of a non-exhaustive list of permitted activities (the "White List"). Permitted activities include taking part in a decision about whether to dispose of the partnership business or to acquire another business or enforcing rights under the partnership and the concept is consistent with legislation introduced in other popular investment funds jurisdictions.
Limited partners are required to contribute an unstipulated amount of capital to a partnership upon entry. They cannot draw out or receive back any portion of their contribution (directly or indirectly) during the lifetime of the partnership. If a withdrawal is made the limited partner will be liable for debts and obligations up to the amount drawn out or received. In practice this has meant that limited partners contribute a nominal amount on admission along with an interest free loan. The arbitrary nature of this arrangement has led to the decision to do away with these requirements allowing for an optional contribution which can be withdrawn. The Response makes it clear that contributions made to LPs prior to the implementation of the LRO will still be treated as if under the old regime even after the LP has transferred to the PLFP regime.
The dissolution of LPs is currently administratively burdensome and plagued with delays. Following the removal of a sole general partner the remaining limited partners must apply for a court order for the partnership to be dissolved. The LRO will remove this requirement. The Response addressed the concern that winding up an LP could cause limited partners to lose their limited liability status as it requires management decisions. The Response clarified that limited partners in PFLPs would be able to appoint a third party to wind up the LP on their behalf and that this would be expressly provided for in the White List.
At present, if a general partner becomes a limited partner or a limited partner assigns its interest in an LP to another person this will only become effective once advertised in the Gazette. The government acknowledged that this was an archaic requirement as the publication is scarcely consulted. The new regime will no longer require a limited partner to advertise in the Gazette when they assign their interest in an LP to a third person but the requirement to advertise when a general partner becomes a limited partner will remain, albeit, without the stipulation that the change will not be effective until advertised.
Exemption from Statutory Duties
The new regime will exempt limited partners in a PFLP from their duties under section 28 (to render accounts and information to other partners) and 30 (account for profits made in competing businesses) of the Partnership Act 1890, both of which were considered inconsistent with the position of a largely passive investor.
The proposals for the new regime have gone some way to ensure that PFLPs are able to compete with LPS in other popular private funds jurisdictions creating a more modern and efficient form of a UK LP. It remains to be seen if the government takes the step to consult more widely and apply similar changes across all LPs. The proposals are due to be fully operational within a year and although some may criticise the reforms for not going far enough, they are definitely a step in the right direction.