HM Treasury have completed a consultation process on proposals to change limited partnership legislation for private investment funds. The changes aim to make UK limited partnerships more competitive as the vehicle of choice for private equity and venture capital funds, particularly by clarifying activities that investors (limited partners) can undertake without risking their limited liability status. They are intended to come into force in around a year's time.
The proposals will amend the Limited Partnerships Act 1907 for "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. For new limited partnerships, once the new rules are in force, in order to benefit from them the general partner will need to confirm on the Form LP5 registering the limited partnership that it meets the conditions for a PFLP. Existing limited partnerships can also opt in to PFLP status at any time (rather than the original transition period of one year), though having done so they will not be able to return to ordinary limited partnership status.
Probably the most interest in the reforms has focussed on the new "white list", which will be implemented largely as proposed. If a limited partner in a UK limited partnership participates in the management of the partnership's affairs, it risks losing its limited liability for the debts and obligations of the partnership. With increasing investor demands for approval and consultation rights, in the absence of clear guidance on what constitutes management both fund managers and investors have struggled to define clear boundaries comfortably. The new PFLP rules will bring in a non-exhaustive "white list" of activities that a limited partner can undertake, without jeopardising its status. The list in some respects goes further in terms of what limited partners can do than most fund managers would want to concede, so while the list will be useful ammunition for investors seeking increased control, fund managers will point out that the list is permissive rather than a set of required investor rights.
On the administrative side, the requirement to make a capital contribution will be removed for new PFLPs set up after the rules come into force and any that are made will be capable of being withdrawn. However, the current law will continue to apply to capital contributions that were made to existing limited partnerships before they opted into the PFLP rules. This means that although such capital contributions can be withdrawn, the limited partners may be required to return them.
Other administrative improvements include removal of the requirement to file a Gazette notice when a limited partner assigns its interest, and the deletion of some of the information on the Form LP5 for registration.