The UK limited partnership is one of the most commonly used structures for European private equity and venture capital funds, and is also used for various other types of private fund.
It has great flexibility in its constitution, is transparent for UK tax purposes and offers limited liability protection to investors. However, it currently suffers from statutory requirements that add unnecessary administrative burdens for general partners, including outdated restrictions on withdrawal of capital that have largely been structured around by the funds industry.
Given the number of other available and increasingly used alternative structures (including those in the Channel Islands), HM Treasury has published a consultation proposing changes to ensure that the UK limited partnership remains a market standard structure for private funds in Europe.
This is not the first time such reform has been on the government’s agenda. In 2003, a Law Commission report made a number of recommendations, and limited changes were made in 2009 following consultation. However, objections from interest groups at the time meant the reforms were unable to be wider-reaching.
The proposed changes would apply to limited partnerships meeting certain ‘private fund conditions’, which require the limited partnership to be (i) a collective investment scheme (within the meaning of FSMA 2000) which is not authorised by the FCA, and (ii) constituted by a written agreement. By including this restriction, certain stakeholders who have historically objected to limited partnership reform proposals will not be affected. The draft order includes a process for designation on the register of those limited partnerships that are private funds at the point of registration, and proposes an option for existing limited partnerships to become designated as private funds within the first year of the changes coming into effect.
The change that will be of most interest to investors is a proposed ‘white list’ of activities that limited partners can be involved in without jeopardising their limited liability status. The list ranges from taking part in decisions regarding amendments to the limited partnership agreement, approving accounts and appointing advisory committee members; to taking part in decisions about particular investments, incurring debt and authorising general partner actions.
Other changes include:
- l removing the current requirement for limited partners to make a capital contribution, and the liability of limited partners for capital contributions that have been withdrawn;
- l allowing partners to agree among themselves who should wind up the limited partnership without having to obtain a court order;
- l exempting limited partners from certain statutory duties, including to render accounts and information to other partners, and to account for profits made in competing businesses; and
- l administrative/practical reforms, such as (i) simplifying the registration process by removing some of the details that must be specified; (ii) granting the registrar a power to remove limited partnerships from the register on application or where the partnership is no longer operating; and (iii) removing the requirement for the advertisement of certain changes in respect of private funds in the Gazette.
Unfortunately the proposed changes do not include allowing funds in the UK outside Scotland to elect to have separate legal personality, as it is not possible to do so using a legislative reform order. The government notes that it remains committed to exploring this possibility.
Emily Harmsworth is an associate at Linklaters LLP
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