Letter of the LP law

It’s been a long time coming but the UK government has launched a consultation on proposed changes to existing limited partnership legislation. Its request for feedback from industry participants includes a key set of recommendations – The White List.

The list of “permitted activities” details for the first time the range of decisions LPs can make regarding a fund without jeopardising their limited liability. The guidelines were first promised in the government’s 2013 Budget.

In the absence of much judicial interpretation or existing rules, it is a long-awaited step towards modernising the Limited Partnership Act 1907, which lags common practice in private equity fund structures.

The current situation gives way to legal nervousness around the extent to which investors’ behaviour could be construed as intervening in the management of a fund. A clear list will give LPs and their advisers comfort.

Crucially, it will reassure LP advisory committees (LPACs) expressing a view, for example on conflicts of interest arising from a general partner investment decision, that their input is acceptable, says Samuel Kay, Travers’ head of investment funds.
“That has always been how the arrangement has been structured but lawyers have always been uncomfortable about it. You could argue that the LPs are taking part in the management of the fund. They are expressing a view on a transaction,” he says.

Other proposed changes include removing the requirement for LPs to make a nominal capital contribution to the fund, which cannot be repaid, introducing a process to strike off defunct funds from the Companies House register and removing the obligation for funds to post notice of the partnership in the Gazette.

The goal of the consultation is to retain the UK’s competiveness as a leading centre for private fund management in Europe.

“The legislation is really outdated and was not developed for the purpose it is most commonly used for,” says Sally Gibson, partner with Debevoise & Plimpton. “There is an obvious benefit to modernising the rules so they are more on a footing with other regimes.”

The key benefit of the changes would be to lift the “significant administrative burden” attached to structuring a fund, Gibson adds. Explaining to investors concepts such as the minimum capital contribution can be complicated. “It’s not easy to find a modern rationale for the 1907 legislation,” she says.

Responses to the consultation are expected to support the amendments. However, Hogan Lovells partner Erik Jamieson anticipates that two key pieces of language will be tweaked.

The first is the definition of a private fund that has been linked to collective investments. “The current drafting means that some actors in a type of PE set-up, such as parallel and co-investment vehicles to accommodate single investors, are not caught in this definition,” he says.

And the wording that states LPs can advise a GP “on the affairs of the partnership” is likely to be tightened to avoid the implication LPs have a say in the management of a fund.

“That goes beyond the current market practice for LPAC consultation,” he adds.

Should the proposals be implemented following the end of the consultation in October, no one expects that any legislative fine-tuning would usher in a fundamental shift in the relationship between LPs and GPs. And neither are the changes expected to prompt a rush of funds to domicile in the UK.

In that respect, the restricted scope of the consultation, targeted at investment funds only is expected to smooth its path into law. As does one notable omission. The consultation does not address the application of the concept of a separate legal personality to limited partnerships.

Such a development, which would result in funds being able to enter into contracts and hold assets, would require new legislation. Sidestepping this issue, the government seems to have decided to conduct a quick spring clean of existing rules rather than a lengthy restructuring of the LP framework.