"Safe Harbours" for New Zealand Limited Partnerships
Issue
7. Limited partners are passive investors in limited partnerships. In common with overseas limited partnership regimes, the Bill prohibits limited partners from taking part in the management of the limited partnership. In exchange for not taking part in the management of the limited partnership, limited partners have significantly lesser exposure to liability than partners in a normal partnership or general partners in a limited partnership. Specifically, they are liable only to the extent of their investment in the limited partnership.
8. The restricted liability of limited partners under the Bill is a key aspect in the limited partnership structure. The Bill specifically provides that limited partners who do not take part in the management of the limited partnership are not liable for the debts and liabilities of the limited partnership.1
9. However, the Bill provides that a limited partner ("A") who does take part in the management of the business of a limited partnership may be liable to a person ("B") in the same way as a general partner if, at the time that the debt or liability to that person was incurred:
- took part in the management of the partnership;
- knew that A took part in the management of the limited partnership; and
- believed on reasonable grounds that A was a general partner.
10. As participating in the management of the business of the limited partnership puts a limited partner in breach of the requirements under the Bill, and potentially exposes them to extra liability, it is important to limited partners to know what activities they can be involved in while not participating in the management of the business of the limited partnership.
11. To provide clarity to limited partners, limited partnership Acts in other jurisdictions often include a list of activities that the limited partners can be involved in while not participating in the management of the limited partnership. The Bill contains provision for regulations to be made in New Zealand setting out the safe harbour activities that would not amount to participating in management.
The objective of safe harbours in the Bill
12. The principal objective of safe harbours is to provide clarity and certainty to limited partners about what activities do not amount to participating in the management of limited partnerships. As the objective of the Bill is also to provide a limited partnership structure that is recognised and accepted by international investors, a further important consideration is that safe harbours for New Zealand limited partnerships are consistent with international best practice and the approaches in other jurisdictions.
Options for safe harbours
13. Safe harbours could take a number of different forms, including
- A list of principles or rules that could be applied by limited partners to determine what activities involve taking part in the management of the limited partnership;
- An exhaustive list of activities that do not amount to taking part in the management of the limited partnership; or
- A non-exhaustive list of activities that do not amount to taking part in the management of the limited partnership.
14. We do not prefer setting out the safe harbours as a list of principles or an exhaustive list of activities. A list of principles would be unlikely to provide sufficient certainty to limited partners about what activities they could be involved in without participating in management, and would be an approach that international investors would be less familiar with. Furthermore, in the most internationally recognised limited partnership regimes (for example, Jersey and Guernsey) safe harbours are a list of specific activities that do not amount to taking part in the management of the limited partnership.
15. We also consider that an exhaustive list of activities would be unnecessarily restrictive. In particular, it would be difficult to establish an exhaustive list that covered all of the circumstances where a limited partner could be involved with the limited partnership while not participating in the management of the limited partnership.
The preferred approach to safe harbours
16. We propose that the safe harbours for New Zealand limited partnerships be a non-exhaustive list of permitted activities set out in regulations made under the Bill. If the activities of a limited partner were not on the list of safe harbours the court would be required to consider whether the activities amount to taking part of the management of the limited partnership or not. This approach provides the necessary flexibility, but also increases the need for the list of safe harbours to be as comprehensive as possible so as to provide certainty to limited partners.
17. In light of this, we consider that this list should be closely based upon that set out in the report Partnership Law prepared in 2003 by the English and Welsh, and Scottish Law Commissions. To that end, we propose the following activities be listed as not amounting to participating in the management of the limited partnership:
- Taking part in a decision about the variation of the partnership agreement;
- Taking part in a decision about whether to approve, or veto, a class of investment by the limited partnership;
- Taking part in a decision about whether the general nature of the partnership business should change;
- Taking part in a decision about whether to dispose of the partnership business or acquire another business;
- Taking part in a decision about whether a person should become or cease to be a partner;
- Taking part in a decision about whether the partnership should end or be wound up;
- Enforcing rights under the partnership agreement (unless those rights are to carry out management functions);
- Approving the accounts of the limited partnership;
- Being engaged under a contract by the limited partnership or by a general partner of the limited partnership (unless the contract is to carry out management functions);
- Acting in his or her capacity as a director or employee of, or a shareholder in, a corporate general partner;
- Taking part in a decision which involves an actual or potential conflict of interest between a limited partner (or limited partners) and a general partner (or general partners).
- Discussing the prospects of the partnership business; and
- Consulting or advising a general partner, or general partners, about the activities of the limited partnership or about its accounts (including doing so as a member of an advisory committee of the limited partnership).
Costs and benefits of the proposed approach to safe harbours
18. The safe harbours in paragraph 17 will provide certainty to limited partners about activities that they can be involved in without participating in the management of the limited partnership. The safe harbours are also similar to those found in internationally accepted limited partnership models, such as those from Jersey and Guernsey.
19. In particular, the safe harbours deal with subject areas that are typically covered in overseas limited partnership Acts, such as involvement in strategic decision making, contract work, and providing consultation or advice to the limited partnership. This means that he proposed safe harbours should be recognised and accepted by international investors.
20. The safe harbours are also similar to, and broadly consistent with, the safe harbours found in many of the limited partnership models from Australian states, for example, New South Wales and Victoria. This is a particularly important consideration in ensuring the recognition of New Zealand limited partnerships by Australian investors. By facilitating trans-Tasman investment, the limited partnerships regime will be an important contribution to the New Zealand and Australian government's goal of a single economic market between the two countries.
21. The fact that these safe harbours that are proposed are not a comprehensive list means that there remains adequate flexibility in interpreting the meaning of "participating in the management of the limited partnership". As the safe harbours are set out in regulations, there is also the ability to more easily amend the list if changed circumstances make it appropriate.
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