Changes to the Cayman Islands exemted limited partnership law

Introduction

A series of amendments to the Cayman Islands Exempted Limited Partnership
Law (2007 Revision) (the "Law") have recently been approved by the
legislature. The Exempted Limited Partnership (Amendment) Law, 2009 (the
"Amendment") requires approval by the Governor and publication in the Gazette
before it is formally passed into law, and it is anticipated that these steps will be
completed by mid-April.

Overview

The Amendment enhances the ability of partners to regulate their affairs
contractually by placing greater reliance on the limited partnership agreements
that govern the relationship between general partners and limited partners. Of
particular interest to GPs and LPs alike will be:

• the recognition of the contractual provisions in LPAs relating to the transfer of
limited partnership interests, and the removal of the absolute statutory
requirement for a GP's prior written approval for transfers;

• an extension of the non-exclusive list of limited liability safe harbours;
• amendments to the statutory claw-back regime applicable to LPs;

• the introduction of a more flexible regime for the continuation of the
partnership during the 90 day period following the death, withdrawal or
insolvency of the last remaining GP; and 2

• the application of relevant provisions relating to the winding up of Cayman
Islands companies to exempted limited partnerships.
The Amendment is to be welcomed as an interim step in what we anticipate will
be a more extensive revision of the current Law in due course.
A summary of the key changes is set out below.

Assignment of Limited Partnership Interests

Under the current Law any assignment of a limited partnership interest
(including the granting of a security interest therein) requires the prior written
approval of the GP, which has absolute discretion to refuse to provide its
consent. The Amendment now provides that any such assignment shall simply
be required to comply with the provisions of the LPA, meaning that parties are
free to legislate themselves for any restrictions on transfer.

Provisions in existing LPAs which permit transfers of limited partnership
interests without obtaining the prior written consent of the GP (commonly,
transfers to an affiliate entity or trust) will now be enforceable.

Extension of Safe Harbours for Limited Liability

LPs will be comforted to know that the non-exclusive list of activities falling
within the limited liability safe harbours has been extended to include certain
additional matters that are routinely engaged in by LPs. It is now confirmed that
an LP does not take part in the conduct of the business of the partnership by:

• being an LP of, holding an office or interest in, or having a contractual
relationship with, a GP; or

• appointing a person to an advisory committee, or serving on an advisory
committee, of a partnership.
As ever, the crux for LPs is to avoid participating in conduct of the business of
the partnership with third parties who believe the LP to be a GP – a factual test
that is not determined by reference to the specific provisions of the LPA.
Amendment to Statutory Claw-Back
The existing Law provides a blanket prohibition on any return of contributions,
which includes the release of any capital commitment, out of the capital of the
partnership if at the time of or immediately subsequent to such payment the
partnership was not solvent. Any such payments in breach of the existing Law
are subject to repayment (with interest) for a period of six months thereafter.
The Amendment retains the prohibition generally, though the Law will now
provide that:

• any return of contributions to LPs, including the release of any capital
commitment, made in the six month period before the insolvency of the
exempted limited partnership may be clawed back, together with interest (in
which regard see below); and

• where the partnership is being voluntarily wound up, the six month period
commences from the earlier of:

(a) the date upon which the resolution for the winding up is passed;
(b) the event of termination specified in the LPA; or
(c) the insolvency of the partnership.

It is worth noting that the parties are free to agree in the LPA that the default
interest rate of 10% per annum applicable to the statutory claw-back provisions
be varied downwards without limitation. This is of particular benefit to Shariacompliant
partnerships, but any party concerned about the rate of interest
generally should specifically address this point in the drafting of the LPA.

Termination, Winding up and Dissolution

Automatic Dissolution
The Amendment makes some key revisions to the provisions relating to the
automatic dissolution of partnerships so that these are now less draconian and
more easily capable of refinement by the partners. The most important of these
are:

• partnerships will no longer simply be dissolved immediately upon the death,
withdrawal or insolvency of the last remaining GP - instead, any such dissolution
will be subject to the provisions of the LPA (or, if not addressed, to the default
position described below);

• if the LPA does not address the point, the default position will now be that
notice will be required to be given to LPs of any dissolution event, but the
partnership will not be dissolved for a period of 90 days following the date of
such notice during which time the LPs will be able to elect to appoint a
replacement GP and continue the partnership; and

• there is no longer a requirement for the unanimous consent of LPs to appoint
a GP and to elect to continue the exempted limited partnership following the
death, withdrawal or insolvency of the GP. The parties are free to agree in the
LPA whatever majority vote of LPs they think fit and if silent, a simple majority
of LPs suffices.

Dissolution generally

Unless the LPA provides to the contrary, the partnership may be required to be
wound up and dissolved by a resolution of a two-thirds majority in interest of
LPs.
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There has always been some uncertainty as to whether the Cayman Courts
would enforce a provision of the LPA providing for the appointment of any
person other than the GP to wind up the affairs of the partnership. It is now
clear that the LPA may provide specifically for the appointment of a third party.

Winding up

Historically, there has been little in the way of regulatory or judicial guidance for
the conduct of the winding up of exempted limited partnerships. The
Amendment seeks to address this by incorporating by reference the relevant
features of the new insolvency regime applicable to the liquidation of Cayman
Islands companies. A summary of the new regime as it pertains to companies is
contained in a separate Walkers advisory which is available at
www.walkersglobal.com. The new regime preserves established principles of
Cayman Islands insolvency law and provides greater certainty in respect of the
practices and procedures that will apply to the winding up of exempted limited
partnerships.

Miscellaneous Changes

There are several other changes, many of which enhance the parties' ability to
contract freely. Of primary interest will be:

• Naming conventions
The use of the letters "LP" in the name of the exempted limited partnership (i.e.
without abbreviation stops) will be permitted.

• Partners' access to financial information
The ability of contracting parties to determine the scope of information
regarding the state of the business and financial condition of the partnership
which LPs are entitled to receive is enhanced.

• Register of partnership interests
- LPs have the right to inspect the register of partnership interests, and the GP
has the ability to extend such information rights to third parties; and
- under the current Law the register of partnership interests is required to
contain information in relation to capital contributions but not capital
commitments. The amendment to the definition of "contribution" to include
commitments means that as a technical matter the register is now required to
show commitments also.

• Deregistration
There is provision for a simple procedure to deregister an exempted limited
partnership, without winding up or dissolution, where the LPA authorizes this,
upon application by the GP.

Conclusion

The Amendment goes some way to enhancing the Law to meet the needs of the
alternative investment fund industry. The added flexibility in relation to several
areas of the LPA is to be welcomed. In adopting relevant sections of the new
regime applicable to insolvency of Cayman Islands companies, the need to
improve certainty in this area at a critical time in the global economy is
addressed to a degree. The Amendment demonstrates the government's
commitment to develop the Cayman Islands' legislative framework to meet the
changing needs and challenges of our industry. We look forward to continuing
our dialogue with clients, colleagues and government to maintain this
momentum.

For more information, please contact:

Vicki Hazelden, Partner, Private Equity
Walkers, Cayman
Tel: (+1 345) 814 4640
Email: vicki.hazelden@walkersglobal.com
Richard Addlestone, Partner, Private Equity
Walkers, Cayman
Tel: (+1 345) 814 4646
Email: richard.addlestone@walkersglobal.com
Rolf Lindsay, Partner, Private Equity
Walkers, Cayman
Tel: (+1 345) 914 6307
Email: rolf.lindsay@walkersglobal.com
Philip Millward, Partner, Private Equity
Walkers, Hong Kong
Tel: (+852) 2596 3328
Email: philip.millward@walkersglobal.com
Deborah Poole, Partner, Private Equity
Walkers, London
Tel: +44 (0) 2072 204 995
Email: deborah.poole@walkersglobal.com
Robert Varley, Partner, Private Equity
Walkers, Dubai
Tel: +971 4 363 7902
Email: robert.varley@walkersglobal.com
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Jennifer Thomson, Partner, Hedge Funds
Walkers, Cayman
Tel: +1 345 914 4280
Email: jennifer.thomson@walkersglobal.com
Ashley Gunning, Partner, Private Equity & Hedge Funds
Walkers, Singapore
Tel: (+65) 6622 5930
Email: ashley.gunning@walkersglobal.com
Jonathan Heaney, Partner, Hedge Funds
Walkers, Jersey
Tel: +44 (0) 1534 700 786
Email: jonathan.heaney@walkersglobal.com