CODEWORD

Introduction

Limited partnerships (LPs) are increasingly common in New Zealand, including as investment vehicles that acquire or otherwise hold or control shares in Code companies.

This article expresses the Panel’s general views about who controls the voting rights in a Code company that are held by an LP (the Code Company Voting Rights). It reflects an evolution of the Panel’s thinking and should be read in replacement of the article “Limited Partnerships and Control of Code Company Voting Rights” in CodeWord 30. This article relates only to New Zealand-registered LPs, but the principles may apply to LPs registered in other jurisdictions.

Further, the question of control will turn on the relevant facts and circumstances of each particular case. Factors that might cause the Panel to form a different view from the general views set out below include (but are not limited to):

• the terms of the partnership agreement or other arrangements between the parties; and
• how the limited partners, the general partner and their related parties act and relate to each other in practice.

Accordingly, advisers should turn their minds to how the Code applies in each particular case.

Control of Code Company Voting Rights

Set out below is a summary of the Panel’s general views on who controls the Code Company Voting Rights held by an LP.

The Limited Partnership

Typically, the Code Company Voting Rights will be held and/or controlled by the LP itself. To explain:

• the LP may hold the Code Company Voting Rights directly (and therefore control the Code Company Voting Rights); or
• the Code Company Voting Rights may be held through a subsidiary of the LP. In such cases the LP will still control the Code Company Voting Rights, but will not hold them directly.
  

The general partner and upstream controllers of the general partner

The general partner may also control the Code Company Voting Rights. This is because the general partner, being, by law, responsible for the management of the LP, will typically be the decision-maker in relation to the exercise of the Code Company Voting Rights.

The upstream owner of an incorporated general partner may also control the Code Company Voting Rights, depending largely on the degree of the upstream owner’s control over the general partner. Assessing whether this is the case will require fact-specific analysis. In general, an upstream owner of a company is likely to have “effective control” of that company if:^[1]

• the upstream owner controls more than 50% of the voting rights in the company; or
• the upstream owner controls less than 50% of the company, but has the power to effect changes in the company (such as the power to appoint and remove directors).

In addition, the Panel is conscious that (particularly in private equity groups), there may be an investment committee or manager (IC/M) providing advice or direction to the LP, the general partner and/or its controllers. If the IC/M provides such directions, it may be a controller of the Code Company Voting Rights. Further, it is possible that the Panel will consider “advice” given by an IC/M to be, in fact, a direction that confers control over Code Company Voting Rights. In determining whether an IC/M provides direction or advice, the Panel will take a substance-over-form approach.

In any situation, advisers should consider entities as far upstream as is necessary to identify who, in fact, has control over the Code Company Voting Rights.

In addition, related companies of the LP (or other controller of the Code Company Voting Rights) may be associates of that entity. Accordingly, there may be Code implications for members of the controller’s group, even if control over Code Company Voting Rights does not rest with the ultimate holding company of the group.

Treatment of limited partners generally

If a limited partner has only an economic interest in the LP, then the limited partner does not control the Code Company Voting Rights, even where the limited partner’s economic interest is significant.^[2]

However, it is possible that a limited partner might participate in the management of an LP (even though this means it may lose its limited liability status). If a limited partner participates in management, it may have control over the Code Company Voting Rights.

Further, because “control” under the Code and “management” under the Limited Partnerships Act 2008 are not identical concepts, it is possible that a limited partner’s participation in one or more of the “safe harbour” activities set out in the Limited Partnerships Act might amount to control over the LP and/or the general partner, and therefore control over the Code Company Voting Rights (even though the limited partner does not participate in “management” for the purposes of the Limited Partnerships Act).^[3] Accordingly, if the limited partner has something more than an economic interest in the LP, the question of whether or not it has control over the Code Company Voting Rights will require factual analysis.

Associations of limited partners

In some cases, a question may arise as to whether limited partners are associates of the LP or the general partner. If such association exists, then the ability of the limited partner and its associates to acquire shares in the relevant Code company could be restricted.

In general, a limited partner’s simple investment in an LP as one of several limited partners is unlikely to result in an association with the general partner (and the general partner’s wider group). However, a limited partner and a general partner may be associates if they share common upstream owners, through the application of rule 4(1)(c) or 4(1)(e) of the Code.

Other circumstances may also indicate association, for example where:

• the limited partner or its related companies have an ownership interest in the general partner. Such ownership interest may not amount to effective control of the general partner, but could still result in association; or
• members of the limited partner’s wider corporate group habitually invest with members of the general partner’s wider corporate group.

The list above is not exhaustive, and the presence of one or more of those circumstances is not determinative, but it will likely increase the chances of association existing.

In addition, depending on the relationships between the limited partner and the LP, the limited partner may be an associate of the LP. The question of association in all cases will be fact-specific.

Disclosure in offer documents of who controls the offeror

Under clause 2(2)(b) of Schedule 1 to the Code, if the person making an offer for voting securities in a Code company is not an individual, the offer document must disclose the name of every person who will become a controller of an increased percentage of voting securities in the target company as a result of the acquisition under the offer.

Accordingly, if an LP (or its wholly owned subsidiary) makes an offer for voting securities in a Code company, the offer document will likely be required to disclose the names of:

• the LP;
• the general partner;
• if the general partner is subject to upstream control, the person or persons who have ultimate effective control over the general partner; and
• any other person who would also become a controller of an increased percentage of the voting securities in the target.
  

Further information

For further general information about control and association, see the Panel’s Guidance Note on Control and Association. The Panel also encourages early engagement with the Panel executive.