On 20 March 2020, the Hong Kong government published the Limited Partnership Fund Bill (Bill). The Bill will be subject to Hong Kong’s usual legislative process. The government’s aim is for it be enacted by 31 August 2020.
The main purpose of the Bill is to provide for the registration of eligible funds as limited partnership funds (LPFs) in Hong Kong. Under Hong Kong’s current legal framework, a fund may be established in the form of a unit trust or an open-ended fund company. However, the preferred structure for private equity (PE) funds is the limited partnership, and Hong Kong’s existing Limited Partnership Ordinance (LPO) does not provide an attractive framework. For Hong Kong’s PE industry, the Bill is a welcome and highly anticipated development.
The government is committed to strengthening Hong Kong’s competitive edge in the asset management space. With regards to PE funds, this commitment is evidenced by a multi-pronged approach: in addition to the introduction of a new LPF regime, the Financial Secretary’s budget earlier this year announced tax concessions for carried interest issued by PE funds, and industry consultations in relation to the details are ongoing.
Below we describe some main features of the Bill, which provides for the registration of eligible funds as LPFs with the Registrar of Companies.
Key eligibility requirements
For a fund to be eligible to be registered as an LPF, it must:
Key features, rights and liabilities
In line with industry standards elsewhere, the LPF will have no separate legal personality.
The Bill confirms that the partners in an LPF have freedom of contract in respect of the operation of the fund, and it lists the matters that are typically determined by an LPA.
There is no minimum capital requirement and there is no restriction on the investment scope and strategy of the LPF.
The GP will have unlimited liability for all the debts and obligations of the LPF and has ultimate responsibility for the management and control of the LPF. In addition, the Bill outlines a number of GP duties, including the duty to:
An LP has the right to participate in the income and profits arising from the LPF. LPs will not have day-to-day management rights or control over the LPF’s assets. An LP will not be liable for debts and obligations of the LPF beyond the amount of its agreed contributions unless it takes part in the management of the fund, in which case the GP and the LP will both be liable for the all the debt and obligations incurred whilst the LP has participated in management.
The LPF can enjoy exemption from profits tax provided it meets the conditions of the existing funds exemption regime.
Migration of funds
The Bill provides a process for an existing fund established under the LPO to register as an LPF if it meets the eligibility requirements. The Bill does not provide a mechanism for limited partnership funds established in other jurisdictions to re-domicile to Hong Kong.
Registration process and confidentiality
The application for registration must be submitted on behalf of the GP by a Hong Kong solicitor or law firm. If the Registrar is satisfied the fund meets the eligibility and other requirements under the Bill, it will issue a certificate of registration.
The Registrar will maintain a register of LPFs and an index of the names of every LPF. The identity of the LP(s) will not be available in public register, but the relevant information must be maintained and made available to law enforcement agencies when required.
The Bill will be introduced into the Legislative Council for first reading on 1 April 2020 with a view to it being passed by 31 August 2020. This development will be seen by PE industry stakeholders as a positive step towards bringing Hong Kong’s active PE market onshore.