Limited Partnerships Bill — Second Reading 
Limited Partnerships Bill — Second Reading 
[Volume:645;Page:14639] 
Limited Partnerships Bill 
Second Reading 
Hon TREVOR MALLARD (Acting Minister of Commerce) 
: 
 I move  
That the Limited Partnerships Bill be now read a second time 
. This bill was considered by the Commerce Committee. The objectives of the bill are to facilitate the development of a local capital investment industry and to encourage foreign venture capital investment. The bill aims to do this by establishing in New Zealand the legal form of limited partnership which is an internationally preferred structure for investing in venture capital. The value of venture capital is clear: venture capital plays an important role in helping innovative and developing businesses to grow. It is an important source of funding for new businesses and early stage expansion and it can sometimes assist growing firms by providing access to new contacts and new managerial and technical expertise. Since the first reading the Commerce Committee has recommended a number of amendments to strengthen the bill which will help it achieve its objectives. 
I will start by discussing some of the more important changes recommended by the committee to Parts 1 to 4 of the bill which establish the legal form of limited partnership. One of the most important of these recommended changes is the inclusion of safe harbours in the bill rather than in regulations. Safe harbours are those activities a limited partner may participate in without being held to have participated in the management of the limited partnership and potentially losing limited liability. The safe harbours recommended by the committee are based on international best practice and cover such matters as involvement in strategic decision-making contract work and the provision of consultation or advice to the limited partnership. These safe harbours provide the sort of clarity certainty and consistency with international approaches that are needed to encourage investment in limited partnerships. 
Another important amendment to the bill as recommended by the committee is the requirement that details of limited partners provided to the registrar are kept confidential. Two competing factors need to be balanced when considering this. One is the principle of transparency and the other is the fact that the anecdotal evidence of having limited partner details available on a public register shows that it may discourage some venture capital investors from putting money into New Zealand limited partnerships—and of course these people have a lot of choice. Limited partner details are not publicly available in some other jurisdictions and the committee has decided that the details on limited partners on the register should be kept confidential. I consider that this is a sound approach which also needs to be seen in light of the objectives of the bill in its broader context. A key objective of the bill is to attract venture capital investment. The international market for venture capital is highly competitive and we do not want to disadvantage our market. 
The committee has also proposed some changes to provide more flexibility in the operation of limited partnerships—in particular that the earlier prohibition on limited partnerships being involved in banking and insurance business can be removed because the generic legislation rules applying in those areas will address governance risk associated with limited partnerships in those areas. Limited partnerships will also be able to apply to the registrar to be deregistered on broadly the same basis as a company. This will ensure that a limited partnership that has ceased operating and has paid its debts can deregister in a simple and cost-effective way without needing to have a liquidator. 
Several other amendments recommended by the committee will help ensure good governance. In particular an obligation has been added to the bill for limited partnerships to prepare financial statements. This will encourage appropriate transparency in relation to the limited partners and to third parties dealing with those partnerships. Partnership agreements must also contain certain specified matters including the entitlement of partners to distributions the times when meetings must be held the ways in which meetings are to be conducted and the manner in which partners may enter or leave a partnership. This is an important measure to ensure the quality of partnership agreements. 
The select committee has recommended three other noteworthy amendments to Parts 1 to 4 of the bill and I will draw these to the attention of the House. Firstly limited partnerships may use the new voluntary administration provisions that came into force last year. Secondly third parties can be protected by applying Companies Act rules around the validity of actions taken by limited partnerships which means that third parties will be able to transact with a limited partnership without having to go behind the transaction to check whether for example the general partner they have been dealing with has been properly appointed. Thirdly with the leave of the court partners will have the power to bring derivative actions on behalf of the limited partnership. This is consistent with the approach taken in several other jurisdictions. 
I will now say a few words about Parts 5 and 6 which contain the new tax rules for limited partnerships and update the tax rules for general partnerships. Under the bill limited partnerships will receive flow-through tax status which means they will be taxed in the same way as general partnerships with partners being taxed individually in proportion to their personal share of the partnership income. 
Limited partners will be subject to new tax loss limitation rules to ensure that the losses they claim reflect the level of their economic loss. The Commerce Committee also recommended a number of technical amendments to the bill that will be useful and make tax rules easier. 
In summing up I am confident that the amendments made both to the regulatory and tax provisions of the bill will help it achieve its twin objectives of facilitating the development of the local venture capital industry and encouraging foreign venture capital investment. I thank the members of the Commerce Committee and the officials from both the Ministry of Economic Development and the Inland Revenue Department for their work on the bill and I acknowledge the contributions of those who provided submissions on it. As someone acting for the Minister and as I was personally quite involved in the venture capital industry through my Ministry of Economic Development responsibilities for a period of time I would like to say that this is a complex area. It is a very very important area for New Zealand and I think the Minister of Commerce has handled it very well. Thank you. 
SIMON POWER (National—Rangitikei) 
: 
 I follow on from the Minister’s opening remarks. Although he had some colour return to his face by the end of his speech he did not have much colour at the start of it after the vote on that last bill. 
National will be supporting the second reading of the Limited Partnerships Bill. I think this is one of those pieces of legislation that actually shows how the select committee process is so valuable in an MMP Parliament. The Commerce Committee managed to make substantial amendments to this bill. Although the Minister covered a number of those amendments in his opening remarks he undervalued in some respects just how comprehensive those changes made by the select committee were. I am pleased to hear him confirm that those changes added value to the Limited Partnerships Bill and I am also pleased to note that matters around revenue collection and tax streams were clarified to the advantage of those seeking to use this particular format for investment. The Limited Partnerships Bill introduces to New Zealand law a new limited partnership vehicle which is intended to encourage investment in New Zealand as the Minister said. The legislation is an attempt to catch up with overseas practice to ensure that experience and positioning for New Zealand does not leave us behind close competitors such as Australia when trying to attract venture capital. 
Although I would normally sit full time on the Commerce Committee I was required to sit on the Justice and Electoral Committee during much of the time this bill was considered. In the Justice and Electoral Committee at that time we were dealing with a piece of legislation called the Electoral Finance Bill so I was unable to participate in the lengthy discussions that the commentary on the report back from the Commerce Committee on the Limited Partnership Bill indicates must have occurred. When one takes the opportunity to read through the report back one finds it is clear that the amount of deletion and amendment was substantial—not just the odd part or clause on the way through but right down to the insertion of a new clause 2 detailing the commencement date of the Act. The committee believed that partnerships should have some sort of certainty about the commencement date and noted that it was disappointed that the explanatory note to the bill failed to provide any reason for deferring commencement of the bill. 
The deletion of clause 11 and the insertion of an entirely new clause 11 by the select committee made explicit the powers and the capacity of a limited partnership in according full rights and powers—as one would expect. More than that fiduciary duties and obligations of a general partner were inserted by way of a new clause 43—the original clause 43 was deleted—and the insertion of a new clause 43A which provides that a limited partner does not have a fiduciary obligation to the limited partnership or any partner something that again it appears was in need of clarification in the original bill. 
It is interesting that with respect to confidentiality of information clause 99 was removed and a new clause inserted to require the registrar to treat limited partner information as confidential and not make it available to the public—the removal of in fact the ability for the purview or scope of the Official Information Act to apply. This is not without controversy and may well be the sort of thing that is detailed or looked at more carefully during the Committee stage. 
The safe harbour mechanism originally recommended in clause 27 had to be amended and as far as derivative actions were concerned new clauses 74A to 74D had to be inserted to provide a process for a partner to take proceedings against a limited partnership. 
Clause 13 was deleted and further amendments were made. Clause 14 was deleted as well. With respect to the method of contracting contained in the bill new clause 15A was inserted and a further amendment made to allow a limited partnership to amend a partnership agreement either by means of a written document or in accordance with the procedures set out in the limited partnership agreement. 
A new clause 9A was inserted—as stated—and the deletion of subclause 17(2) and insertion of new subclause 17(2) was also recommended. The insertion of new clause 18A which sets out when a person becomes a general partner and a new parallel clause 18B were also included. These amendments tell us two things. The first thing it tells us is that the original bill was not up to scratch. The second thing it tells us is that the select committee process can work on occasion reasonably constructively to fix up legislation that is referred to the committee in the first instance. So far over the last couple of years I have worked with Lianne Dalziel on a number of issues in the commerce area and I have to say she is by and large willing to listen to suggestions for changes and amendment. Although National will be supporting this bill at its second reading for the obvious reasons I have outlined it was quite clear that the Government needed to have its ears well and truly opened given the substantial number of major amendments deletions and insertions that the select committee saw fit to apply in order that this legislation could actually work in a constructive setting. 
I think we will be able to have a more detailed discussion about these clauses at the Committee of the whole House stage. Some of those matters I have mentioned are not without controversy; the confidentiality and non-application of the Official Information Act are matters that will require a little further examination. I know that Paul Swain will be anxious to share with the Committee of the whole House his knowledge of the tax laws that apply once moneys are withdrawn or change hands from different accounts under this new limited partnerships regime. It is known that his knowledge of these revenue stream matters will add substantially to the discussion in the Committee of the whole House. I say to the Hon Paul Swain that National would look closely at any Supplementary Order Paper or amendment that he might like to table in his own name in order to clarify some of those issues. 
National looks forward to discussing further matters relating to this bill in the Committee stage and supports the second reading of this bill. 
Hon PAUL SWAIN (Labour—Rimutaka) 
: 
 Firstly can I say that I am extremely flattered by Simon Power’s acknowledgment of my tax knowledge. I usually try to hide that under a bushel. 
Simon Power 
: A very modest bushel. 
Hon PAUL SWAIN 
: Yes a very modest bushel. It is clear that the member has identified some of my expertise and I will be going through the legislation and taking up the challenge the member has laid down. 
Mr Power at the start of his speech mentioned Trevor Mallard’s demeanour and slight paleness when there was potentially a slight legislative blip in the bill beforehand. It is probably quite fitting that Trevor Mallard had that demeanour because there has not been a legislative blip such as that since 1990 when he was a whip and it turned out to be a legislative catastrophe. That is probably why he was a little pale—it was the thought of history repeating itself on his own watch. 
Before I get into the legislation I will respond to some issues raised by Simon Power. He raised the issue of the legislation the select committee process and how there has been a number of changes. It really is a case of the glass half full and the glass half empty. I was not sure whether he was going to rave on about the constitutional outrage it was that the bill had not had much attention before it came to the Commerce Committee or whether he was going to praise the committee for doing extremely good work. Having been a Minister of Commerce my view is that these issues are always complex. 
The truth is that officials never really get it right the first time notwithstanding the discussion that goes on with the industry prior to the introduction of legislation. What happens is that good submissions come along and on a committee like that where it is quite technical the committee is very intent on listening. There were a couple of things in there that I think the chair Gerry Brownlee was keen to see moved through. I think one was the partnership share rule which he persisted with and he got some changes through which was good. 
Much has been said about the importance of this legislation. Essentially the guts of this issue is that we have an outdated system of attracting venture capital. International best practice is around some form of limited partnership arrangement and this legislation brings us into international best practice with the sole intent of ensuring that venture capital can be attracted to New Zealand. Limited partnership is a form of partnership involving two groups—general partners—who are liable for debts and liabilities of the partnership. But limited partners are liable only to the extent of the contribution in the partnership and that is the important thing—liability is related to contribution. 
As I have said the current arrangement we have goes back to 1908. The Government is trying to promote economic transformation to try to attract venture capital in an area where we need it so this measure is important. New Zealand’s venture capital market is still relatively thin compared to the rest of the world. It is important that we have venture capital particularly for those small businesses that are looking to step off and expand at a time of high risk. So this is critical. 
Simon Power raised two or three issues that are worth mentioning quickly. The first is transparency. We had a lot of discussion about that on the select committee and it is a bit of a line call. On the one hand we want to make sure that a register is transparent so that everybody can see who the limited partners are but on the other hand it has been shown overseas that if we make it too transparent and everybody knows who is in then that acts as a bit of a deterrent for people to put their money into an arrangement. On balance we have come down on the side of saying that this can be a confidential register and I think that is something that maybe we will have another look at when we come to the Committee stage. It was an issue that the select committee spent some time thinking about because it is one of those line-call decisions. In the end I think we made the right decision but I am sure there will be people who want to raise that matter later on. 
The other issue is the safe harbour arrangement. Activities that a limited partner can participate in without being held to have participated in the management of the limited partnership and potentially losing their limited liability are important too because people will want to retain their limited liability status. 
The issue about the Official Information Act linked into the transparency question and I remember having quite a long and lengthy debate about that. By and large members of the committee would be keen on transparency and on everything being under the Official Information Act. With some advice from officials it was felt that if we make this kind of area too open and transparent it means that people do not put forward their money and that means then that small businesses suffer. There are interesting parallels with other legislation that deals with transparency. In the end we made those calls. As I said Gerry Brownlee pushed for a matter that I think is around the partnership share rule. I cannot quite remember whether that was it but he beavered away on one particular issue and as I recall he had some success. 
This legislation has had a lot of attention. There are some difficult and complex things in it. It is quite technical. The New Zealand Law Society says in a leaflet it has put out which is part of an exercise to attract people to come and learn about these things that the passing of the limited partnerships legislation will be one of the most significant developments in corporate law since the Companies Act 1993. So this is important legislation. It has had a good thorough going-over at the Commerce Committee. A number of significant changes were made at the committee as a result of the good work under the chairmanship of Gerry Brownlee. I commend this bill to the House and to further consideration during the Committee stage. 
GERRY BROWNLEE (National—Ilam) 
: 
 I thank the previous speaker the Hon Paul Swain for his generous comments about the way in which the Commerce Committee worked on the Limited Partnerships Bill. It is significant legislation as he mentioned because it brings arrangements in New Zealand into line with other international jurisdictions. It has the effect of making sure that venture capital flowing into New Zealand can be used here for the development of our economy with investors knowing that the regime that operates inside New Zealand is a safe one that there is good law and that for those who make investments there is reasonable protection from a failure of the system to look after the interests they have. 
Is it not a little bit interesting though that we have a bill here effectively made workable by the National Party but promoted by the Government to encourage foreign investment in New Zealand? Here in Parliament we are discussing it just a day after the current Government embarked on yet another nationalisation of a business inside New Zealand. I will say no more than that but there is simply a certain irony in that which I think should not escape the attention of those who understand these matters. 
I also think it is interesting that we are talking about encouraging this foreign investment. For example when we look at the forestry industry in New Zealand we see we could do with significant amounts of foreign investment because it has such a long life cycle. The end product takes 25 or 30 years to mature and therefore cash flows are pushed out for a long number of years. At the same time we have a Government in New Zealand making sure that such investment is very very unattractive because of its failure to ascertain the same opportunities for New Zealand foresters as the Australians managed to obtain for Australian foresters in negotiations around the Kyoto Protocol. 
I do not want to talk for a long time about a bill that is essentially well-supported in the House and that has gone through a very good process at the select committee. People have a view that Parliament is a very adversarial place and that we are just out there to knock each other over all the time. A lot of legislation goes through the House every year and I think everybody who was part of the select committee for this bill made a fair effort to get good information. We most certainly had very good advisors at various points and I can only commend the colleagues who were on the select committee with me for the work they did. I think we have managed to deliver up for the Minister of Commerce a much improved version of the bill that was originally sent to us. With that I tell the House that the National Party will be supporting the bill this afternoon and I will end my comments. 
DAIL JONES (NZ First) 
: 
 This bill is supported by New Zealand First and is an excellent piece of legislation. I take the point that has been made about the Law Society’s reports and its suggestion for lawyers to attend seminars on this bill. I wholeheartedly support the need for that. The suggestion that this bill will change New Zealand commercial law to a much greater extent than the 1993 Companies Act would be very fair because after all the 1993 Companies Act was a consolidation of earlier legislation—tidying it up and bringing it up to date—whereas this legislation is a new type of concept. Of course we used to have special partnerships in the old law under the Partnership Act of 1908. I think they were abolished at some stage and we do not do them very often these days. But this is an excellent piece of legislation. 
The previous speaker Gerry Brownlee raised the point about foreign investment in New Zealand. Of course as is well known New Zealand First supports and insists upon New Zealanders retaining the ownership of strategic assets in New Zealand. This bill is something different because it should encourage foreign investment in new developments in New Zealand. I think also of the new tax incentives that will arise from 1 April this year and one would hope that we may be able to see some big companies coming to New Zealand indulging in research and development and taking advantage of the tax incentives that relate to research and development as part of the special partnership venture that is proposed in this legislation. New Zealand First is keen on seeing more research and development being done by the private sector in New Zealand. Currently most research and development is done by the Government and there needs to be greater expansion by the private sector. 
One aspect of the bill that concerns me—I have to confess I have looked at it for the first time only today since my recent return to Parliament—is the question of the penalties for the misuse of the name of the partnership. I just wonder whether in clause 28 which is entitled “Name of limited partnership must include words limited partnership” the penalty is severe enough. It might be that people use a name and do not make it clear that it is a limited partnership. Someone might get involved with the limited partnership not realising the limitations of limited partnerships on the liability of certain members of that partnership. He or she might think that the members are fully liable but in fact because of the nature of the partnership they may not be fully liable such as under clause 27. A penalty of only $5000 seems to be hopelessly insignificant to me when many hundreds of thousands if not millions of dollars might be involved in this type of venture. 
New Zealand First being strong on law and order is keen on making sure that not only rogues and villains who beat up people and damage property and such like suffer severe penalties but people who might be engaged in what might turn out to be white-collar crime suffer severe penalties as well. I wonder whether the penalty set out in this bill for what would be white-collar crime is insufficient. I would hope that the officials might have another look at that and increase the penalties that might be available including if the name is not used properly making all members totally liable rather than limiting some of their liability. 
Overall though this is a wonderful new concept for New Zealand. Lawyers will have to specialise in this law as it will be a very difficult area. Speaking as a lawyer I recommend that any lawyer who wants to be known as a commercial lawyer attends the Law Society’s seminar because this will be something totally new—and hopefully very profitable for lawyers as well in due course. 
LINDSAY TISCH (National—Piako) 
: 
 As previous speakers on the National team have said we will be supporting the Limited Partnerships Bill. It is important legislation. Although the bill is of a technical nature it has certainly been interesting to sit on the Commerce Committee and hear the submissions that came through. They were very informative submissions and out of that we made a number of changes. Many amendments were made during the select committee process and that is significant in getting legislation that we believe is important for New Zealand. 
If we were to just look and recap on what the Limited Partnerships Bill does it introduces a new limited partnership vehicle which is intended to encourage investment in New Zealand. There are three real key features to the bill. The first feature is that liability for limited partners will be limited to the amount of their contribution to the partnership which is certainly an important piece in the bill. It protects the partners so that their liability is not open-ended. The second major feature is that the bill establishes safe harbours that allow limited partnerships to participate in the management of the investment partnership without tainting their limited liability status. The third important feature is that the bill makes limited partnerships a separate legal entity. As opposed to being just a trading entity or a business entity they will actually be a legal entity. Significant tax changes are also included in this legislation and I will mention a couple of them very shortly. 
The primary vehicle for venture capital in New Zealand is the New Zealand Venture Investment Fund. I think it is appropriate first to make just a few comments and talk about how important this is to the New Zealand economy. I quote from a Harvard professor by the name of Josh Lerner an expert in venture capital at the Harvard Business School. He suggests that market failures have resulted in Government support being a factor in the initial development of all future venture capital markets. 
Josh Lerner identifies three potential market failures: first a heightened risk of research and development spillover to competitors when small innovative firms have scarce resources to defend their intellectual property; second the increasing returns nature of a developing venture capital market whereby the development of specialised venture capital skills and a soft infrastructure involving lawyers accountants and business advisers with a deep understanding of venture capital processes means that the 100th investment is considerably easier than the first investment made; and third severe information gaps between venture capital firms and potential investors leads to the requirement that the size of the investment must be significantly large to justify the considerable due diligence costs involved in making the investment. 
If we apply that to young venture capital funds we find that they have yet to develop a track record of success and therefore they have difficulty in securing funds from institutional investors. Josh Lerner states: “In this context the Government’s initiative in 2002 of establishing the New Zealand Venture Investment Fund on an arm’s length basis from political interference and as a co-investor with private sector investors should be recognised as having been a catalyst for the developing of a professional venture capital industry in New Zealand.” 
So we have the New Zealand Venture Investment Fund which is responsible for managing two early-stage investment programmes on behalf of the New Zealand Government. These two investment programmes are first the VIF Venture Capital Programme of $160 million established as a funder of funds. Second there is the Seed Co-investment Fund programme which is a $40 million co-investment programme. 
The team from the New Zealand Venture Investment Fund came to the select committee and made these points and I think they are significant because hopefully this bill will address some of the issues they identified. They said that the New Zealand venture capital market is small and undeveloped by international comparisons. The reported total investment value for New Zealand private equity in venture capital investment in 2004 was $158 million which represents only 0.11 percent of GDP. So in this measure New Zealand is lagging well behind other OECD countries. In fact the size of the New Zealand venture capital sector would need to increase by at least fivefold to approach the levels comparable with Ireland the United Kingdom and Singapore. 
In 2004 the fund surveyed 15 offshore funds that might invest their venture capital into private equity funds globally and into New Zealand. Twelve of those 15 responded representing in excess of $50 billion of private equity and venture capital funds under management. All but one of those parties said they would consider investing private equity and venture capital funds in New Zealand. However the prerequisites for investing were the presence of a world-class investment structure in the form of a limited partnership and flow-through taxation treatment. This is what this bill actually provides for. This bill addresses those concerns that have been identified as a major challenge by the Venture Investment Fund. 
I move now to another point that has been made by many submitters and it has also been mentioned in the debate this evening—that is the safe harbour provisions. The original legislation made provisions for safe harbours to be in regulations but they will now be part of the bill. I will quote from one of the submissions about what the safe harbours do: “The bill provides the power to set out in regulations safe harbours or activities that do not constitute taking part in the management of the business of a limited partnership. This is important because limited partners are not permitted to take part in the management of the limited partnership. If they do they may be jointly and severally liable with the limited partnership and general partners in the same way as a general partner would be.” This bill actually protects them from that and that is a significant change. 
The Ministry of Economic Development came out with a discussion document on safe harbours for limited partnerships. It is interesting that it has made about 15 recommendations that would add value to the safe harbour position. 
I will make just a final point concerning clause 116 in the original bill which related to the tax treatment where a partner’s right to a partnership income is different from his or her share in the partnership assets. That was one of the major concerns that submitters picked up on because there needed to be some clarity as to what it actually meant. This concern was raised by members of the committee as well and it is very clear now that this has been sorted out. To give an example in a farming situation in some farming operations it is possible for a partner’s proportional entitlement to income from the partnership to be different from his or her share in the partnership assets. For example a father and son might each own 50 percent of the farm’s land and buildings but for family reasons one partner has rights to 90 percent of the income from the farm. 
This situation can also occur in professional services firms such as accounting and law firms where it is common for each partner’s rights to the profit from the partnership to fluctuate from year to year based on individual performances but each partner’s share of the partnership assets remains the same. For example 10 partners in a firm each have a share of 10 percent in the assets of the firm. However the partnership agreement may provide that their right to income from the partnership is partly dependent on their performance during the year. Therefore a partner who performs particularly well may be allocated 15 percent of the partnership profits from that year and a partner who performs poorly may be allocated 5 percent of the profits. Although one partner may have 10 percent of the assets overall in this case in terms of the income distribution it could be treated on that partner’s performance. The bill clears up that issue which was a major concern raised by a number of submitters. 
That is important because if we are to proceed with this legislation—and National supports this bill—then these technical aspects of the bill are the sorts of things that need to be sorted out and need to be very clear if we are to get investment. National will support this bill and we look forward to its Committee stage. 
Bill read a second time.