Getting the Deal Through – Private Equity 2012 – Fund ... - Gowlings

Gowling Lafleur Henderson LLPSuch information is often generally available to certain third partiesupon request. Failure to make this information available may resultin a fine. In some provinces, information relating to the identity oflimited partners may be available on the public record, and the failureto file such information could adversely affect the partnership’sstatus. Generally, unless the fund’s limited partnership interests arebeing offered to the public by prospectus (as a result of which thelimited partnership generally would not be viewed as a private equitylimited partnership), the limited partnership agreement would beavailable only to the partners of a limited partnership and not to thepublic. In some provinces, the limited partnership’s private placementmemorandum is required to be filed with the provincial securitiesregulator. Even though this filing is not public, it may be accessedthrough an application under freedom of information legislation.Further, in some provinces, partnership filings require certain detailsof the partnership agreement.5 Limited liability for third-party investorsIn what circumstances would the limited liability of third-party investorsin a private equity fund formed in your jurisdiction not be respected asa matter of local law?Liability of a limited partner is generally limited to the amount contributedor agreed to be contributed by such limited partner. A limitedpartner may have unlimited liability (similar to that of a generalpartner) if such limited partner takes part in the control of the businessof a limited partnership (though it should be noted that certainjurisdictions are more investor friendly in statutory language thanothers). There are relatively few ‘safe harbour’ activities, and caselaw is fairly limited.A limited partner may be liable for amounts received on accountof profits paid out when a partnership is not in a solvent position.Also, in circumstances where a limited partner has received thereturn of all or a part of the limited partner’s contribution, the limitedpartner is nevertheless liable to the limited partnership (or wherethe limited partnership is dissolved to its creditors) for any amountnot in excess of the amount returned with interest necessary to dischargethe liabilities of the limited partnership to all creditors whoextended credit or whose claims otherwise arose before the returnof contribution.In addition to the above circumstances, a limited partner couldalso be liable in circumstances where such limited partner is awareof false statements in the record of limited partners, or if its nameis used as part of the limited partnership’s name. In practice, thesecircumstances are rare.6 Fund manager’s fiduciary dutiesWhat are the fiduciary duties owed to a private equity fund formed inyour jurisdiction and its third-party investors by that fund’s manager(or other similar control party or fiduciary) under the laws of yourjurisdiction, and to what extent can those fiduciary duties be modifiedby agreement of the parties?Partners owe a fiduciary responsibility to other partners, whichincludes, among other things, loyalty, good faith and avoidance ofconflicts of interest. In the context of limited partnerships, this isoften viewed as a duty of the general partner to the limited partners,though generally neither statute nor case law are clear as to thedistinction. It is common practice for partnership agreements toaddress any contemplated activities that may be viewed as inconsistentwith such responsibility, as there is judicial precedent for such anapproach. For example, transactions where the general partner has aconflict of interest may be subject to a veto by an investor committee.CanadaHowever, any exceptions should be addressed with a high degree ofspecificity, as a blanket exemption from all fiduciary or like duties orlike standards is unlikely to be accepted by a Canadian court.While the law is not clear, limited partners that are registeredpension plans could argue that the statutory standards of care thatapply to agents of plan administrators under the governing pensionbenefits standards can attach to the general partner of a fund basedon an agency argument.While the law is not clear, many investors have the perceptionthat a manager has similar duties to the limited partnership, orthe limited partners, as does the general partner of such a limitedpartnership.7 Gross negligenceDoes your jurisdiction recognise a ‘gross negligence’ (as opposedto ‘ordinary negligence’) standard of liability applicable to themanagement of a private equity fund?While Canadian courts would recognise a gross negligence standard,the distinction as between ‘ordinary’ negligence and ‘gross’ negligenceis less clear than in some other jurisdictions.8 Other special issues or requirementsAre there any other special issues or requirements particular toprivate equity fund vehicles formed in your jurisdiction? Is conversionor redomiciling to vehicles in your jurisdiction permitted? If so, inconverting or redomiciling limited partnerships formed in otherjurisdictions into limited partnerships in your jurisdiction, what are themost material terms that typically must be modified?Apart from considerations described elsewhere in this summary,Canadian law imposes no clear special requirements on limited partnerships.Moreover, absent basic rules relating to issues such as formalitiesfor admittance of limited partners, fiduciary duties, liabilityof limited partners and consequences of dissolution of a corporategeneral partner, and subject to two exceptions noted below, partnersgenerally have significant flexibility in structuring and documentingtheir commercial arrangements. First, statutes in a number ofprovinces contain a section that prohibits the general partner fromtaking certain actions without the consent of all limited partners.In the case of Ontario, for example, these prohibitions include prohibitionsagainst any act that makes it impossible to carry on theordinary business of the limited partnership and against consentingto a judgment against the limited partnership. In practice, theseprohibitions are often ignored, though some agreements attempt toaddress them by providing for powers of attorneys (conditional orotherwise) in favour of the general partner or requiring approval ofonly a majority limited partner in such circumstances. Second, whileit is usual to have restrictions on transferability of limited partnershipinterests, certain provincial statutes on their face provide thatlimited partnership interests are transferable, though the rights ofthe transferee may be limited if there has been no compliance withthe applicable limited partnership agreement. In light of such language,there is some question as to the enforceability of a completeprohibition on transfer. While there are methods to reduce the riskof non-compliant transfers, many limited partnership agreements donot address this issue.Most Canadian jurisdictions do not address the consequences ofconversion or redomiciliation of an existing partnership (governedunder the laws of another province or a non-Canadian jurisdiction),though there may be Canadian and foreign tax considerations, aswell as commercial considerations relating to such a step.FUND FORMATIONwww.gettingthedealthrough.com 29