A general partner (GP) of a Cayman Islands exempted
limited partnership (ELP) has a statutory duty to
act in good faith and, until recently, an absolute duty to act in
the interests of the ELP. Before the new Exempted Limited
Partnership law came into effect, GPs managing multiple ELPs
potentially faced conflicts of interest when the interests of the
two or more of its ELPs were not aligned. The Exempted
Limited Partnership Law 2014 amended the position such that a
GP's duty to act in the interests of the ELP is now
"subject to any express provisions of the partnership
agreement to the contrary".
This is an important development for GPs as it may assist them
to manage competing interests, for example in: (i) the allocation
of investment and co-investment opportunities between multiple ELPs
and (ii) the allocation of co-investments between co-investor pools
and/or between limited partners (LPs) in any one
There is now scope for the partnership agreement
(LPA) to provide that the GP is not obliged to act
in the interests of the ELP (we would expect that this would only
be applied to specific defined circumstances rather than in its
totality). It would be advisable to ensure that detailed
consideration is given to the drafting of the relevant provisions
in the LPA where this duty is varied, including setting out a broad
range of factors the GP may be free to take into account when
exercising its discretion. GPs should be aware that where
adequate provision is not made, the default is that the GP must act
in good faith in the interests of the ELP (i.e. in the collective
interests of the LPs).
Another consideration for GPs acting
for multiple ELPs is that GPs have unlimited liability for the
debts and obligations of the ELP in the event that the assets of
the ELP are inadequate. Therefore there is the potential for the
GP's assets (including carried interest from each of the ELPs
it manages) to be exposed to claw-back following the insolvency of
one of its ELPs. If the result is that the GP itself is
wound-up or dissolved, then a new GP will need to be appointed to
each of the ELPs it manages.
In general, we find that clients are
comfortable with the risks associated with GPs acting for multiple
it's easier operationally to use
the same GP for multiple structures and more cost effective;
creditors of an ELP in
liquidation cannot gain access to the assets of another ELP by
virtue of them having the same GP;
the LPs of the
'automatically dissolving' ELP have 90 days to elect a new
GP and to continue the ELP and this can usually be achieved in that
time frame; and
the conflict of interest point can
now to a large extent be mitigated contractually in the LPA.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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