The Limited Partnerships regime – key legal concepts summary Introduction The limited partnership provisions of the Limited Partnerships Act 2008 (LP Act) came into force on 2 May 2008 and introduced to New Zealand a new form of corporate entity, the limited partnership. The limited partnership is an evolution of the special partnership (statutorily enacted in New Zealand by Part II of the Partnership Act 1908 (repealed by the LP Act)) which was initially formulated to enable persons (limited partners) to provide silent or passive capital to a business operated through a manager or group of managing persons (the general partner(s)). Under this model, the limited partners would have limited liability for the debts and obligations of the business venture provided they did not participate in management of the business. Due to some of the more inherently problematic aspects of the special partnership (such as the lack of separate legal personality), various jurisdictions enacted legislation creating limited partnerships with separate legal personality. This model has become recognised as the international standard form of structure for the venture capital and investment funds industry and by choosing to adopt it (albeit amended for the local context) New Zealand has brought itself into line with international standard practice. While the adoption of the limited partnerships regime in New Zealand is principally targeted at the venture capital and investment funds industries, the limited partnership structure is not limited to use in those industries alone. However, this summary focuses only on the use of limited partnerships operating in the venture capital and investment funds industries. Capacity and formation of the Limited Partnership Each registered limited partnership is a separate legal person (like a company) and, subject to the LP Act, any other statute, general law and the terms of the relevant partnership agreement, has full capacity to carry on or undertake any business or activity within and outside New Zealand. This capacity will usually be exercised by the general partner (as discussed in the section headed “General Partners” below). A limited partnership has three key components: •
at least one general partner, who is jointly liable with the limited partnership for the debts and liabilities of the limited partnership;
•
at least one limited partner, whose liability is limited to the amount of capital it has committed to the limited partnership; and
•
a partnership agreement regulating the arrangements between the partners.
There is no restriction on who or what type of legal person may be a partner of a limited partnership. For example, a natural person, a company, a trust, or an overseas limited partnership may be a partner of a limited partnership. A person or entity cannot be both a limited and a general partner in the same limited partnership. However, there is nothing in the LP Act which prevents two separate entities associated with the same person from being the general and limited partner respectively of the same limited partnership.
Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
Partnership Agreement As the LP Act does not provide a default regime in respect of the operation of limited partnerships, the partnership agreement must deal with certain matters, as set out in section 10 of the LP Act. These matters include: •
any restriction on the ability of a partner to assign or otherwise dispose of their interest in the limited partnership;
•
any restriction on the business or activities that the limited partnership may undertake;
•
the entitlement of partners to distributions;
•
when a meeting of partners must be held and the procedure for conducting such meeting;
•
whether the financial statements of the limited partnership must be audited;
•
how a partner may leave the limited partnership, whether they can be expelled and how a new partner may be admitted;
•
when and how the limited partnership will terminate; and
•
whether there is a conflict of interest policy and, if so, its nature.
The LP Act does not mandate how any of these matters shall be dealt with, only that the partnership agreement must provide for them. Other than the above requirements, it is largely left to the partners to negotiate and agree the terms of the partnership agreement. In addition to the above matters, a partnership agreement (in an investment funds context) would also usually cover the following matters: •
constitution and formation of the limited partnership;
•
capital contributions (including calls on capital) and partnership interests;
•
operation and management of the limited partnership (including the appointment of the manager);
•
conflicts and co-investment policies; and
•
mechanics for calculating partnership expenses and attributing partnership profits and losses.
General Partners General partners are responsible for the management of the limited partnership. A general partner is an agent of the limited partnership for the purposes of the limited partnership’s business and may enter into legally binding obligations and otherwise bind the limited partnership. As it lacks any other functionary (such as, by analogy, a director of a company) a limited partnership will not generally be able to act other than through the general partner. Under the LP Act, general partners owe fiduciary duties to the limited partnership to: •
render true accounts and information relating to all matters affecting the limited partnership;
•
account to the limited partnership for any profit derived from any transaction concerning the limited partnership or the use by the general partner of the name, property or business connections of the limited partnership without consent of the limited partnership; and
Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
•
account for and pay to the limited partnership any profit made by the general partner in any business which is of the same nature and competes with the business of the limited partnership where the relevant business is carried out without the consent of the limited partnership.
These fiduciary obligations may be varied or excluded by the partnership agreement and given the generally stronger negotiating position of the general partner (in a funds context) it is likely that such statutory fiduciary obligations would be excluded as far as possible. This said the partnership agreement will usually include extensive accounting and conflict provisions that address similar matters and may, in the case of any conflict issue arising, require the approval/consent of the limited partners or their delegates. General partners are jointly and severally liable for the debts and liabilities of the limited partnership (including those incurred in connection with business of the limited partnership conducted overseas) which are incurred while they are general partners. As such, a general partner, in addition to being an agent of the limited partnership, stands effectively as a guarantor of the limited partnership for the period that it is a general partner. Unless the partnership agreement provides otherwise, section 28 of the LP Act provides that general partners are only liable for the debts and other liabilities of the limited partnership to the extent that the limited partnership cannot pay or meet those debts or liabilities itself. A general partner will usually seek to limit its liability to the limited partnership in the partnership agreement. It is also likely that general partners will also seek a contractual indemnity from the limited partnership for liabilities incurred by the general partner on behalf of the limited partnership. In an investment funds context, a general partner will usually contract with and appoint a separate manager (which may or may not be related to the general partner) to undertake the operation and management of the limited partnership. The LP Act does not prevent a general partner from delegating its management roles and responsibilities in this manner. As a person only becomes a general partner when that person’s name is entered in the register as a general partner of a limited partnership, an appointed manager should not be deemed to be a general partner by virtue of this appointment alone. Similarly, if the manager of a limited partnership appoints an investment committee to assist it with any investment related matter concerning the limited partnership, such investment committee members will be delegates of the manager (not the general partner) and should not be deemed to be general partners of the limited partnership. Limited Partners A limited partner is not an agent of the limited partnership, any general partner or any other limited partner. Limited partners have no authority to act on behalf of the limited partnership. A limited partner does not owe any fiduciary duties to the limited partnership or any other partner (in that person’s capacity as a limited partner) unless the partnership agreement provides otherwise. In order to retain limited liability status, limited partners must not take part in the management of the limited partnership. Provided this is the case, a limited partner will not be liable for the debts and liabilities of the limited partnership and, under section 23 of the LP Act, cannot be made party to any proceeding in a court or tribunal in which the limited partnership is a party unless it is suing or being sued by the limited partnership or the proceeding relates to the termination of the limited partnership. If a limited partner does take part in management of a limited partnership, it will be deemed to be a general partner. Where this is the case, the limited partner may become liable for the debts and liabilities of the limited partnership in the same manner as a general partner. This will occur where a limited partner has dealt with a third party and, at the time any relevant debt or liability of the limited partnership was incurred in respect of the third party: •
the limited partner participated in the management of the limited partnership;
Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
•
the third party knew that the limited partner was participating in the management of the limited partnership; and
•
the third party believed on reasonable grounds that the limited partner was a general partner of the limited partnership.
The schedule to the LP Act (copy attached) prescribes certain ‘safe harbour’ activities that are specifically stated as not constituting taking part in the management of the limited partnership and may therefore be safely undertaken by the limited partners without risk to their limited liability status. These safe harbours include activities which will often be delegated to an investor’s advisory committee, such as: •
taking part in decisions relating to variation or replacement of the partnership agreement;
•
the approval or vetoing of proposed investments, the value of which would exceed half the value of the limited partnership’s assets prior to the investment;
•
approving proposed changes relating to general partners (such as changes in senior personnel and operations);
•
participating in decisions relating to any disposal of the business of the limited partnership or any acquisition of a new business; and
•
participating in decisions relating to broader procedural and/or administrative matters affecting the limited partnership (such as enforcing the partnership agreement, admission of general partners and termination of the limited partnership).
The provisions of the LP Act generally contemplate that the mere existence of an investors’ advisory committee does not, of itself, constitute participation by limited partners in management. Thus, a committee may be established to represent the limited partners in relation to key decisions affecting the affairs of the limited partnership (such as veto rights in relation to substantial investments) so long as it does not stray into management of the limited partnership. Capital contributions and partnership interest Under the LP Act, limited and general partners may, but are not required to, make capital contributions to the limited partnership. However, the partnership agreement will normally contain provisions requiring capital contributions to be made, usually (but not exclusively) by limited partners, depending on the business activities and capital requirements of the limited partnership. There is inherent flexibility in the manner in which capital contributions can be made, which means that there is flexibility for partners to apportion partnership interests in a limited partnership to reflect various cash and non-cash contributions. Further, it is possible to provide for differential rights in respect of contributed capital and therefore differential returns on such capital. Accordingly, each partner’s “partnership interest” is not necessarily directly related to the partner’s capital contribution, but is determined in accordance with the provisions of the LP Act and the partnership agreement. Under the LP Act, a partner’s partnership interest is that partner’s: •
share of the assets of the limited partnership;
•
right to receive distributions from the limited partnership; and
•
right to any other benefit conferred by the partnership agreement,
and includes any liability or other burden of the partner in relation to the limited partnership. In the investment funds context, particularly in relation to venture capital and private equity funds, this flexibility enables a general partner’s interest to be structured to have a different return profile from those of Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
the limited partners, given the differing contribution of the partners to the limited partnership and the timing of the payment of their respective returns. Registration and administration of Limited Partnerships A limited partnership comes into existence on registration, and similarly a person does not become a partner of a limited partnership until that person’s name is entered on the register. The registration process for a limited partnership is similar to that of a company, and is administered by the Registrar through the Ministry of Economic Development. On initial registration of a limited partnership, the names, birth dates (as applicable) and addresses of the partners must be provided, together with the required forms, written consent of the general partner(s) to act, and a certificate of the applicant (usually the general partner) that the partnership agreement complies with the requirements of section 10 (as noted above). The online register of all registered limited partnerships is available at www.limitedpartnerships.govt.nz, and while the details of the limited partnership and the general partner are publicly searchable, the identities of the limited partners may only be searched by the Registrar and not the general public. Each limited partnership must file an annual return (much like that filed by a company), prepare financial statements and maintain certain statutory records. The Limited Partnerships Regulations 2008 (which also came into force on 2 May 2008) set out in detail the information that is required to be provided in each application, consent, annual return or other notice to be filed by a limited partnership, and the fees for an application for registration ($270) and for obtaining certified copies of the register ($25). Termination of a Limited Partnership Section 86 of the LP Act provides for mandatory termination of a limited partnership on the occurrence of the following events: •
where there has been no general partner for 10 working days or more;
•
where there has been no limited partner for 10 working days or more; or
•
the partnership agreement has lapsed for 10 working days or more.
The general partner, or if there is no general partner a limited partner, may apply to the Court for an order to extend the timeframes set out above (even if the timeframe has expired). In addition, section 86 provides that unless the partnership agreement provides otherwise, the limited partnership will terminate on a resolution to that effect passed by partners who together have contributed at least 75% of the limited partnership’s capital. The limited partnership will also terminate on the occurrence of a particular event, or the expiry of a period of time, if the partnership agreement so provides. If a terminating event has occurred, the limited partnership may appoint a liquidator by a resolution of partners who contributed 75% of the limited partnership’s capital. On termination of the limited partnership, the general partner has such residual authority as may be necessary to wind up the limited partnership’s affairs and complete any transactions which were undertaken prior to termination.
Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
Further information Anderson Creagh Lai is a boutique law firm based in Auckland, specialising in corporate and securities law, with extensive experience in structuring special and limited partnerships. If you require further information or advice or have any queries regarding the limited partnerships regime, please feel free to contact:
Jeffrey Lai Partner
Jamie Barr Solicitor
t: m: e:
t: m: e:
+ 64 9 306 5790 + 64 21 625 318
[email protected]
+ 64 9 306 5794 + 64 21 990 974
[email protected]
Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
Schedule The following is the list of activities that do not constitute taking part in the management of a limited partnership: •
taking part in a decision about the variation or replacement of the partnership agreement;
•
taking part in a decision about whether to approve or veto investments proposed to be made by the limited partnership;
•
-
if the value of the investments would be more than half the value of the limited partnership’s assets before the investment; or
-
as a member of an advisory committee of the limited partnership:
approving (including doing so as a member of an advisory committee of the limited partnership): -
a change in the senior employees of a general partner or of the limited partnership; or
-
a change of contractors engaged by a general partner or the limited partnership:
•
approving (including doing so as a member of an advisory committee of the limited partnership) a change to the manner of operation of a general partner;
•
taking part in a decision about whether the general nature of the limited partnership business should change;
•
taking part in a decision about whether to dispose of the business of the limited partnership or to acquire another business;
•
taking part in a decision about whether a person should become or cease to be a partner;
•
taking part in a decision about whether the limited partnership should end or be terminated;
•
enforcing rights under the partnership agreement (unless those rights are to carry out management functions);
•
reviewing and approving the accounts of the limited partnership;
•
being engaged under a contract by the limited partnership or by a general partner of the limited partnership (unless the contract is to carry out management functions);
•
acting in the capacity as a director or employee of, or consultant or contractor to, or a shareholder in, a general partner that is a body corporate (including any right, to appoint or remove directors and employees, attached to shares held by a shareholder);
•
taking part in a decision to determine an actual or potential conflict of interest involving a partner (or partners) and the business of a limited partnership;
•
discussing the strategic direction or financial prospects of the business of the limited partnership;
•
consulting or advising a general partner or general partners about the activities or the limited partnership or about its accounts (including doing so as a member of an advisory committee of the limited partnership);
•
acting as a director or employee of, or contractor to, any person in which the limited partnership has an interest; or
•
bringing a derivative action on behalf of the limited partnership in accordance with the LP Act.
Important notice: The information in this summary is for general information purposes only and should not be relied upon other than for its intended general purpose. This summary is focussed on the key legal concepts of the LP Act and does not address any tax related provisions of the Act. Any person reading this summary should seek specific legal/tax advice prior to undertaking any substantive proceedings or entering into any contractual or other legal relationship that is related to the limited partnerships regime. This summary is prepared as at 1 July 2008.
