Response to HM Treasury's Consultation on Using
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Response to HM Treasury’s Consultation on using Legislative Reform Order to change partnership legislation for private equity investments (July 2015) This document is a co-ordinated response to the consultation and draft Legislative Reform Order prepared by and submitted on behalf of the following law firms: Addleshaw Goddard LLP Hogan Lovells Allen & Overy LLP King & Wood Mallesons LLP Ashurst LLP Kirkland & Ellis International LLP Berwin Leighton Paisner LLP Linklaters LLP Burness Paull LLP Nabarro LLP Charles Russell Speechlys LLP Olswang LLP Cleary Gottlieb Steen & Hamilton LLP Pinsent Masons LLP Clifford Chance LLP Ropes & Gray LLP CMS Cameron McKenna LLP Simmons & Simmons LLP Dentons Simpson Thacher & Bartlett LLP Farrer & Co LLP Skadden, Arps, Slate, Meagher & Flom Freshfields Bruckhaus Deringer LLP Travers Smith These firms have many years’ experience of advising on the use of English and Scottish limited partnerships, as well as limited partnerships established under the laws of Jersey, Guernsey, the Cayman Islands, Delaware, Luxembourg and elsewhere, for use as private fund vehicles and other investment and business purposes. The English and Scots law practitioners who have contributed to this response are therefore well- placed to comment upon the existing difficulties with UK limited partnership law, the practical impact of the reforms proposed by HM Treasury and the competitive position of the UK limited partnership structure compared to structures that exist in other jurisdictions. Contact details This response has been co-ordinated by Linklaters LLP, and queries or requests for further information should be directed to Jonathan de Lance Holmes, Partner ([email protected]) and Emily Harmsworth, Managing PSL ([email protected]). Terms used in this document “1907 Act” means the Limited Partnerships Act 1907, as amended; “CIS” means a collective investment scheme within the meaning of s235 Financial Services and Markets Act 2000; “CIS Exemption Order” means the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001; A30407557/1.0/05 Oct 2015 1 “Consultation” means the consultation paper issued by HM Treasury in July 2015 titled ‘Proposal on using Legislative Reform Order to change partnership legislation for private equity investments’; “LRO” means the Legislative Reform (Limited Partnerships) Order 2015 draft statutory instrument; and “PFLP” means a private fund limited partnership. Overview We welcome the proposals to reform limited partnership law, and our responses to specific questions raised in the Consultation are below. Given the number of firms participating in the response, there is naturally some divergence in views. While this response seeks to provide a single agreed upon position, we have noted the differing views/suggestions where relevant. We want to emphasise that the new PFLP regime should be viewed as an entirely separate subset of limited partnership, such that any provisions in the LRO should be neutral as to its impact on the law governing limited partnerships which do not constitute PFLP. For example, the list of permitted activities set out in draft section 6A should not give rise to an inference that these activities constitute taking part in management in relation to a limited partnership which is not a PFLP. That issue should continue to be interpreted by the courts without reference to the LRO. While we note that the possibility of allowing funds in the UK outside Scotland to elect to have separate legal personality is not within the scope of this Consultation, we are pleased to see the Government’s intention to explore the feasibility of implementing this additional change in the future reaffirmed in the Consultation. Whilst recognising that English limited partnerships do not have separate legal personality, we would nevertheless in the interim welcome the inclusion of a provision expressly allowing the registration of an English limited partnership (“A”) as a limited partner in another UK (English or Scottish) limited partnership (“B”) without the result being that each of the partners in partnership A has to be registered as a partner in partnership B. This would provide a welcome degree of flexibility in terms of the overall objectives of the UK as a competitive fund domicile, and help to minimise costs to investors. Finally we note there are various other issues in relation to limited partnership law which need further thought and probably reform. These include, for example, registration of charges in respect of corporate limited partners, and the application of insolvency law generally to limited partnerships. Responses to questions asked in the Consultation 1 What are your views on the proposed process for designating private fund limited partnerships? We welcome the designation and registration process for a PFLP, but have some comments as to how these can be improved. In summary: (1) the designation should be the result of filing a notice in the prescribed form with the registrar; (2) once designated, the designation shown on the register should constitute conclusive evidence that the limited partnership is a PFLP; (3) there should be no restriction on when an existing or yet- to-be-formed limited partnership elects to be designated as a PFLP; (4) the requirement for a solicitor’s certificate is inappropriate; it should be sufficient for the general partner (or operator, if one is required) to attest to the status or intended status of the limited partnership and its business purpose; and (5) any limited partnership that is, or is expected to be, a CIS, disregarding the CIS Exemption Order, should be eligible to be designated. A30407557/1.0/05 Oct 2015 2 1.1 Designation Process – Conclusive Evidence Section 8C(4) of the 1907 Act provides that the certificate of registration is conclusive evidence of the existence of the partnership. We as law firms welcomed this conclusive evidence provision when it was introduced in 2009. The LRO would amend section 8C to reflect the designation as a PFLP on the certificate; but that does not entail that such designation is conclusive evidence that the limited partnership is, at law, a PFLP. This is hopefully a minor drafting change, but it would be very helpful to extend the proposed amendment to section 8C to make this explicit as it would provide necessary legal certainty in this area. 1.2 Designation Process – Timing The ability to elect to be designated as a PFLP should be available at any time during the life of the limited partnership. An existing limited partnership should be able to register as a PFLP at any time after the LRO comes into force rather than just during the proposed one year grandfathering period. The ability to re-register as a PFLP should equally apply to a limited partnership registered after the LRO comes into force. 1.3 Designation Process – Solicitor’s Certificate In our view, the requirement for a certificate signed by a solicitor is inappropriate for the following reasons: 1.3.1 The purpose for the reforms is to remove inconvenience and uncertainty. It is not in the interests of the commercial parties to engage a solicitor to certify that a limited partnership is, or will be, a CIS (either in terms of their time or cost). 1.3.2 Whether or not a limited partnership is or will be a CIS is also not strictly the type of matter that a solicitor can ‘certify’ without exercising judgement and making assumptions about its operation. The question of what is or is not a CIS is, or can be, technical and difficult and fact specific. Solicitors are often asked whether an arrangement is a CIS or not, and while a solicitor can form a view on whether a limited partnership is a CIS it is an expression of an opinion based on an assumption of certain facts. Anyone dealing with the limited partnership will be on notice of its status as a PFLP and the consequences of it being so designated in any case. It is therefore appropriate in our view that it should be the general partner, or the operator of the scheme if one is required, which attests to the business intention as part of the formal submission to the registrar, rather than a solicitor’s certificate being required - this is in keeping with the purpose of the reforms and provides a proportionate means of restricting the class of limited partnerships to those intended to benefit from these changes. In practical terms, we suggest this be a tick box confirmation by the GP in the Form LP5 or Form LP6. We note that the timing of the certification process may also cause an administrative issue for parties. Parties typically prefer to establish a limited partnership prior to bringing investors into the limited partnership and we suspect would prefer to register as a PFLP prior to bringing investors into the limited partnership. However, some limited partnerships may not actually be a CIS until the investors are brought into the limited partnership and it may therefore not be possible to provide the certification, and register as a PFLP, until after investors are brought in. To remove this inconvenience, we would suggest that the certification instead include a declaration that the limited partnership is, or is expected to be, a CIS. A30407557/1.0/05 Oct 2015 3 1.4 Fund Condition – Agreement in Writing The requirement that the partnership is constituted by an agreement in writing is unobjectionable in our view. 1.5 CIS Exemptions We understand the intention of the LRO is to catch limited partnerships that are fund vehicles. In our view, the essential characteristics of a ‘fund’ are contained in the core language of s235 Financial Services and Markets Act 2000. The exemptions in the CIS Exemption Order are highly technical, have been drafted and evolved over the years (and presumably may be added to or amended in future) to deal with unintended consequences for all sorts of specific circumstances and in the light of policy considerations as to whether it is appropriate to apply a particular marketing regime and requirements for an authorised operator.