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In Part One of our overview of common provisions in limited partnership agreements, we covered some of the provisions one would expect to find in a limited partnership agreement. In this article, we continue that overview, with a focus on financial matters, management and dissolution.

1.                  Capital Contributions and Accounts. These provisions set out the initial capital contributions of each partner to the limited partnership and the establishment of accounts on the books of the limited partnership for each limited partner for the purposes of crediting net income and/or allocating net loss and for distributions. Some limited partnership agreements limit a limited partner’s financial obligations to a one-time capital contribution while others contemplate ongoing capital contributions. In the latter scenario, a limited partner may be obligated, or may simply have the option, when called upon by the general partner, to invest further money in the limited partnership. A failure to participate may have consequences for the non-participating limited partner, including dilution of that limited partner’s equity interest in the partnership.

2.                  Return of Capital. These provisions set out the timing and circumstances for the return of a limited partner’s capital contribution(s). Some limited partners want to see some mechanism for the return of capital contribution in the event a business milestone is not achieved by a particular date. While this can help avoid the risk that a limited partner’s capital contribution will be tied up in the limited partnership indefinitely, depending on the nature of the partnership business, there may not be sufficient cashflow or liquidity for the limited partnership’s assets to meet such an obligation.

3.                  Allocation of Income and Loss. These provisions will set out the allocations of net income and net loss, taxable income and tax loss. A limited partnership agreement should set out the method the general partner will use to calculate and allocate income and losses, though the general partner may have a certain level of discretion. The level of detail provided will vary between agreements. In some cases, a limited partnership agreement will include a step-by-step breakdown (referred to as a “waterfall”) of the order and proportions of allocated income and losses among the partners. To the extent possible, a limited partner will want to ensure that the allocation of income and losses in the agreement appears to deliver the allocation it would expect based on its proportionate interest in the limited partnership. Key questions will include whether the mechanism provided or key defined terms act to favour a particular partner to the detriment of other partners.

4.                  Distributions of Cash/Net Profit. These provisions, often expressed in a “waterfall” format, set out which partners (including the general partner) are paid what proportions, and in what order, when cash is available for distribution. A consideration here is how the limited partnership agreement defines the concept of available cash/net profits. In other words, what amounts are included in or excluded from the definition? A limited partner should ensure it understands how the waterfall or other distribution mechanism works. It can be helpful in these instances to try to model a distribution to get a sense of how much of the available cash will actually make its way to a particular limited partner.

5.                  Debt Financing. Generally, these provisions will set out the sources of debt financing for the limited partnership. The general partner may be required to try to obtain financing from banks prior to resorting to private loans or loans from limited partners. Limited partners should confirm if they have an obligation to provide guarantees or other security to secure loans made to the limited partnership. Some limited partnership agreements require, or provide a right of first refusal or other option to, limited partners to provide loans to the partnership. These loans, plus applicable interest, may be repayable from available cash prior to any distributions to other limited partners thus impacting the distribution “waterfall” discussed above.

6.                  Management of the Limited Partnership / Amendments / Voting Thresholds. Limited partnership agreements typically grant the general partner broad authority to manage the affairs of the limited partnership. While this is to be expected, a limited partner may want to see some limits placed on this authority. For example, the consent of all, or a special majority, of the limited partners could be required in order for the general partner to take certain fundamental actions that would materially affect the existing limited partners. For example, selling key limited partnership assets, fundamentally changing the parameters of a project, or making material changes to the limited partnership agreement itself. Limited partnership agreements should also include voting rules for limited partners, including the thresholds required to constitute quorum in any meeting, and to pass a vote on particular matters. A limited partner should confirm whether their units entitle them to vote, and voting thresholds required for particular actions.

7.                  Change of General Partner. This deals with the assignment of the general partner’s interest in the limited partnership agreement, as well as the removal, retirement and replacement of the general partner in particular circumstances.

8.                  Dissolution and Termination. These provisions address the circumstances under which the limited partnership may be dissolved, whether voluntarily or involuntarily, including liquidation of assets, satisfaction of liabilities and distribution of proceeds and capital, if any, to the limited partners.

9.                  Miscellaneous. Among other things, these may include notice, confidentiality, and, if not included elsewhere, powers of attorney (often limited partners are asked to appoint the general partner as their attorney for the purposes of undertaking certain actions necessary for the efficient functioning of the limited partnership), governing law and dispute resolution provisions.

As you might imagine, it is not possible in a short overview to cover all provisions and areas of concern that might arise in a limited partnership agreement. Nonetheless, we hope this overview has provided a better understanding of some important contractual considerations for parties contemplating forming or joining a limited partnership.