In previous blog posts, we discussed the characteristics of New Zealand Limited Partnerships, the importance of partnership agreements and what it means for clients to hold a partnership interest. This article will look at how investors may benefit from limited liability and still retain control over key management decisions.
Control Rule - Liability Protection For Limited Partners
In a typical limited partnership structure, the Limited Partner is the passive investor with limited liability. The General Partner is responsible for the day-to-day management of the partnership without liability protection. The Limited Partner benefits from limited liability but is prohibited from taking part in the management of the partnership. This is known as the “control rule”.
A limited partner may lose their liability protection should they take part in the management of the partnership.
Safe Harbour Rules
In New Zealand, however, the Limited Partnership Act 2008 provides a “safe harbour” mechanism, which allows Limited Partners to become involved in key decision making activities without the risk of losing their limited liability.
The following are just some of the activities that do not constitute taking part in the management of a limited partnership:
Taking part in a decision about the variation or replacement of the partnership agreement;
Taking part in a decision about whether a person should become or cease to be a partner;
Reviewing and approving the accounts of the limited partnership;
Taking part in a decision about whether the general nature of the limited partnership business should change;
Taking part in a decision about whether to approve or veto proposed investments under certain circumstances;
Discussing the strategic direction or financial prospects of the business of the limited partnership:
Approving a change in the senior employees of a general partner or of the limited partnership;
Approving a change to the manner of operation of a general partner;
Taking part in a decision about whether to dispose of the business of the limited partnership or to acquire another business; and
Taking part in a decision about whether the limited partnership should end or be terminated.
Know The Rules
Limited partners are principally concerned that their limited liability is not attacked or prejudiced in any way. The so-called “control rule” creates uncertainty around limited partners exercising veto, voting and other control rights over the management and operation of the limited partnership. Careful reference must always be made to the list of management activities given safe harbour under the Act, otherwise investors risk losing liability protection.
Pearse Trust would be happy to advise upon the safe harbour activities upon request.