Changing limited partnership legislation for private equity investments: consultation response

Limited partnerships are an essential part of the structure of many private equity funds and other structures set up for pension deficit funding. Giving its separate legal personality and on-shore status, it is often a requirement of the tax structure for such arrangements that the limited partnership is established in Scotland.

Agreement

At Harper Macleod we have built up significant experience in using the structure of Scottish limited partnerships in connection with private equity investments and pension central asset reserves. In addition to work which we carry out ourselves, we work closely with a significant number of LondonCity firms in assisting on setting up their structures and in preparation for a response.

The Treasury has recently closed its consultation on draft legislation to change partnership legislation for private equity investments and Harper Macleod has been assisting in this process.

As part of the consultation Harper Macleod surveyed over 120 contacts within the private equity investment sector, both legal advisers and fund managers, to ask their views on the proposed reforms and submitted a formal response to the Treasury.

Below we run through each of the main proposals and our recommendations on them, drawn from the responses to our own survey.

What are the Treasury proposals?

The Treasury proposals mainly cover the registration of a private fund limited partnership (“PFLP”) and its on-going filing and notification requirements; the role and function and rights of limited partners in a PFLP and the obligations of, and restrictions on, limited partners in a PFLP in respect of capital.

Designation as a PFLP

Proposal: The Treasury proposals include a process for the designation of a PFLP so that it can be identified readily from the Register of Limited Partnerships. Limited Partners will be able to choose to be a PFLP on the point of registration and it is also proposed that there is a one-year period after the changes came into effect for existing limited partnerships to choose to be designated as a PFLP.
HM survey response: This is seen as both  workable and welcome change although the Treasury should re-consider the one-year time limit, which seemed arbitrary.

Removal of inactive PFLPs by the Registrar of Companies

Proposal: The Treasury proposes granting the Registrar of Companies the ability to remove inactive limited partnerships from the Register of Limited Partnerships.
HM survey response: Again, this is widely welcomed by both Harper Macleod and the respondents to its survey. Indeed as there is no procedure for removing a limited partnership from the Register of Limited Partnerships, there is a strong argument for giving this right to all limited partnerships and not just PFLPs.

Taking part in the management of the partnership business

Proposal: Under the Limited Partnerships Act 1907 (the “Act”) a limited partner may not “take part in the management of the partnership business” or it will be liable for all the debts and obligations of the limited partnership incurred while it takes part in the management as though it were a general partner. However, notwithstanding that this will have serious consequences for a limited partner, the Act does not state expressly what actions are, or are not, to be considered to amount to taking part in the management of the partnership business.
This has called into question whether consultation rights of the limited partner (which is common in fund documentation) fall within the ambit of management.
The Treasury therefore proposes to set out a non-exhaustive list of activities that a limited partner in a PFLP may undertake without being considered to take part in the management of the business, and therefore without losing its limited liability.
HM survey response: This has been widely welcomed by the respondents to our survey.

Capital Contributions

Proposal: The Treasury proposes to remove the requirement for limited partners in a PFLP to make a capital contribution and remove the liability of limited partners in a PFLP for capital contributions that have been withdrawn.
HM survey response: The responses to our survey were broadly split down the middle as to whether the proposals on capital contributions were desirable.

Winding up a PFLP

Proposal: The Treasury proposes to give the limited partners in a PFLP the ability to agree among themselves who should wind up the PFLP without having to obtain a court order.
HM survey response: The responses to our survey were overwhelmingly in favour of such a proposal.

Removal of capital contributedand the nature of the partnership's business

Proposal: In an effort to reduce the administrative burden of registering a PFLP and to protect investors’ privacy, the Treasury proposes to remove some of the details required for registration including the amount of capital contributed and the nature of the partnership’s business.
HM survey response: In a somewhat surprising response the respondents to our survey were in favour of keeping the requirement to specify the amount contributed but not the requirement to specify the nature of the partnership’s business.

Gazette Notices

Proposal: A rather archaic law is the requirement to register in the Gazette notice of a general partner becoming a limited partner or a limited partner assigning its interest in a limited partnership to another person. The Treasury proposes to remove this requirement.
HM survey response: Unsurprisingly, this has been roundly welcomed by the respondents to our survey. Harper Macleod’s view is that all filings relating to limited partnerships (and not just PFLPs) should be effected by filing with the Registrar of Companies and not in the Gazette.

Accounts and information

Proposal: The Treasury proposes that the duties to render accounts information and account to other partners and to account for profits made in competing businesses should be removed.
HM survey response: Our respondents were largely in favour of this.

Get in touch

If you would like to discuss the Treasury proposals, or any other matter relating to limited partnerships, please get in touch.