General Partners are pivotal figures in the structure of limited partnerships, carrying significant responsibilities and liabilities. This article delves into the intricacies of general partners, drawing from the Delaware Limited Partnership Act, to provide a comprehensive understanding of their admission, withdrawal, powers, and obligations. Whether you are an investor, legal professional, or business owner, understanding the role of general partners is crucial in navigating the landscape of limited partnerships.
Admission of General Partners
Becoming a general partner in a limited partnership is a process governed by the partnership agreement and Delaware law. Interestingly, under § 17-401 of the Delaware Limited Partnership Act, a person can be admitted as a general partner without necessarily contributing capital or being obligated to contribute. This highlights that the role of a general partner is not solely defined by financial investment but also by their managerial and operational responsibilities.
Furthermore, unless the partnership agreement specifies otherwise, an individual can be admitted as a general partner without even acquiring a partnership interest. Remarkably, it’s also legally permissible to have a single general partner in a limited partnership, and this sole general partner isn’t mandated to make contributions or acquire a partnership interest, as long as the partnership agreement allows it. This flexibility in admission underscores the importance of the partnership agreement in defining the specifics of general partner roles.
After the initial formation of a limited partnership, adding new general partners typically requires the consent of all existing partners, as stated in § 17-401(b). This unanimous consent requirement emphasizes the significant influence general partners wield and ensures that the existing partnership structure is maintained unless all partners agree to a change. Additionally, § 17-401(c) clarifies that general partners do not automatically have preemptive rights to subscribe to additional partnership interests unless explicitly granted in the partnership agreement or another agreement.
Events of Withdrawal for General Partners
The departure of a general partner from a limited partnership is a significant event with legal implications. Section § 17-402 of the Delaware Limited Partnership Act outlines specific events that lead to a general partner’s withdrawal. These events are crucial for maintaining the legal and operational integrity of the partnership.
Withdrawal events include:
- Voluntary Withdrawal: As per § 17-602, a general partner can withdraw from the limited partnership, following the procedures outlined in the partnership agreement or Delaware law.
- Cessation as General Partner: Under § 17-702, certain actions or changes in circumstances can automatically lead to a general partner ceasing to hold that position.
- Removal: The partnership agreement may contain provisions for removing a general partner. This could be triggered by specific performance issues or breaches of the agreement.
- Financial Instability: Unless the partnership agreement states differently or all partners consent, certain financial events constitute withdrawal events. These include:
- Making an assignment for the benefit of creditors.
- Filing a voluntary bankruptcy petition.
- Being declared bankrupt or insolvent.
- Seeking reorganization, arrangement, or liquidation under any statute.
- Admitting to or not contesting allegations in a bankruptcy-related petition.
- Seeking or consenting to the appointment of a trustee, receiver, or liquidator.
- Prolonged Financial Proceedings: If, within 120 days of commencement, proceedings related to reorganization, liquidation, or similar relief are not dismissed, it can trigger withdrawal. Similarly, if a trustee or receiver is appointed without the general partner’s consent and the appointment isn’t vacated within 90 days (or 90 days after a stay), withdrawal occurs.
- Incapacity or Death (Natural Person): For individual general partners, death or legal adjudication of incompetence automatically leads to withdrawal.
- Termination of Entity Status: If a general partner is acting as a trustee, the termination of the trust leads to withdrawal. Similarly, dissolution and winding up of a general partner that is a separate partnership or limited liability company also trigger withdrawal. For corporate general partners, the filing of dissolution or revocation of charter (if not reinstated within 90 days) are withdrawal events.
- Estate Distribution: If a general partner is an estate, the distribution of the estate’s entire partnership interest, unless otherwise agreed, leads to withdrawal.
- Termination of Non-Standard Entities: For general partners that don’t fit the categories of individual, partnership, LLC, corporation, trust, or estate, their termination also constitutes a withdrawal event.
It’s important to note that § 17-402(b) mandates a general partner experiencing an event that could lead to withdrawal under paragraphs (a)(4) or (5) to notify other general partners or limited partners (if no other general partners exist) within 30 days of the event. This notification requirement ensures transparency and allows the partnership to address the implications of a potential withdrawal promptly.
Powers and Liabilities of General Partners
General partners in a limited partnership occupy a unique position, wielding significant power while bearing considerable liability. Section § 17-403 of the Delaware Limited Partnership Act outlines these powers and liabilities, drawing parallels to partners in a general partnership under the Delaware Uniform Partnership Law.
(a) Rights and Powers:
Except when limited by the Delaware Limited Partnership Act or the partnership agreement, a general partner possesses the same rights and powers as a partner in a general partnership governed by the Delaware Uniform Partnership Law. This broad grant of authority allows general partners to manage and control the partnership’s business operations and strategic direction.
(b) Liabilities:
General partners also bear the liabilities of a partner in a general partnership, both to external parties and to the partnership itself and its partners. This means general partners typically have personal liability for the debts and obligations of the limited partnership. This liability is a key distinction between general partners and limited partners, who generally have limited liability.
(c) Delegation of Authority:
Interestingly, § 17-403(c) provides general partners with the power to delegate their rights, powers, and duties to others. This delegation can be irrespective of whether the general partner has a conflict of interest. This delegated authority can be given to agents, officers, employees, or committees and can be formalized through management agreements. Unless the partnership agreement states otherwise, such delegation can be irrevocable and does not cause the general partner to cease being a general partner or the delegate to become one. This provision offers significant flexibility in management structure and allows for specialized expertise to be brought into the partnership’s operations without altering the fundamental partnership structure.
(d) Judgment Creditors:
Section 17-403(d) provides some protection to general partners from direct execution by judgment creditors of the limited partnership. A creditor of the limited partnership cannot directly seize the personal assets of a general partner unless certain conditions are met. These conditions include:
- Obtaining a judgment against the limited partnership first and demonstrating that execution against partnership assets was unsatisfied.
- The limited partnership being in bankruptcy.
- The general partner agreeing to bypass exhaustion of partnership assets.
- A court permitting execution after finding partnership assets are insufficient, exhaustion is too burdensome, or it’s equitable to allow direct execution.
- Liability being imposed on the general partner independently of the partnership.
These conditions provide a layer of protection for general partners, requiring creditors to primarily target partnership assets before pursuing the personal assets of general partners, unless specific circumstances justify direct action.
Contributions by General Partners
While admission as a general partner doesn’t mandate initial capital contributions, § 17-404 clarifies that general partners can make contributions to the limited partnership. They can also share in the partnership’s profits, losses, and distributions in their capacity as general partners. Furthermore, a general partner can simultaneously act as a limited partner, contributing capital and sharing in profits, losses, and distributions in that separate role. In such dual roles, the partner assumes the rights, powers, restrictions, and liabilities of both a general and a limited partner, as defined by the partnership agreement.
Classes and Voting of General Partners
To provide flexibility in governance, § 17-405 allows for the creation of different classes or groups of general partners within a limited partnership. The partnership agreement can define the relative rights, powers, and duties of these classes, and even provide for the future creation of new classes with potentially senior rights. This structure allows for sophisticated governance arrangements tailored to the specific needs of the partnership.
(a) Classes and Groups:
The partnership agreement can authorize actions, including amendments to the agreement, without requiring a vote or approval from any general partner or class, including creating new classes of partnership interests.
(b) Voting Rights:
Voting rights can be granted to specific general partners or classes, either separately or jointly with limited partners, on any matter. Voting can be structured in various ways: per capita, by number, financial interest, class, group, or any other basis defined in the partnership agreement.
(c) Meeting Procedures and Consents:
The partnership agreement can detail procedures for meetings, including notice, waivers, consent actions without meetings, record dates, quorum requirements, and voting methods (in person or by proxy). Meetings can be held via conference call or similar equipment, and electronic participation counts as in-person presence. Unless restricted by the partnership agreement, general partners can act by written consent without a meeting, provided the consenting partners hold the minimum votes required for action at a meeting. Consents can be made effective at a future time, and proxies can be granted in writing or electronically. Electronic consents are deemed written and signed.
Remedies for Breach of Partnership Agreement by General Partner
Section § 17-406 acknowledges that partnership agreements can specify penalties or consequences for general partners who fail to comply with the terms of the agreement. These penalties, triggered by specific failures or events outlined in the agreement, can mirror those applicable to limited partners under § 17-502(c). This provision allows partnerships to enforce the obligations of general partners and maintain accountability within the partnership structure.
Reliance on Reports and Information
To ensure smooth operation and protect partners acting in good faith, § 17-407 provides “safe harbor” provisions for reliance on information.
(a) Limited Partners and Liquidating Trustees:
Limited partners and liquidating trustees are fully protected when relying in good faith on partnership records and information, opinions, reports, or statements presented by general partners, officers/employees of general partners, other liquidating trustees, committees, or other experts. This reliance can extend to information about asset values, liabilities, profits, losses, and provisions for obligations.
(b) General Partners of Limited Liability Limited Partnerships (LLLPs):
General partners of LLLPs also receive similar protection when relying on information from other general partners, officers/employees of the limited partnership, liquidating trustees, committees, or experts.
(c) General Partners of Limited Partnerships (Non-LLLPs):
General partners of traditional limited partnerships (non-LLLPs) are protected from liability to the partnership, its partners, or parties bound by the partnership agreement when relying in good faith on the same sources of information as mentioned above. This protection encourages informed decision-making based on provided data without undue fear of liability for inaccuracies beyond their direct control.
Conclusion
General partners are central to the operation and governance of limited partnerships, bearing significant responsibilities and liabilities as defined by the Delaware Limited Partnership Act. Understanding their admission, withdrawal conditions, powers, obligations, and protections is paramount for anyone involved in or considering forming a limited partnership. This overview, based on the Delaware statute, provides a foundational understanding of these critical roles and their legal framework. For specific legal advice and partnership structuring, consulting with legal professionals experienced in Delaware partnership law is always recommended.
