Last year, HM Treasury consulted on proposals to change limited partnership legislation for private investment funds in the UK. The intention of these warmly welcomed proposals is to improve the position of UK limited partnerships as the vehicle of choice for both private equity and venture capital funds, although the changes are expected to benefit a wide range of collective investment vehicles provided they meet the criteria.
HM Treasury published the response to the consultation in March this year and announced that for the most part, the reforms will be implemented as planned. That announcement indicated that we can expect the changes to be effective by around March 2017, although in view of recent events, it is possible that the UK Parliament's priorities may have subsequently changed. Here, the key proposals and how they will be implemented following the consultation process are examined.
Qualifying limited partnerships
It remains the case that the amendments to the Limited Partnerships Act 1907 (the Act) will apply to private fund limited partnerships or PFLPs only. Any limited partnership that qualifies as a collective investment scheme under the Financial Services and Markets Act 2000 (FSMA), as well as any limited partnership that would qualify were it not for one of the statutory exceptions made under section 235(5) of FSMA, will be able to benefit from the new regime.
To benefit, the general partner of any new limited partnership established after the effective date of the reforms will need to confirm on the Form LP5 registering the limited partnership that it meets the conditions for a PFLP – there will no longer be a requirement for a solicitor's certificate as originally proposed. Existing limited partnerships will be allowed to opt in to PFLP status at any time (a helpful improvement from the original transition period of one year). However, if they do so they will not be able to return to ordinary limited partnership status.
One of the striking aspects of the proposed reforms is a new white list of activities that a limited partner can engage in without jeopardising its status as a limited partner. Under English and Scottish limited partnership law, if a limited partner participates in the management of the partnership's affairs, it will be at risk of losing its limited liability for the partnership's debts and obligations.
While this principle will remain unchanged, fund managers and investors have been struggling for some time to define exactly what is meant by management of the partnership's affairs. Bringing UK partnership law in line with that of a number of other competing jurisdictions, the new rules will introduce a non-exhaustive white list of activities that a limited partner can undertake, without putting this status in danger.
This white list was unanimously welcomed as a concept by the responses to the consultation. The government has taken on board a number of more detailed comments made in those responses, including agreeing to add a useful clarification that the list is non-exhaustive to ward off any suggestion that an activity not on the list would constitute management.
"The white list was unanimously welcomed as a concept by the responses to the consultation"
As noted by many of those responding, the list does, in places, allow limited partners rather more significant input than a typical fund manager may want to allow from a commercial perspective.
The list is permissive rather than setting out rights that are automatically granted to limited partners, but managers can nonetheless expect this list to be mentioned by investors who want more of a say when it comes to negotiating fund terms.
Broadly speaking, the activities included in the white list will be implemented as originally drafted, including useful codifications of current market practice such as a limited partner also being a shareholder in the general partner and some more advanced rights such as the ability to take part in a decision about whether the partnership should make an investment.
The eventual rules will also include a further activity of look-through voting for feeder funds (ie, where limited partners exercise voting rights to require the feeder fund to vote in a certain way at master fund level).
As proposed, the requirement to make a capital contribution will be removed for new PFLPs set up after the rules come into force. If for any reason the partners agree that capital contributions should be made nonetheless, these will be capable of being withdrawn and will not need to be repaid. Furthermore, there will be no requirement to register capital contributions at Companies House.
The position will be different for existing PFLPs, even if they opt in to the new regime. In view of concerns raised that creditors of existing limited partnerships may have relied on the current legal status of capital contributions, HM Treasury have announced that the existing law would continue to apply to any capital contributions that were made before the date of opting in. Most importantly, this means that if those capital contributions are withdrawn, the limited partners may be required to return them.
Winding up PFLPs
The government had proposed a procedure to remove PFLPs from the limited partnership register once they have been wound up. This was welcomed by many in principle, since currently limited partnerships remain on the register even if they have been dissolved, which can cause confusion. However, some respondents noted that a PFLP could be removed from the register when it had not actually been wound up, which would cause the limited partners to lose their limited liability status unwittingly. Also, it would be confusing if PFLPs but not other limited partnerships could be removed. HM Treasury concluded that the best course of action is not to allow for limited partnerships to be struck off the register as originally planned. They will consider wider options and may make further proposals in due course.
By Hogan Lovells senior associate Amelia Stawpert and partner Erik Jamieson in London