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In our last article on limited partnerships (link here), we introduced the concept of limited partnerships as a business structure in British Columbia.  In Part One and Part Two (to follow) of this article, we will cover some of the provisions one would expect to find in a limited partnership agreement, with a more detailed discussion of provisions that, if not well understood, can pose risks to the partners.

1.                  Basic and/or general information. This would include the name, registered office location, fiscal period, term, business/purpose of the partnership, books and records, and other general or administrative matters.

2.                  Representations and warranties. These can be made by the general partner to the limited partners, and by the limited partners to the general partner. The subject matter of these varies depending on the parties and purposes of the partnership, but may include the residency, tax status and corporate existence of the parties, as well as their compliance with relevant securities and other laws.

3.                  Liability and Indemnification. These provisions typically reinforce the unlimited liability of the general partner and the limited liability of the limited partners. The general partner will often agree to indemnify the limited partners for losses suffered (above and beyond each limited partner’s capital contribution) as a result of the general partner’s management of the limited partnership. In some cases, the limited partners are asked to indemnify the general partner. Such indemnities should be carefully reviewed to ensure the limited partners are not indirectly assuming liability for the management of the limited partnership.

4.                  Restrictions on Activities/Permission to Engage in Other Business. Limited partners are generally restricted, in accordance with the Act, from participating in the active management of the business of the limited partnership. The general partner is also prohibited from engaging in certain actions under the Partnership Act (British Columbia) (unless consent is given by all limited partners),[1] and may have certain additional prohibitions imposed on it under the limited partnership agreement. Note that many limited partnership agreements permit the limited partners and the general partner to engage in other businesses, even if competitive with the business of the limited partnership.

5.                  Units/Equity Interest in the Limited Partnership. Typically, a limited partnership agreement will set out the number, classes and attributes of units (i.e. ownership interests) held by limited partners or issuable by the limited partnership, and the circumstances under which units may be issued to new and existing limited partners. Often, the general partner has broad discretion to issue additional units. A limited partner may want to see anti-dilution provisions included that require the general partner to first offer new units to existing limited partners.

6.                  Transfer of Units. These provisions set out rules around the transfer of units in the limited partnership. Quite often, limited partners may not transfer their units except to affiliates or other “permitted transferees” or by following approved mechanisms (e.g. rights of first refusal/offer, drag-along, tag-along or other compelled sales) set out in the limited partnership agreement. A limited partner should carefully review the mechanics of these provisions as well as the voting control required to trigger or block them.

7.                  Triggering or Withdrawing Events. Events such as the bankruptcy, insolvency, or appointment of a receiver over the assets of a limited partner will commonly result in a loss of entitlement to vote one’s units, as well as an eventual compelled sale of all such units, either to the limited partnership or to other limited partners on a pro rata basis.

In Part Two of our overview, we will discuss additional provisions commonly encountered in limited partnership agreements, with a focus on financial matters, management and dissolution.

[1] Partnership Act, RSBC 1996, c 348, s. 56.