In a recent case the Finnish Supreme Court found that a
registration offence had been committed, arguing that certain
limited partners of a Finnish limited partnership should have been
registered as general partners as they in practice participated in
the decision-making of the partnership and as the business of the
partnership was primarily managed by one of the limited partners.
Although the case is primarily a criminal case which seems to
relate to other criminal conduct as well, the ruling in essence
also seems to discuss whether a limited partner may lose its
limited liability status in a limited partnership. Although the
ruling may be criticized in many aspects, and although it does not
directly address liability towards the creditors of a limited
partnership, in practice it may change the way that limited
partners may participate in the management of a Finnish limited
partnership, and therefore it may also affect the fund management
industry.
In many jurisdictions a limited partner of a limited partnership
may lose its limited liability status (and become liable for the
obligations of the partnership as a general partner) if it
participates in the management of the partnership. This is commonly
known in the private equity industry where the role of limited
partners in a limited partnership fund is usually restricted
accordingly.
The question has not been relevant in Finnish limited partnership
structures since the Finnish Partnerships Act does not set forth
any rules that would even imply that a limited partner could be
treated as a general partner, nor does it provide any limitations
on the ways that a limited partner could participate in the
decision-making in a limited partnership.
In case KKO 2012:41 (www.kko.fi/58199.htm), however, the Finnish
Supreme Court has surprisingly found that in a certain limited
partnership, two limited partners should have been registered as
general partners and that registering them as limited partners
constituted a registration offence. The Finnish Criminal Code
provides that a person who, in order to cause a legally relevant
error in a public register kept by a public authority, provides
false information to that authority, shall be sentenced for a
registration offence to a fine or to imprisonment for three years
at most.
In essence the ruling seems to be based on the thought that certain
criteria would mean that a partner is a general partner
irrespective of the status agreed in the limited partnership
agreement. As the Finnish Partnerships Act contains no such
criteria, disregarding the partnership agreement and constituting
criminal liability on that basis is somewhat surprising. The ruling
contains different arguments but does not specify what factors have
been finally relevant in making the conclusion. The ruling inter
alia notes that the partnership arrangement had been made in order
to enable the limited partners to engage in a business that they,
due their background (previous bankruptcy), could not have engaged
in in their own name, but the key point seems to be the fact that
the limited partners participated in "the administrative and
business decision-making" together with the general partner
and that in fact the operations of the partnership were primarily
managed by one of the limited partners. In practice the general
partner had also given that limited partner a power of attorney to
represent the partnership.
It should be emphasized that this case is a criminal case and does
not take any stand on whether the limited partners in this case
should be deemed to have become subject to unlimited liability for
the obligations of the partnership. In any event it could be used
as an argument for trying to breach the limited liability of
partners that have been registered as limited partners if they
actively participate in the management of a limited partnership. In
this respect it seems that Finnish partnership law now comes closer
to the partnership law in some other jurisdictions. In practice the
ruling presumably means that in different partnership structures
the role of the limited partners may be analyzed in more detail,
and may be possibly limited further compared to the existing
decision-making models. As regards fund structures where the
limited partners do not participate in investment decisions or
other material decisions, the ruling does not necessarily change
much. There may however be cases where the limited partners may
wish to reconsider their role in order to protect their limited
liability. This "spill over" effect from the ruling to
private equity has most likely been something that went unnoticed
by the court.
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.