A new era for PE Funds in Hong Kong - Long-awaited Limited Partnership Bill to take effect on August 31, 2020
On 9 July 2020, the Legislative Council of Hong Kong has passed the Limited Partnership Fund Bill (the “Bill”) which will take effect on 31 August 2020 and provide a new statuary framework for the formation of limited partnership funds (“LPF”) in Hong Kong.
Currently, most investment funds in Asia are established under the laws of the Cayman Islands or other offshore jurisdictions. While Hong Kong is one of the top financial centres in the world, its investment fund market continues to lag behind. With the recent changes to the legal and regulatory regimes in other jurisdictions, many investors and fund managers are exploring other jurisdictions to have their funds set up. Contact us
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All information contained in this article are for the purposes of general information only. This article is not to be treated as legal advice or opinion. YTL LLP accepts no responsibility for any loss or damage arising directly or indirectly from any action taken (or not taken) which may arise from reliance on information contained in this article. Please seek legal advice concerning your own circumstances and any legal queries that you may have.
BE A FIRST MOVER!
With the uncertainties brough by the prevalent COVID-19 pandemic and reserve banks working day and night printing out notes, investors and fund managers should capture the opportunity brought by the Limited Partner Fund Bill.
The passage of the Partnership Funds Bill is very timely as it will not only serve as a much-awaited improvement to capital markets in Hong Kong, but also help to promote Hong Kong as an investment-fund-friendly jurisdiction, so as to attract more investment funds to be established in Hong Kong. This article will briefly discuss the legal structure and the main characteristics of an LPF, as well as the advantages of this new framework.
a private company limited by shares;
a registered non- Hong Kong company;
a limited partnership;
an LPF; or
an individual who is at least 18 years old. No minimum capital requirements
No separate legal personality
Partners in an LPF will have freedom of contract
GP has ultimate liability and ultimate responsible for the management and control of the LPF
LP has limited liability but do not have management and control of the day to day activities of the LPF A GP must be:
a natural person;
an unincorporated body; or
any other entity. A LP must either be:
The LPF vehicle will have no legal personality and will be a “fund” registered with the Registrar of Companies. The structure of the LPF should consist of at least one general partner (the “GP”) and one limited partner (the “LP”). The relationship between the GP and the LP will be governed by the terms of the limited partnership agreement. Further, to set up a LPF, the GP must also engage (i): an investment manager (which may be the GP himself/herself) to carry out day to day management activities of the LPF; (ii) an auditor appointed by the GP to carry out annual audit of the LPF; and (iii) a responsible person and an authorized representative if the GP is a LPF or a non-Hong Kong limited partnership.
Benefits of LPFs under the Bill
The structure for private equity funds in Hong Kong is currently governed by the Limited Partnership Ordinance (Cap. 37) (“LPO”) which is based on the Limited Partnership Act of 1907 of the United Kingdom. The already outdated LPO is unable to meet the needs of the ever-changing investment funds market in Hong Kong. Issues that fund managers may encounter under the LPO include: distribution of capitals and profits of limited partnerships, unclear guidance in relation to the SFC licensing requirement of GPs, absence of flexibility of the partnership (including dissolution mechanism) and potential tax risks. The Bill proposed the following improvements that are beneficial to the investment funds market:
The formation of a limited partnership is simple. A Form 1 (Application for registration of a limited partnership) along with required fees (a registration fee of HK$340 and a fee of HK$8 for every HK$1,000 or part of HK$1,000 of the sum contributed by each limited partner) shall be delivered to the Companies Registry, then a Certificate of Registration of a Limited Partnership can be issued in 5 working days. However, unlike ordinary limited partnerships, the application of registration of an LPF must be filed via a Hong Kong solicitor.
In compliance with laws and regulations, partners of LPFs can enjoy freedom of contract in relation to the fund, the Bill also prescribed a series of matters that are normally determinable by the written agreement between partners. There will be no restriction or minimal requirements on capital or investment scope. 1. Simplicity
The Bill did not prescribe any identity or eligibility restriction over LPs. That is to say, LPs do not have to be licensed under the SFC, or even Hong Kong residents. While the establishment of LPFs are managed by the Companies Registry, which would maintain a register of LPFs and an index of the names of every LPF, the identity of LPs are not generally available to the public.
3. Preferential tax treatments
Under the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance, LPFs can enjoy profits tax exemption provided certain conditions are met. Such exemption is applicable to the investment fund’s investment in both overseas and local private companies.
Funds established under the LPO
Under the Bill, some funds registered under the LPO may have the option to convert their status to LPF upon application with the Registrar of Companies, and they will not lose their statutory powers as a result of the conversion.
Seize the Opportunity
The enactment of the Bill will not only provide the legal framework for investors and fund managers to have their investment funds set up in Hong Kong, it will also help reduce costs and bring investors, markets and fund managers closer together. Contact our teams on how we could assist you in capturing this new opportunity during these unprecedented times.
Alfred Leung, Partner
Cherry Lam, Trainee solicitor
Aaron Feng, Paralegal