Luxembourg’s legal framework for alternative fund structures will be significantly extended as part of the draft legislation transposing the European Union’s Alternative Investment Fund Managers Directive into national law.
In addition to implementing the directive, the Luxembourg legislation introduces changes designed to make the grand duchy significantly more attractive as jurisdiction for the management and structuring of private equity, venture capital and real estate fund vehicles.
The changes involve the updating and enhancement of two existing partnership vehicles, the standard limited partnership (société en commandite simple) and partnership limited by shares (société en commandite par actions), and the creation of a new special limited partnership (société en commandite spéciale).
Bill of law no. 6471 was submitted to the grand duchy’s Chamber of Deputies by finance minister Luc Frieden on August 24. It is scheduled for approval by parliament and on the statute book before the end of this year, well ahead of the deadline for AIFMD adoption of
July 22, 2013.
The changes to the existing partnership vehicles and the establishment of the special limited partnership involve amendment of the laws of August 10, 1915 on commercial companies and of December 19, 2002 on the Commercial and Companies Register and corporate accounting, as well as changes to Luxembourg’s Commercial Code.
They also involve changes to the February 13, 2007 law on Specialised Investment Funds (SIFs) and that of June 15, 2004 on Risk Capital Investment Companies (Sicars) to enable these types of fund to adopt the legal form of a standard limited partnership or special limited partnership.
The preamble to the draft legislation notes that the standard limited partnership is a very long-established type of company. It has antecedents in Roman law, although in its current form it dates back to contracts used in maritime trade contracts in 10th century Italy, and has also played an important role in spreading the concept of limited liability throughout corporate law, before becoming an important tool of the fund industry in recent years.
It also has deep roots in the grand duchy’s commercial law as a very lightly regulated type of commercial entity, whose legislative framework has barely changed since 1915. Despite certain constraints, contractual freedom is primordial in the structuring of such an entity.
Historically limited partnerships have been little used or understood in Luxembourg, France and Germany, although the number of standard limited partnerships and partnerships limited by shares on the Commercial and Companies Register has been growing in recent years.
The lack of attention paid to limited partnerships in a financial centres of Luxembourg’s importance is all the more surprising, the preamble says, given that partnerships are widely used for fund structuring in Anglo-Saxon jurisdictions, including the Channel Islands, UK dependent territories in the Caribbean and the US state of Delaware, and especially for the private equity and real estate investment sectors.
While Luxembourg already offers the fonds commun de placement (common contractual fund), which shares certain characteristics with partnership structures, which is used not only for Ucits funds but certain alternative investments such as property funds, private equity and venture capital firms have traditionally preferred the Anglo-Saxon partnership model.
Although standard limited partnerships enjoy a special status under the Sicar legislation, only a handful of Sicars have so far been structured in this way. That may be down to the fact that Sicars are regulated and common law partnerships are typically not so, but the introduction of the AIFM Directive could well prompt alternative fund managers to reconsider their domicile options in the future.
Whereas the standard limited partnership has a legal personality of its own distinct from that of its limited partners, the special limited partnership does not have legal personality and is designed to resemble as closely as possible the English limited partnership regime.
The existence of both types of vehicle, as is the case in Anglo-Saxon jurisdictions, provides industry participants with a maximum degree of choice and flexibility, allowing broad freedom of organisation within an efficient contractual structure.
Both the standard and special limited partnership regimes in Luxembourg provide managers and investors with the structuring flexibility expected in the sector as well as a legal framework for the general partner-limited partner relationship.
The Luxembourg government and the country’s fund industry hope that the availability of these options in an onshore civil law jurisdiction will consolidate the grand duchy’s position as a leading European jurisdiction for regulated alternative investment funds and managers of all kinds, bolstered by its long experience in fund domicile and regulation and the depth and expertise of its service offering.
Luxembourg already has a substantial private equity sector, including the management, domiciliation and servicing of both funds and transaction vehicles. However, being able to offer vehicles equivalent to those available in traditional offshore jurisdictions will reinforce the country’s appeal to leading private equity and private equity real estate houses as well as private and institutional investors that are used to and comfortable with Anglo-Saxon-type limited partnership structures.
The strategy of upgrading the standard limited partnership, as opposed to the creation of a Luxembourg partnership vehicle out of whole cloth, provides continuity in the grand duchy’s companies law as well as demonstrating its readiness to adapt with the times.
While the changes entail a number of innovations, they involve not so much a wholesale change in the standard limited partnership structure as refinement of the existing legislation while respecting the fundamental principles of the legislation on commercial companies.
The upgrading of the standard limited partnership and the introduction of the special limited partnership are likely to prompt increased use of partnership structures under the Sicar and SIF regimes for funds employing alternative strategies and/or aimed at sophisticated investors.
The changes to Luxembourg law involved in the reform of the limited partnership regime are contained in articles 182 to 201 of the draft legislation, entailing amendments principally to the 1915 commercial companies law (Articles 182-194), as well as to the 2002 law on the Commercial and Companies Register (Articles 195-200), and to the Commercial Code (Article 201), as well as assorted tax provisions.