Worth Richard: Limited Partnerships Bill — Instruction to Committee In Committee 
Worth Richard: Limited Partnerships Bill — Instruction to Committee In Committee 
[Volume:645;Page:14705] 
Dr RICHARD WORTH (National) 
: 
 National supports the Limited Partnerships Bill. I think it is unfortunate that Supplementary Order Paper 176 in the name of the Hon Lianne Dalziel has come so late in the day more particularly because in the explanatory note of the Supplementary Order Paper where mention is made of the amendments that are to be made to the bill it states that the amendments are minor technical and grammatical corrections. I express the hope that in the future greater care is taken before sign-off in the relevant select committee as a result of the inputs that come from parliamentary counsel. 
That said I too would like to join those who have congratulated Gerry Brownlee on his chairmanship of the Commerce Committee. It seems to me that in what is a very complex area of law his deft hand was often in evidence to guide us through some of the more tricky parts of the legislation. I would also say this bill is a very good example of legislation that has been hugely improved in the select committee process as a result of a decision that the select committee made to engage outside assistance. The outside assistance that we secured came in the form of a lawyer from one of the major law firms who had been deeply involved in this type of legislative regime in at least two countries. So there was presented for the select committee if you like a foil whereby the views of the officials could be contrasted with the views of someone who had practical hands-on experience of such legislation. 
I do not want to understate the impact of the bill because I think it has the potential to have a huge impact and one that in all respects will be well worthwhile. We should start I believe in this Committee stage by accepting an assumption that venture capital plays a critical role in driving individual company growth and innovation and that this will bring substantial benefits to the overall national economic performance. We have at the moment in New Zealand a capital market that is small and undeveloped by international comparisons. I understand for example that the reported total investment value for New Zealand private equity and venture capital investment in 2004 was only $150 million. That represents 0.11 percent of GDP. 
If members look at the OECD tables they will see that we lag hugely behind the key players at the top of the tables: the United Kingdom Israel the United States of America Sweden Singapore and countries of those types. Overseas the reality is that investors in private equity and venture capital funds are typically long-term investors such as pension funds and other institutional investors. The standard investment vehicle used by those investors to invest in those funds is the limited partnership. We had the old provisions in Part II of the Partnership Act 1908 that provided on a very restricted basis for special partnerships but this bill goes way way further than that. I hope that in the course of the Committee debate there will be an opportunity to look at some of the complexities of the tax provisions because they are very compelling I believe in the style that has been set up to make the regime more attractive. 
We have the situation of course in this legislation where those who seek to invest are commonly referred to as limited partners. Perhaps at first blush that is an odd expression but it is used because they have limited liability. They have not only limited liability but also limited control over the management of the funds. Therefore the word “limited” is really used in two senses. They invest significant amounts in private equity and venture capital funds for a long-term horizon typically of 10 years or more. The investment activities of the private equity and venture capital funds are undertaken by fund managers and those fund managers are referred to as the general partners or the general partner. 
A very significant barrier to the growth of the New Zealand venture capital industry has occurred because of the lack of investment from international and domestic institutional investors. The industry needs to attract those investors in order to develop in both scale and maturity. The lack of an investment vehicle that is easily recognised by institutional investors has been identified as one of the constraints to investment in New Zealand. It is interesting to speculate on the impact that this set of Government interventions may have—in the Auckland airport context—in connection with our need for public-private partnerships to move into the area of infrastructure development. I suggest it is probably hugely unhelpful. 
I said that the Commerce Committee has made a large number of changes to the bill. One of the most interesting changes is that in the Partnership Act 1908 there was a restraint on banking or insurance activities being undertaken by special partnerships. The officials actually sought to maintain that separation. The committee has not accepted that position and I think that in the result the officials yielded on that point because we were satisfied that the generic regulation that applies to the banking and insurance sectors today provides sufficient safeguards against the governance risks that may arise when a limited partnership operates as such a business. 
The officials also had another view from that of the select committee concerning issues that related to tax. But the reality is that there are no tax implications to justify the prohibition on a limited partnership from undertaking banking or insurance activities and it may very well be that the Inland Revenue Department will continue to monitor developments in that particular area. 
Another issue I would like to deal with is the question of “safe harbours” for two reasons: firstly it is a very important topic in itself and secondly it was the view of the officials that the “safe harbour” regime which I will talk about in a moment should really be the subject of regulation—of delegated legislation. That view I suggest is fundamentally flawed. If we are to talk about an issue like “safe harbours” we should talk about controls being put in legislation. “Safe harbours” is perhaps rather a strange phrase. What we are talking about are activities that do not constitute taking part in the management of a limited partnership. What happened was that the officials yielded to the proposition that it was appropriate for the “safe harbour” regime to be transferred from the regulations into the Act. So we find reference to that in clause 27 and in a detailed schedule that identifies activities that do not constitute taking part in the management of a limited partnership. I can give two examples of that. One is taking part in a decision about the variation or replacement of the partnership agreement. Another example is taking part in a decision about whether a person should become or cease to be a general or limited partner. 
I will refer to one further issue which relates to derivative actions. It is a complex legal concept. One of the things the select committee has recommended is the insertion of a number of clauses to provide a process for a partner to take proceedings against a limited partnership. That has been done in I think a very careful and appropriate way. For example there is a clause that sets out a threshold that must be satisfied in order for a proceeding to take place. It also specifies the circumstances in which a limited partner can institute proceedings. There is a provision relating to the costs of the proceedings with the general rule being that those costs would be met by the limited partnership unless the court should judge that to be unjust or inequitable. Then there are also provisions that deal with approving settlements compromise or discontinuation. 
I think it was certainly in the forefront of the select committee’s mind that we had to work on a regime that would be attractive objectively to overseas investors. The select committee sought to identify in many of its changes what those particular aspects of attraction or seduction might be. There is an issue which is now dealt with in the bill as amended relating to the confidentiality of limited partner information. There was a view that the names and addresses of the general partners and the limited partners should be in the public domain. The reality is that the policy intent of the bill is to encourage investment into the capital venture market. Potential investors might very well be discouraged from investing in a limited partnership if their personal details were to be made public. So a compromise has been reached that gives certain powers to the Ombudsmen but nevertheless preserves those names and addresses from the public domain albeit that such information is available to the registrar. 
Those were the main issues that I sought to deal with. I have noted the importance and significance of the tax changes. Some members of the committee spent a considerable period of time in looking at those particular issues and I believe the accord that has now been struck is highly workable. 
The question was put that the amendments set out on Supplementary Order Paper 176 in the name of the Hon Lianne Dalziel be agreed to. 
Amendments agreed to. 
Parts 1 to 6 schedule and clauses 1 and 2 as amended agreed to. 
The Committee divided the bill into the Limited Partnerships Bill and the Taxation (Limited Partnerships) Bill  
divided into Limited Partnerships Bill| Taxation (Limited Partnerships)Bill| 
pursuant to Supplementary Order Paper179. 
Bill to be reported with amendment presently.