Cayman Islands: Partnership rules

Author: | Published: 1 Jul 2008
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When a US fund forms an alternative investment vehicle or a co-investment fund for certain tax-exempt or foreign investors in the Cayman Islands, the partnership agreement for the Cayman Islands exempted limited partnership will usually mirror the terms of the Delaware limited partnership used as the principal onshore fund vehicle as far as possible. The commercial terms of the Cayman Islands law governed partnership agreement, the legal protection offered to limited partners, and the general partner and persons sitting on the advisory board must be as consistent with the Delaware limited partnership as possible.

Where the laws of Cayman Islands and Delaware differ, changes must be made to the Cayman Islands law governed partnership agreement if the draft partnership agreement was based on a Delaware partnership agreement.

Non-participation

Section 7(1) of the Exempted Limited Partnership law (2007 Revision) prohibits a limited partner from taking part in in the conduct of the business of an exempted limited partnership. However, the Law does not define what "taking part in the conduct of the business" means. Under the Law, no penalty exists for breaching Section 7(1), although Section 7(2) provides that a limited partner may lose its limited liability protection in certain circumstances.

Section 7(2) of the Law states: "if a limited partner takes part in the conduct of the business of an exempted limited partnership in its dealings with persons who are not partners, that limited partner shall be liable, in the event of insolvency of the exempted limited partnership, for all debts and obligations of the exempted limited partnership incurred during the period that he so participates in the conduct of the business as though he were, for such period, a general partner, provided always that he shall only be rendered liable ... to a person who transacts business with the exempted limited partnership during such period with actual knowledge of such participation and who then reasonably believed such partner to be a general partner."

It is unlikely that this provision would catch any limited partner. It would require the limited partner to present itself as a general partner to persons that are not partners and to transact business on behalf of the partnership with such persons. The provisions of the partnership agreement dealing with advisory boards and conflicts committees will require careful review. To ensure that the members of these boards and committees do not inadvertently breach Section 7(2), it is good practice to expressly provide that members of such boards and committees only communicate with other limited partners and the general partner, and not with persons who are not general partners, and at no time describe themselves as a general partner of the partnership. Provided their roles relate solely to the partnership's internal management, limited partners that are members are unlikely to breach Section 7(2).

Section 7(3) of the Law provides safe harbour provisions like those of Delaware (but not as exhaustive). They do not expressly include participation on advisory boards or conflicts committees but they state that consulting or advising a general partner, voting as a limited partner on the purchase or sale of assets by, or of, the partnership, or reviewing or approving the partnership's business does not constitute taking part in the conduct of the business.

Appointing a manager

A manager is sometimes appointed to carry out certain functions relating to the investment and management of the partnership's assets. Because an exempted limited partnership of the Cayman Islands does not have a separate legal personality, and the general partner is responsible for contracting on behalf of the partnership and holding its assets in trust, one should ensure that the manager is properly appointed. We recommend that the partnership agreement provides that the general partner may delegate any of the powers (including signing authority) granted to it under the Law or the partnership agreement to a third party manager.

The general partner and the partnership should enter into a management agreement with the manager. This will allow a clear delegation of the general partner's powers to the manager. The general partner will also grant the manager power of attorney to sign partnership documents on its behalf. The manager should always disclose its authority and contract as the manager. It should ensure that it does not present itself as the general partner of the exempted limited partnership or it may be liable as a general partner or under common law as an undisclosed agent holding itself out as principal.

The manager, if it is a Cayman Islands company, will probably be regulated under the Securities Investment Business Law (2004 Revision) of the Cayman Islands, and will file an exemption from requiring a licence pursuant to Section 5(4) of SIBL with the Cayman Islands Monetary Authority.

Partners in the partnership

The partnership agreement must be executed properly as a matter of Cayman Islands law. This can be achieved by one of the following alternatives: all partners sign identical counterparts that are simultaneously released at closing; each limited partner signs a subscription agreement containing a power of attorney in favour of a general partner, who signs the partnership agreement on behalf of all the limited partners or attaches a signature page to the partnership agreement supplied by the limited partner; or all partners sign the same agreement. The subscription and partnership agreements must be executed as a deed if they contain a power of attorney as a matter of Cayman Islands law.

Once the partnership agreement has been executed and delivered by the initial partners, it constitutes a contract. Unless an incoming partner becomes party to the partnership agreement, there is no privity of contract between the original partners and that incoming partner. The general partner (for itself and on behalf of all the limited partners pursuant to a power of attorney) must enter into an agreement with an incoming partner to formalise its admission.

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