Following the industry consultation by the Hong Kong government on the proposal to establish a limited partnership regime for investment funds in August 2019, the long-awaited Limited Partnership Funds Bill was gazetted on Friday, March 20, 2020.
The bill aims to address the inherent limitations of the Limited Partnership Ordinance (Cap. 37) (LPO), which was enacted in 1912 before the advent of the modern private fund industry. The LPO is widely viewed as outdated and ineffective, and this has acted as a significant disincentive to the domiciliation of private funds in Hong Kong to date.
When will the bill become law?
The bill will be presented to legislature for reading, and it is expected to become law on August 31, 2020.
Whom does this law affect?
Once enacted, the Limited Partnership Funds Ordinance (LPFO) will provide for the registration of funds established in the form of limited partnerships in Hong Kong.
The LPFO will directly affect segments of the market that traditionally use limited partnerships to structure privately offered investment funds. These include
- venture capital, private equity and buyout funds
- real estate funds
- infrastructure and projects funds
- special situations and hybrid funds
- credit funds
- hedge funds
- funds that invest in digital assets, such as cryptocurrency and virtual assets (collectively, Private Funds)
The LPFO will not preclude investment funds that invest in public equity and other liquid assets, although the limited partnership structure is less commonly used by these segments of the market in Asia.
The new regime will be of interest to fund managers that would like to
- establish limited partnership funds in Hong Kong,
- migrate limited partnership funds registered under the LPO to the LPFO,
- explore the possibility of redomiciling limited partnership funds established overseas to Hong Kong or
- take advantage of the tax concessions that are to be introduced in respect of carried interest fee streams, as recently announced in the government’s budget proposal,
in each case, in order to align with their business activities in Asia and facilitate greater regulatory and taxation certainty.
Set forth below is a high-level summary of the key aspects of the new regime.
1. Eligibility requirements
1.1 Funds that qualify for the new regime are
(a) funds that admit external and proprietary capital: funds that meet the definition of a “fund” in the LPFO, which is largely the same as the definition of a “collective investment scheme” under Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571)
(b) funds that admit proprietary capital only: funds that meet the definition of a “fund” in the LPFO and have a general partner and limited partners (Partners) that are each wholly owned corporations within the same group of companies at the date of initial registration
1.2 A fund is eligible to be registered as a limited partnership fund (LPF) under the following circumstances:
(a) It has one general partner (GP) and at least one limited partner (LP).
(b) It is constituted by a limited partnership agreement, and the arrangements in the agreement do not contravene the LPFO or any other applicable law.
(c) It is not established for an unlawful purpose.
(d) It complies with the naming conventions prescribed in the LPFO.
(e) It has a registered office in Hong Kong for receipt of communications and notices.
1.3 The GP
1.3.1 The GP must be at least one of the following:
(i) a natural person over 18 years old
(ii) a Hong Kong company
(iii) a non-Hong Kong company registered in Hong Kong
(iv) an LPF
(v) a limited partnership registered under the LPO
(vi) a non-Hong Kong Limited Partnership (with or without legal personality)
1.3.2 If the GP takes the form of another LPF or a non-Hong Kong limited partnership without a legal personality, the GP must appoint an authorized representative of the fund to be responsible for the management and control of the fund.
The authorized representative must be at least one of the following:
(i) a Hong Kong resident who is at least 18 years old
(ii) a Hong Kong company
(iii) a non-Hong Kong company registered in Hong Kong
The authorized representative will generally be liable for the obligations imposed on the GP, and references to the GP in the LPFO will largely refer to the authorized representative while acting in this capacity as prescribed in the LPFO.
1.4 The Limited Partners
Each LP may be one of the following:
(a) a natural person
(b) a corporation
(c) a partnership
(d) an unincorporated body
(e) any other entity
2. Registration Procedure
2.1 The application for registration of a fund as an LPF must be submitted to the Registrar of Companies (Registrar) on behalf of the GP by a Hong Kong registered law firm or solicitor.
2.2 The application will consist of information that includes:
(a) the name, registered office address in Hong Kong, recordkeeping address in Hong Kong and investment scope of the fund
(b) the name, address in Hong Kong, identity and signature of the GP
(c) the name and identity of the investment manager (if different from the GP)
(d) the name and identity of the responsible person appointed to perform anti-money-laundering and counterterrorist financing functions and obligations for the fund
(e) a declaration and undertaking from the GP that the fund is intended to be established as an LPF and meets all the eligibility requirements in paragraph 1 above
(f) a statement on whether all Partners of the fund are wholly owned corporations within the same group of companies and, if so, an acknowledgement by the GP that the fund may be deregistered if there is no external limited partner following the second anniversary of registration
(g) an acknowledgement by the GP that it is an offense to make a statement in the application that is false, misleading or deceptive in a material respect
2.3 The application fee is HK$479, and the registration fee is HK$2,555.
2.4 Upon satisfaction of the registration requirements, the Registrar will issue a certificate of registration.
3. Publicly Available Information
3.1 The Registrar must establish and maintain a register in relation to each LPF that records information contained in
(a) every document that is delivered to, and the Registrar decides to register, under the LPFO
(b) every certificate that is issued by the Registrar under the LPFO
3.2 The Registrar must establish and maintain an index of the names of every LPF.
3.3 The register in paragraph 3.1 above shall be available for public inspection on payment of a prescribed fee to allow members of the public to ascertain
(a) the identity of the GP, the authorized representative of the fund (if any) or the investment manager of the fund and
(b) the particulars of
(i) the fund,
(ii) the current/former GP,
(iii) the current/former authorized representative of the fund (if any) or
(iv) the current/former investment manager of the fund.
The bill does not specify whether “particulars” are confined only to the information provided in the application under paragraph 2.2 above.
3.4 The index of names in paragraph 3.2 above shall be freely available for public inspection by the Registrar.
4.1 The Duties and Responsibilities of the GP
4.1.1 The GP has ultimate responsibility for the management and control of the fund and therefore assumes unlimited liability for all the debts and obligations of the fund.
4.1.2 The GP must appoint a person (either the GP itself or another person) as investment manager to carry out the day-to-day investment management functions of the fund. The investment manager must be one of the following:
(i) a Hong Kong resident who is at least 18 years old
(ii) a Hong Kong company
(iii) a non-Hong Kong company registered in Hong Kong
If the GP or the investment manager carries out regulated activities in Hong Kong, it will need be licensed by the Securities and Futures Commission of Hong Kong.
For further guidance relating to the licensing requirements applicable to private equity firms, please refer to our newsletter:
4.1.3 The GP must appoint a responsible person (who may be the GP or another person) to carry out the prescribed measures under Schedule 2 to the Anti-Money Laundering and Counter-Financing of Terrorists Ordinance (Cap. 615) (AMLO). The responsible person must be an authorized institution, a licensed corporation or an accounting or legal professional that is registered in Hong Kong.
4.1.4 The GP must appoint an auditor that is independent of the GP, the authorized representative of the fund (if any) and the investment manager to audit the financial statements of the fund on an annual basis.
4.1.5 The GP must ensure that there are proper custody arrangements for the assets of the fund in accordance with the limited partnership agreement of the fund.
4.1.6 The GP must file an annual return with the Registrar within 42 days following each anniversary of the date on which the certificate of registration was originally issued to the fund.
4.1.7 Records that must be kept
126.96.36.199 The specified person (the GP or the investment manager for this purpose) must keep the following records at the recordkeeping address in Hong Kong:
(A) the audited financial statements of the fund
(B) a register of the GP and LPs that includes the following information:
(1) the names, identities, address and contact details of the GP, LPs or authorized representative (if applicable)
(2) the date of admission and cessation as partner or authorized representative (if applicable)
(3) the amount and date of capital commitments and capital contributions and withdrawals
(C) in relation to a customer of the fund, the documents, records and files prescribed in section 20(1)(b) of Schedule 2 to the AMLO
(D) the supporting documents and records of each transaction carried out by the fund
(E) the controller of each of the GP and LPs in the fund
A controller means a natural person (whether in his/her own capacity or in the capacity of a settlor, trustee, protector, enforcer or a beneficiary) who exercises control over the partner by (i) directly or indirectly owning or controlling more than 25 percent of the issued share capital, capital or profits, or vested interest, (ii) directly or indirectly being entitled to exercise or control the exercise of more than 25 percent of the voting rights or (iii) exercising ultimate control over the management of an entity.
188.8.131.52 The records mentioned in paragraph 184.108.40.206 above must be kept for at least six years following the date of dissolution of the fund.
220.127.116.11 The specified person is not required to make the above records available for public inspection but must make them available for inspection by a regulator, a department or agency of the government or a statutory body prescribed in the LPFO on request.
18.104.22.168 Only the audited financial statements of the fund are required to be made available for inspection by the GP and all the LPs in the fund.
4.2 Custody and Administration Arrangements
4.2.1 The bill does not specify the meaning of “proper custody arrangements.”
4.2.2 However, if the GP, the authorized representative (if applicable) or the investment manager carries out regulated activities in Hong Kong, it will need to be licensed by the
Securities and Futures Commission (SFC). A corporation that is licensed for Type 9 (Asset Management) regulated activity will need to comply with the custody requirements applicable under the SFC Fund Manager Code of Conduct (FMCC).
4.2.3 Licensed fund managers are typically subject to license conditions that effectively mandate the appointment of an independent custodian.
4.2.4 In engaging a custodian, a licensed corporation licensed for Type 9 (Asset Management) regulated activity should ensure that the custodian is one of the following:
(a) a registered trust company
(b) an authorized financial institution (including a licensed bank, deposit-taking company or restricted-license bank) or the subsidiary of a licensed bank
(c) a banking institution or trust company outside Hong Kong that is subject to prudential supervision
(d) any other appropriately qualified institution
Additional custody requirements also apply to licensed fund managers under the FMCC.
4.2.5 There is no mandatory requirement under the bill to appoint an administrator. An independent administrator may be engaged at the option of the GP or the investment manager.
4.2.6 A licensed investment manager must also comply with the regulatory guidelines applicable under the SFC’s administrative codes of conduct concerning the appointment of counterparties.
4.3 Rights and Protections of the LPs
4.3.1 An LP has the right to participate in the income and profits arising from the management of the assets and transactions of the fund by the GP and investment manager of the fund.
4.3.2 An LP does not owe any fiduciary duty to the GP or another LP of the fund and does not have day-to-day management rights or control over the assets of the fund.
4.3.3 An LP will enjoy limited liability protection within a range of prescribed safe harbor activities. An LP will not be liable for the fund’s debts and obligations beyond the amount it has agreed to contribute, unless the LP participates in the management of the fund in a manner that falls outside the scope of the prescribed safe harbor activities. In this event, the LP and GP will be jointly and severally liable for all the debts and obligations of the fund incurred while the LP takes part in such management activities in contravention of the safe harbor requirements.
4.3.4 The prescribed safe harbor activities set out in the LPFO are very broad and nonexhaustive. Among these are the following key provisions:
- acting, or authorizing a person to act, as an agent, member, contractor, officer or employee of the LPF or the GP
- serving, or appointing a person to serve, on a board or committee of the fund or the GP or any corporation in which the fund has an interest or business relationship
- advising the GP, another LP or the investment manager, or authorizing their actions, in relation to the fund’s business, prospects, affairs or transactions
- voting on any of the fund’s proposed transactions
- taking part in a decision of the fund relating to but not limited to one or more of the following:
- the admission or cessation of partners
- an extension of the fund’s term
- changes in persons responsible for the fund’s day-to-day management
- a change in the fund’s investment scope
- participation by an LP in a particular investment by the fund
- entering into contracts with other parties in relation to the fund’s business
- the creation, extension, variation or discharge of obligations owed by the fund
4.4 Extensive Contractual Freedom
The partners will enjoy extensive freedom of contract in respect of the operations of the fund. There must be a written limited partnership agreement between the GP and the LPs.
5. Striking Off and Deregistration of LPFs
5.1 The Registrar may, after issuing an inquiry letter and publishing a notice in the Gazette, strike an LPF’s name off the LPF Register under at least one of the following circumstances:
(a) The fund no longer meets the eligibility requirements for registration.
(b) The fund does not have an investment manager, a responsible person or an authorized representative (if applicable).
(c) The fund is not in operation or is not carrying on business as a fund following the second anniversary of the date on which its certificate of registration is issued.
(d) All the partners in the fund are wholly owned corporations in the same group of companies following the second anniversary of the date on which its certificate of registration is issued.
5.2 The GP of the LPF may apply to the Registrar for the deregistration of the fund in the following circumstances:
(a) All the partners of the fund agree to the deregistration.
(b) The fund has no outstanding liabilities.
(c) The GP is not a party to any legal proceedings in respect of the affairs of the fund.
(d) The fund’s assets do not consist of any immovable property (as defined in Section 3 of the Interpretation and General Clauses Ordinance (Cap. 1)) situated in Hong Kong.
5.3 Once a fund’s name has been removed from the LPF register or upon deregistration, the fund ceases to be an LPF.
6. Dissolution and Winding Up of LPFs
6.1.1 An LPF may be dissolved either
(i) voluntarily in accordance with the limited partnership agreement of the fund or
(ii) if the GP or the authorized representative (if applicable) can no longer act in such capacity under prescribed circumstances and is not replaced with a new GP or authorized representative (if applicable) within 30 days.
6.1.2 A partner or creditor of an LPF may also apply to the court for a dissolution of the LPF. The court may order a dissolution of the LPF under at least one of the following circumstances:
(i) The court is of the opinion that a partner has undertaken any act or made any omission calculated to prejudicially affect the carrying on of the business of the fund.
(ii) A partner willfully or persistently commits a breach of the limited partnership agreement or otherwise engages in conduct in respect of the business of the fund such that it is not reasonably practicable for the other partners to carry on the business of the fund with that partner.
(iii) The business of the fund can only be carried on at a loss.
(iv) The court is of the opinion that it is just and equitable that the fund be dissolved.
(v) The GP is mentally incapacitated as defined under the Mental Health Ordinance (Cap. 136)).
(vi) The GP becomes, in any other way, permanently incapable of performing its obligations in accordance with the limited partnership agreement.
6.1.3 Upon dissolution of the fund under paragraphs 6.1 or 6.2 above, a notification of dissolution or a copy of the court order must be filed by the applicant within 15 days after the fund is dissolved or a court order is made.
6.2 Winding Up
6.2.1 An LPF may largely be wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) as if it were an unregistered company within the meaning of Part X of that ordinance.
6.2.2 An LPF may also be wound up by the court, on the application of the Registrar by petition under one of the following circumstances:
(i) The fund is being used for an unlawful purpose.
(ii) The fund is being used for any purpose that is lawful but cannot be validly carried out by the fund in accordance with the LPFO.
(iii) The obligations under the LPFO have been persistently breached in relation to the fund.
7. Migration of limited partnership funds registered under the LPO to the LPFO
7.1 The GP of a limited partnership that is registered under the LPO (Specified Fund) may apply to the Registrar for the registration of the Specified Fund as an LPF if it meets the eligibility requirements under paragraph 1 above.
7.2 No new legal entity of the partnership is created upon registration of the Specified Fund under the LPFO. The rights and liabilities of the Specified Fund before its re-registration remain unaffected. The registration of the Specified Fund under the LPFO will not be regarded as a transfer of its assets or constitute a legal change in beneficial ownership of its assets for Hong Kong tax purposes.
7.3 Upon satisfaction of the eligibility and registration requirements, the Registrar will issue a certificate of registration and provide notice in the Gazette of the registration. The GP must apply for, or apply for changes to be made to, the business registration certificate of the fund within one month of registration.
8. Redomiciliation of non-Hong Kong limited partnerships to the LPFO
The bill does not presently include a provision that permits the redomiciliation of a non-Hong Kong limited partnership fund to an LPF. The current version of the bill does not preclude the possibility that such a provision may be included in the final version that is enacted as law.
If a redomiciliation mechanism is ultimately included in the LPFO, the GP of a non-Hong Kong limited partnership should similarly be able to apply to the Registrar for the registration of the partnership as an LPF if it meets the eligibility requirements outlined under paragraph 1 above.
This provision will allow redomiciliation to occur for a significant proportion of the existing private fund industry that currently remains domiciled outside Hong Kong.
For further details on the bill, please see
How Sidley can assist
We are well positioned to advise you as to
- the requirements of the new Limited Partnership Fund regime
- the fund structuring opportunities and benefits that exist
- the documentation required to structure and register your private fund under the new regime
- the opportunities and benefits that exist for service providers to the private fund industry including custodians, administrators and placement agents
- the taxation benefits that will apply following the government’s recent budget announcement that competitive tax concessions will be extended on carried interest fee arrangements
- the best manner in which to structure carried interest and other fee streams under the new regime
- the benefits of the new regime in respect of double tax arrangements
- the anti-money-laundering and licensing requirements that will apply in respect of private funds that seek to use the LPFO.
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