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 ELP.
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 ELPs because:
- 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.