Further to our update issued on 21 February 2014, the revised Exempted Limited Partnership Law was enacted on 2 July 2014 and is now in full force and effect. The purpose of this advisory is to give greater detail of the new law and its practical implications.
A copy of our previous update can be viewed via the following link:
A copy of our update with respect to The Contracts (Rights of Third Parties) Law, 2014, which was enacted on 21 May 2014, can be viewed via the following link:
Exempted Limited Partnership Law
The Exempted Limited Partnership Law (2013 Revision) has been repealed and is replaced by the Exempted Limited Partnership Law, 2014 (the "ELP Law"). The new law is a comprehensive revision of the previous law, but does not make fundamental alterations to the nature, formation or operation of Exempted Limited Partnerships ("ELPs").
The principal objectives of the ELP Law are:
(a) To promote freedom of contract between partners.
(b) To the extent consistent with Cayman Islands law, to help synchronise the drafting of the Cayman Islands limited partnership agreement ("LPA") with its onshore counterpart where a structure comprises both onshore and offshore partnerships.
(c) To deal with certain issues which the market has signalled it would like to have addressed in order to make ELPs even more straight forward and cost effective to set up and manage.
The basic constitution of an ELP remains the same. An ELP will continue to require a general partner, who will have unlimited liability, to act for and on behalf of the limited partners, who will have limited liability. As previously, an ELP will not have separate legal personality meaning that it will continue to contract through, and property or other assets of the ELP will continue to be held by, the general partner for and on behalf of the ELP. The establishment of an ELP through execution of an LPA between the partners followed by registration using a simple statement will remain the same, as does the basis on which an ELP is dissolved.
However, in a number of significant respects, the law governing ELPs has been improved or clarified and, in addition, welcome new concepts have been introduced. In summary, these are:
The ELP Law amends the statutory duty of good faith for the general partner in the following respect:
"A general partner shall act at all times in good faith and, subject to any express provisions of the partnership agreement to the contrary [emphasis added], in the interests of the exempted limited partnership."
This means the absolute requirement of the general partner to act at all times in good faith has been preserved, but the LPA may now determine in whose interests the general partner is required to act in any given circumstance. This will enable the LPA to manage competing interests, for example, in the context of conflicts of interest or where the general partner is general partner to multiple partnerships. The default position in the absence of express provisions in the LPA is that the general partner is required to act in good faith in the interests of the ELP (which in effect means the limited partners taken as a whole).
The ELP Law now expressly confirms that neither limited partners nor members of any board or committee of an ELP owe any fiduciary duty in exercising any of their rights or authorities or in performing any obligations under the LPA or as a member of the board or committee as the case may be. In both cases this is subject to the express provisions of the LPA to the contrary so that the application and scope of fiduciary duties can be adjusted by agreement of the partners. This does not mean that limited partners or members of a committee can never owe any duty or obligation in any circumstance. Duties can be accepted through contract or conduct. It is also submitted that the Cayman Islands court will not give the benefit of exculpation or indemnification provisions in the LPA in cases of dishonesty or other unconscionable behaviour. Limited partners and members of committees should continue always to act in good faith.
Key Investor Improvements
The ELP Law enhances the protections and safe guards available to the limited partners of an ELP which in turn will make the operation of an ELP both more efficient and certain. These improvements include:
(a) An expansion of the express limited liability "safe harbours" with respect to membership and operation of boards and committees related to an ELP. The limited partners of an ELP can lose limited liability if they take part in the conduct or management of the business of the ELP. The ELP Law sets out a comprehensive list of activities which, if undertaken by a limited partner, will be deemed not to be taking part in the conduct or management of the business. These will be extended to cover:
(i) serving on any board or committee of any of the ELP, a general partner or the limited partners or by appointing or electing a representative to serve on any board or committee; and
(ii) serving on the board of directors or a committee of any person in which the ELP has an interest or any person providing services to or otherwise having a business or other relationship with the ELP or a general partner of the ELP.
(b) Ability to enforce committee terms. Where the LPA contains provisions for the establishment and regulation of any boards or committees of the ELP, or of its partners or a class or category of those partners (including the manner and terms of appointment; powers, rights and obligations; regulation of proceedings and rights to exculpation and indemnification), then subject to the express provisions of the LPA any person duly appointed to the board or committee shall have notice of those provisions which will not be unenforceable by such person by reason only that the person is not a party to the LPA. This will provide comfort to committee members that they will have the benefit of committee terms of reference set out in the LPA even if they are not an express party to the LPA.
(c) Streamlining and simplifying the technical requirements for the admission of partners and transfer of partnership interests. As the LPA is simply a contract, it is necessary to make sure that all of the partners either on admission or following a subsequent transfer of an interest are brought into a contractual relationship with all of the existing partners (general and limited). This can be done in a number of ways including through the execution of counterpart agreements or entering into deeds of adherence, either stand-alone or through a subscription agreement. The ELP Law contains new provisions confirming that admissions or transfers will be perfected provided that any requirements for or conditions thereto contained in the LPA have been complied with or waived in accordance with their terms. This also has retrospective effect.
(d) Confirmation of preservation of limited liability if the last qualifying general partner is lost. An ELP is required to have a qualifying general partner, usually being a Cayman Islands company or ELP or a foreign registered company (and, since enactment of the ELP Law, a foreign registered partnership). The ELP Law now confirms that a limited partner of an ELP will not cease to have the benefit of limited liability by reason only of the ELP ceasing to have a qualifying general partner.
(e) Amendment to the circumstances in which there can be a clawback of capital contributions made to a limited partner in the event of insolvency of the ELP. Now, the clawback obligation will only arise if the ELP is insolvent at the time a capital distribution is made and the limited partner has actual knowledge of the insolvency of the ELP. The hardening period remains at six months. Previously the clawback obligation could arise if the ELP became insolvent after the distribution of capital.
(f) Introduction of new provisions relating to the maintenance of the register of partnership interests and the recording of contributions and distributions in order to simplify the requirements of the statutory register. The register of partnership interests, which can be held in the Cayman Islands or elsewhere, will need to contain simply the name and address of each limited partner, the date the person became a limited partner and the date the person ceased to be a limited partner. The register is capable of inspection by all partners, subject to an express or implied term of the LPA to the contrary, and any other person with the consent of the general partner. However, financial details, such as with respect to contributions and payments representing a return of contribution, can be kept on a separate record maintained by the general partner in any country or territory. The record is open to inspection only with the consent of the general partner.
The ELP Law introduces a number of new provisions and confirmations intended to simplify the administration and operation of ELPs and to assist with partnership transactions. These include:
(a) Enabling registration of foreign limited partnerships to allow such partnerships to qualify as a general partner of an ELP. In addition to Cayman Islands companies, ELPs and foreign registered companies, overseas limited or limited liability partnerships will now be able to register in the Cayman Islands for the purposes of being a qualifying general partner of an ELP. This will require the filing of formation documentation together with a certificate of good standing with respect to the foreign partnership similar to the procedures through which an overseas company is registered in the Cayman Islands. This will avoid the need for a second, or administrative, general partner to be appointed to act as the qualifying general partner if it is intended that an overseas limited or limited liability partnership, such as a Delaware limited partnership, should carry out the substantive general partner duties.
(b) Introduction of a short form method of dissolving an ELP through strike-off. This ability, which is already available to Cayman Islands companies, will enable the Registrar where there is reason to believe that an ELP is not carrying on business or is not in operation to be struck from the Register and be dissolved. The strike-off may be effected directly by the Registrar or following a request by the general partner to strike the ELP. An ELP struck from the Register can be restored within two years on general application and up to 10 years with the approval of the Cayman Islands government. The striking-off of an ELP will not affect the liability, if any, of any general partner or limited partner.
(c) Introduction of new provisions enabling an ELP to transfer by way of continuation, "migrate", from the Cayman Islands to another jurisdiction. If allowed by the laws of the incoming jurisdiction, that continuation can be as a partnership, body corporate or other form of entity. Again, the process will be similar to that already available to Cayman Islands companies and will require the submission of an affidavit to the Registrar. This will provide greater certainty and ease in re-domiciling an ELP to another jurisdiction.
(d) Enabling third parties to execute the LPA in order to take the benefit of a particular provision without being deemed a partner. Third parties who are named or who are otherwise identified, including as a class, will not be deemed a partner of the ELP if that person has executed the LPA in order to take the benefit of a provision, or assume an obligation under the LPA otherwise than as a partner or where on proper construction of the LPA the parties did not intend the person to be a partner of the ELP. This will enable stakeholders to the ELP who properly are not partners, such as managers or sponsors, to take the benefit or obligation of the terms of the LPA without risking adverse consequences if they would otherwise be characterised as a partner of the ELP.
(e) Express confirmation that an ELP can create a floating charge over its assets or any class of assets. This removes any uncertainty as to whether an ELP can create a floating charge due to an absence of corporate personality.
(f) Express confirmation that any right to make capital calls vested in the general partner or in the name of the ELP shall be held by the general partner as an asset of the ELP. This puts the right to make capital calls on the same footing as any other asset of the ELP and will give greater certainty in the context of assignment of the right to make capital calls by way of security in finance transactions.
(g) Express confirmation that written notice of the grant of a security interest in whole or in part of a limited partnership interest shall be given by the grantor or the grantee to the ELP at its registered office. This removes any uncertainty as to the process for giving notice of assignment and confirms that individual limited partners do not need to receive notice.
(h) Introduction of new provisions creating a statutory novation of assets and liabilities on substitution of a general partner such that all rights and property of every description of the ELP held by the former general partner will vest without further formalities in the incoming general partner (and any continuing existing general partners). Similarly, the ELP Law confirms that upon the withdrawal of a general partner all rights and property of the ELP will continue to be held by the remaining general partners. This will simplify the administration of changes in general partners and avoid the need, as a matter of Cayman Islands law, for express transfers of assets and liabilities as between general partners on any change in the constitution thereof.
Certain Technical Clarifications
The ELP Law makes a number of technical changes intended to help clarify certain questions and also to simplify the administration of an ELP. These include:
(a) An amendment to the definition of "majority of limited partners" to allow the LPA to specify the class of persons who can be taken into account when determining voting or consent thresholds of limited partners for the purposes of the ELP Law. This is expressly extended to include persons who are not parties to the LPA. This would, for example, allow partners (general or limited) in parallel or co-investment structures to be included in the calculation of the majority.
(b) Equivalent to amendments recently made to the Companies Law, the ELP Law will provide for the use of a dual foreign name for an ELP. This enables an ELP operating in a non-English speaking jurisdiction to have official recognition of a translated name in that jurisdiction.
(c) Express confirmation that an LPA, and any related subscription agreement, will be validly executed where the complete agreement is executed or where any signature or execution page is attached with that party's express or implied authority to do so. This is an express overrule of the English law governed judgment in the Mercury1 case, and ensures that the typical arrangement for closings, where signature pages are collected in advance and then attached to final form agreements under authority of the incoming investors, remain valid and effective.
(d) Separation of the definition of "contribution", being an amount of capital actually contributed, and "commitment" being the contractual obligation to commit capital whether or not called. This will simplify the reading of certain definitions in the ELP Law.
(e) Express disapplication of Section 31 of the Partnership Law (2013 Revision) of the Cayman Islands, (which is a separate statute to the ELP Law). The result is that the rights of a transferee of an ELP partnership interest will fall to be determined exclusively under the ELP Law and the LPA. Section 31 of the Partnership Law only entitles the transferee of an interest in a general partnership to receive the share of profits to which the transferring partner would otherwise be entitled.
(f) Introduction of a savings provision if formalities with respect to execution of a deed have not been followed such that a power of attorney set out in the LPA may nonetheless be considered validly executed. This means that where there has been an inadvertent failure to comply with technical formalities, a power may still be valid. In practice we expect that LPAs will, as a matter of routine, continue to be executed as a deed first to ensure the validity of powers of attorney under the Cayman Islands Powers of Attorney Law (1996 Revision), including as to irrevocability, and also in order to take the benefit of other advantages of execution by way of deed.
(g) Introduction of new provisions confirming that if the LPA provides that where a partner fails to perform any of its obligations under or otherwise breaches the LPA, the sanctions applicable for the failure of performance or breach will not be unenforceable solely because they are penal in nature. Pure penalty provisions (i.e. remedies which are not commensurate with loss calculated in accordance with Cayman Islands damages principles) may be unenforceable as a matter of Cayman Islands law generally. This amendment will make clear that the sanctions routinely found in LPAs, for example in the context of failure to commit additional capital when called upon to do so, will not be unenforceable solely by virtue of being deemed a penalty.
(h) Introduction of a new provision confirming that where an ELP has more than one general partner and the ELP Law provides an authority, consent or power (but not an obligation or liability) to the general partners jointly, the LPA may specify which general partner is entitled to exercise that authority, consent or power to the exclusion of any other general partner. This revision gives complete flexibility to the parties to the LPA to determine which general partner may exercise individual powers or consents such that the general partners do not have to act jointly, for example, when entering into agreements on behalf of the ELP. Liabilities and obligations remain joint and several.
(i) Confirmation of ability to transfer a general partner interest. The ELP Law expressly confirms that subject to the LPA and the ELP Law, a general partner may transfer or grant a security interest over the whole or any part of a general partnership interest if the written consent of any other general partner is given prior to, or simultaneously with, the transfer or grant. The ELP Law also confirms that:
(i) the transferee of a general partnership interest or part thereof shall not be liable for any obligation of the ELP incurred before he is admitted unless otherwise agreed in writing; and
(ii) that the transferring general partner shall remain liable for any obligation of the ELP incurred prior to the transfer unless otherwise agreed in writing between the transferor, the transferee and the person to whom the obligation is owed.
(j) Finally, the opportunity has been taken in this new statute to re-order many of the existing sections so that they appear in a more logical sequence throughout the statute. However, frequently used sections (such as the registration Section 9 and update Section 10) have remained in the same numerical sequence and a savings provision is introduced such that a provision of any document referring to the Exempted Partnership Law (2013 Revision) shall, so far as is necessary to preserve its effect, be construed as referring to the corresponding provision in the ELP Law.
This advisory is intended only to highlight the principal changes to the law governing ELPs and the ELP Law does make other amendments to the Exempted Limited Partnership Law (2013 Revision).
1 R (on the application of Mercury Tax Group Limited and another) v. HMRC and others  EWHC 2721 (Admin)
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