LAWFUEL – NZ Law Jobs & News –
By Andrew Abernethy, Partner | Thursday 6 December 2007
Proposed changes to the Bill establishing limited partnerships in New Zealand will make the structure more appealing to investors but there remain key issues to be sorted.
The Commerce Select Committee yesterday reported back to Parliament on the Limited Partnerships Bill introduced in August to establish a new regulatory and tax regime for New Zealand for limited partnerships – the internationally preferred legal structure for investing in venture capital.
The committee has recommended several changes which improve the attractiveness of New Zealand limited partnerships as an alternative investment vehicle. Key changes are outlined below:
Contracting out obligations
The fiduciary obligations of a general partner to the limited partners may now be contracted out of through the relevant Limited Partnership agreement. A new clause also provides that a limited partner does not have any fiduciary obligations to the limited partnership or to any other partner. While fiduciary principles may have their place in contractual dealings, they are not ideal as mandatory principles for participants in limited partnerships. It is encouraging to see that these principles are now “default” rules, which may be contracted out of by relevant partners. The overseas experience has been that mandatory inclusion of fiduciary principles into a structure such as the limited partnership creates operational uncertainties and inefficiencies.
The select committee has also proposed a change in requirements around the provision of limited partnership information. While certain information regarding limited partners must be provided to the Registrar of Companies, it is now not to be made available to members of the public (and is not to be subject to Official Information Act requests). The disclosure of limited partnership information, in some jurisdictions, goes beyond basic information and into details of capital commitments. Given that limited partners are not responsible for the debts of the partnership other than for unpaid capital, details of the identity of the partners rarely provides useful information to members of the public (and is often sensitive).
Restrictions on limited partnerships engaging in banking and insurance or on listing on securities markets have been deleted from the Bill. The place for these restrictions is in industry-specific regulation (such as banking and insurance legislation or in stock exchange listing rules) rather than an entity-type regulation. There is nothing in the nature of a limited partnership that makes it more or less suitable for listing on the stock exchange, for example, than any other sort of entity.
REMAINING AREAS FOR IMPROVEMENT
While the amendments are an improvement, there are still two areas in which the Bill could be significantly improved.
The so-called “control rule”, which provides that limited partners are responsible for the debts of the limited partnership if they engage in “control type” activities, is not a good idea even when it is coupled, as anticipated, with a long list of authorised “safe harbour” activities. The Commerce Committee has recommended only that the list of safe harbours be moved from regulations to be made under the Act into the body of the Act itself.
The “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. The rule has led, in its application, in its to uncertainty and costs for market participants in the administration of limited partnerships worldwide.
A better approach has been adopted by the National Conference of Commissioners on 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 it believed 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”.
In its submission, Bell Gully recommended that the draft Bill be amended to remove the control rule and with it the need to draft (and continue to keep updated in line with international jurisdictions) the list of safe harbours.
Limited partnership agreement
The Bill has moved from requiring that limited partnerships have a limited partnership agreement to requiring that the limited partnership agreement itself cover certain specified matters. To save time, litigations costs and uncertainty for participants, it would be preferable to create a default set of rules that apply in the absence of agreement to the contrary.
Given the sophisticated nature of participants who are likely to use limited partnerships, almost all limited partnerships established will have detailed limited partnership agreements. Even so, however, we do not consider that it is good use of public funds to have courts have to deal with situations in which the partners to a limited partnership have not addressed a matter that could have been dealt with in default rules.