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Limited Partnerships Bill - safe harbours not safe enough
The Limited Partnerships regime is designed to encourage greater capital investment but Bell Gully corporate partner Andrew Abernethy believes the rule prohibiting limited partners' involvement in management is confusing and outdated.
Limited partnerships are a form of partnership involving general and limited partners. General partners transact the business of the partnership while limited partners are passive investors and are liable only to the extent of their capital contribution to the partnership.
The Ministry of Economic Development has released a discussion paper outlining proposed regulations to be made under the Limited Partnerships Bill, now before the Commerce Select Committee.
Andrew says a main concern with the proposed legislation is the adoption of the so-called "control rule", which means that limited partners lose the benefits of limited liability if they engage in the "management" of the limited partnership. The emphasis is then put on drafting regulations which specify the activities that can be undertaken. The better approach would be to do away with the control rule altogether.
Limited partners are principally concerned that their limited liability is not attacked or prejudiced in any way. The so-called "control rule" creates uncertainty around limited partners exercising veto, voting and other control rights over the management and operation of the limited partnership and therefore requires elaborate and often exhaustive lists of permitted activities that limited partners may engage in without losing the benefits of limited partnership, otherwise known as "safe harbours".
This rule has led to uncertainty and costs for market participants in the administration of limited partnerships worldwide, says Andrew, who has experience advising on limited partnerships in Delaware, Cayman Islands and British Virgin Islands.
He says a better designed principle has been adopted by the National Conference of Commissioners of Uniform State Laws in the United States. It does away with the control rule altogether and provides that limited partners are not liable for the obligations of the partnership even if they do engage in the management and control of the limited partnership.
The National Conference of Commissioners adopted this principle because of its stated belief that the control rule had become an anachronism in a world with limited partnerships, limited liability companies and other flow-through entities, and that eliminating the control rule would allow for the "next logical step in the evolution of the limited partnership".
Bell Gully has recommended that the draft Bill be amended to remove the control rule and with it the need to negotiate, draft and continue to keep updated the lists of presumptively safe harbours.
Bell Gully would like to see New Zealand provide a more secure environment for limited partners by removing the control rule and the need for safe harbours. It is the "next logical step" and the best way for the Bill to encourage greater venture capital investment in New Zealand.
