In line with its objective of maintaining and enhancing the UK's competitiveness as a centre for fund domicile, the government has set out proposed changes to UK partnership law.
Recognising that existing UK limited partnership law is not able to accommodate fully the needs of private equity and venture capital trusts, the government has issued a consultation on a proposed new private fund limited partnership vehicle.
The proposed amendments are designed to simplify the existing regime and remove some of the uncertainties that exist, whilst ensuring that 'the UK remains the market standard structure for European private equity and venture capital funds.'
The new vehicle would be designated as a private fund limited partnership (PFLP) and would be available to limited partnerships meeting the criteria at the point of registration, namely those constituted by written agreement, qualifying as a collective investment scheme (under the Financial Services and Markets Act 2000) and whose application for registration includes a certificate signed by a solicitor confirming that the partnership meets the criteria.
To reduce administrative burden and protect investors' privacy the registration process would also be simplified by removing the requirements to register the amount of capital, the general nature of the PFLP and the term of the PFLP.
It is also proposed that existing limited partnerships will be able to re-designate as PFLPs within one year of the introduction of the new legislation.
Capital contribution changes
Under current legislation, withdrawal of its capital contribution will result in a limited partner becoming liable for the debts and liabilities of the limited partnership up to the amount of the withdrawal. For this reason, contributions are often structured with only a minimal capital element, the majority being provided by way of loan.
The government recognises that this results in considerable complications and unnecessary confusion for those unfamiliar with UK partnership law. It therefore proposes removal of the requirement to make any capital contribution to the PFLP, alongside removal of liability for capital contributions that have been withdrawn.
'White list' activities
Currently, if a limited partner takes part in the management of the partnership business, it may lose its limited liability status and become liable for the partnership debts and obligations incurred while it does so. This principle will continue to apply to PFLPs but a 'white list' is proposed which will allow limited partners to undertake specified activities without being deemed to take part in the management of the business. These include:
- approving the partnership accounts
- acting as a director, member, officer or agent of, or shareholder in, a general partner or person appointed to manage or advise the partnership
- appointing or nominating a person to represent the limited partner on a committee
- enforcing rights under the partnership agreement
- taking part in decisions about types of investment, changes in the general nature of the partnership, acquisitions and disposals of partnership business, appointment of partners and dissolution or winding up of the partnership
Exemption from statutory duties
In the context of private fund investments, some of the statutory duties applying to partners generally are inconsistent with the position of a largely passive investor which often makes its investments in competing businesses.
For this reason, it is proposed that the duty to render accounts and information to other partners and the duty to account for profits made in competing businesses, shall not apply to limited partners in a PFLP.
Other changes proposed in the consultation include:
- removal of the requirement to advertise in the Gazette if a general partner becomes a limited partner or if a limited partner assigns its interest to another person
- allowing the partners (and, where there is no general partner, just the limited partners) to agree among themselves who should wind up the partnership without having to obtain a court order
- granting the Registrar of Companies the power to remove inactive PFLPs from the register (currently there is no procedure for removing a limited partnership from the register, even if it has been dissolved)
The need for reform
If introduced, these reforms will align the UK with other jurisdictions which already have, or are introducing legislation which provides for, flexibility for private fund structures.
It is proposed that the changes will be effected through a legislative reform order - a statutory instrument used for removing or reducing legislative burden.
The consultation closes on 5 October 2015. Read it here.