UK Private Fund Limited Partnerships

May 8, 2017

On 6 April 2017, the Legislative Reform (Private Fund Limited partnerships) Order 2017 ("LRO") came into force. The LRO amends the Limited Partnerships Act 1907 ("LPA") and introduces a new form of limited partnership, the ‘private fund limited partnership’ ("PFLP") for use as a fund vehicle.

UK limited partnerships are often used as investment vehicles across a range of asset classes, including private equity and real estate, due to their organisational flexibility, tax transparency and limited liability for investors. UK limited partnerships have not been as popular in recent years as certain, more flexible, forms of limited partnerships are available in other jurisdictions. The intention of the LRO is to enhance the competitiveness of UK limited partnerships compared to limited partnerships in other jurisdictions by reducing the administrative burdens and complexities of limited partnerships and codifying activities that may be taken by limited partners without jeopardising their limited liability status.

Establishing a PFLP

Designation as a PFLP is voluntary and open to existing and new limited partnerships. A limited partnership can elect to become a PFLP by making a filing with Companies House subject to the following conditions:

(i) the PFLP is constituted by an agreement in writing; and

(ii) the PFLP is a ‘collective investment scheme’ as defined in section 235 of the Financial Services and Markets Act 2000 (ignoring the exemptions from such classification for these purposes).

While we would expect that most limited partnerships would be able to meet these two conditions, certain limited partnerships may fall outside of the definition of ‘collective investment scheme’ if the limited partners have significant involvement in the day-to-day operations.

As was the case under the LPA prior to amendment, a PFLP must include ‘limited partnership’ or ‘LP’ after its name, but its status as a PFLP need not be disclosed in its name. It will not therefore be immediately obvious whether a partnership is a PFLP unless the Companies House filings are inspected. Once designated as a PFLP, the limited partnership will not be able to reverse the election. Both an existing limited partnership and a new limited partnership can be designated as a PFLP. It may be necessary for an existing limited partnership to amend its limited partnership agreements in order to become designated as a PFLP.

To be designated as a PFLP, the general partner of a limited partnership must file either form LP7 with Companies House at the time of the initial registration of the limited partnership or form LP8 if designation as a PFLP is sought after the initial registration of the limited partnership.

Key changes

1. White list:  Limited partnerships have traditionally been a popular investment structure as they offer flexibility, tax transparency and, provided limited partners do not take part in management, limited liability to the limited partners. One problematic area under the previous law was uncertainty as to the scope of activities a limited partner could be involved in without being considered to have taken part in management of the limited partnership, with the consequent loss of limited liability status. While the fundamental position remains the same (if a limited partner engages in management it loses its limited liability), the LRO introduces a ‘white list’ of permitted activities that limited partners can undertake without the risk of being found to have taken part in management (the inclusion of this white list brings the LPA into line with equivalent limited partnership regimes in other jurisdictions, such as Jersey, Guernsey and Luxembourg). The full ‘white list’ can be found here and includes:
   • taking part in a decision about the variation of the limited partnership agreement, the nature of the limited partnership or a disposal or dissolution of the limited partnership;
   • consulting or advising the general partner or manager about the limited partnership’s affairs or accounts;
   • providing surety or acting as guarantor for the limited partnership;
   • taking part in decisions authorising the general partner to incur, extend, vary or discharge debt of the limited partnership;
   • approving the accounts of the limited partnership or valuations of its assets;
   • taking part in decisions regarding changes to persons in charge of the day-to-day management of the limited partnership;
   • taking part in a decision regarding the disposal of the limited partnership, or the acquisition of another business by the limited partnership;
   • acting, or authorising a person to act, as a director, member, employee, officer or agent of, or a shareholder or partner in, a general partner of, or a manager or adviser to, the limited partnership (provided that this does not extend to taking part in management of the partnership’s business); and
   • appointing or nominating a representative to a committee, for example to an advisory committee.

   The ‘white list’ is a non-exhaustive list of activities and, therefore, it remains the case that if a limited partner undertakes an activity which is not on the list, a determination of whether a limited partner has taken part in the management of the company (and thus liable for all debts and obligations of the limited partnership as if it were a general partner) will continue to be subject to case law.

2. Capital contributions:  Limited partners are generally required to make capital contributions to a limited partnership upon admission and, if such capital contributions are returned during the term of the limited partnership they are then liable for the debts and obligations of the limited partnership up to the amount returned. In the fund context, this restriction was typically addressed by allocating limited partners’ commitments into loan and capital contribution elements, allowing for earlier repayment of loan commitments without any adverse consequences to the limited partners.

   Limited partners in PFLPs are not required to contribute capital on admission to the limited partnership and may withdraw any capital contributions made to a PFLP without incurring liability for the amount withdrawn. However, the ability to withdraw capital contributions without liability does not apply (i) to capital contributions made before 6 April 2017, or (ii) where a capital contribution was made before the limited partnership became a PFLP.

3. Winding up:  The LRO removes the requirement for the limited partners of a PFLP to obtain a court order to wind up the limited partnership in circumstances where the general partner has been removed. In such circumstances, the limited partners can instead appoint a third party to wind up the limited partnership. The LRO provides limited partners with further comfort in the ‘white list’ of activities that the appointment of a third party to wind up the limited partnership will not constitute ‘taking part in the management’ of the limited partnership.
4. Gazette notices:  The LRO removes certain administrative burdens on PFLPs, including the requirement for a Gazette notice to be published upon the assignment by a limited partner of its interest in a PLFP to give the assignment legal effect, for the purposes of the LPA.
5. Fewer Companies House filings:  A PFLP will not be required to notify Companies House of changes to (i) the nature of the limited partnership’s business, (ii) the character of the limited partnership or (iii) the amount of capital contributions made to the limited partnership.

*          *          *

These changes should make UK limited partnerships more attractive as investment vehicles by streamlining administration and bringing the law surrounding unlimited liability of limited partners into line with equivalent limited partnership regimes in, for example, Jersey, Guernsey, the Cayman Islands and Luxembourg, which have in recent years introduced reforms to make structuring and operating private funds more efficient. We expect that a significant number of fund sponsors that use UK limited partnerships will choose to register new limited partnerships as PFLPs and fund sponsors that have looked elsewhere for the formation of limited partnerships may now consider UK limited partnerships as a viable alternative.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the authors:

Wayne McArdle – Partner, London (+44 (0)20 7071 4237, [email protected])

Chézard F. Ameer – Partner, Dubai (+971 (0)4 318 4614, [email protected])

Josh Tod – Of Counsel, London (+44 (0)20 7071 4157, [email protected])

Edward A. Tran – Of Counsel, London (+44 (0)20 7071 4228, [email protected])

© 2017 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.