The Transfer Conditions the Seller Cannot Answer

A limited partner has a buyer and a price. Under ILPA's model agreement the sale starts out prohibited: §17.1 provides that no partner may transfer all or any of its interest except as the transfer article allows, and "Transfer" is defined as a transfer in any form. What follows is the route back to permission, and three of the conditions along it are answered outside the seller's file.

The standard attaches conditionally

Section 17.2.1 requires the prior written consent of the general partner, unless the general partner waives the requirement. Consent "shall not be unreasonably withheld" — but not from the outset. The constraint attaches if the transferee is an affiliate of the transferor, or if the transfer meets five listed criteria. Outside those two routes, §17.2.1 imposes no express reasonableness constraint on withholding consent.

Three criteria reach past the seller's file

Section 17.2.1.4 requires that the transfer not cause any portion of the fund's assets to constitute Plan Assets, and not cause the general partner to become a fiduciary to any existing or contemplated limited partner under ERISA. Plan Assets is defined by reference to the Department of Labor regulation at 29 C.F.R. §2510.3-101, as modified by ERISA §3(42). Broadly, participation by benefit plan investors becomes significant at 25 percent or more of the value of a class of equity interests, after applying the regulation's exclusions from the denominator — which disregard interests held by anyone (other than a benefit plan investor) with discretionary authority or control over the entity's assets, by anyone providing investment advice for a fee with respect to those assets, and by affiliates of either. The test runs immediately after the most recent acquisition of any equity interest, and a secondary purchase is such an acquisition.

Section 17.2.1.5 reaches further. The transfer must not cause the fund, the general partner or any limited partner to become subject to laws, regulations or taxation they would not be subject to but for it. One of the parties the criterion protects is an investor with no involvement in the deal.

The third is section 17.2.1.3, which requires that the transferee constitute only one Partner within the meaning of Treasury Regulations §1.7704-1(h). That regulation contains a private-placement safe harbour under which a partnership will not be treated as publicly traded where all interests were issued without Securities Act registration and the partnership has no more than 100 partners at any time in the taxable year. The ceiling belongs to the fund, but the criterion measures the buyer: how many partners the transferee counts as, which turns on how the buyer is assembled.

What the parties can actually produce

The other two criteria are within reach. Section 17.2.1.2 asks the transferee and transferor for confirmation of the transferee's identity, confirmation that it is an accredited investor under Regulation D and — bracketed in the model — a qualified purchaser under the Investment Company Act, a completed subscription agreement for the interest being transferred, and a certificate that the transferor's own subscription representations hold true of the transferee. It ends with whatever further documents, opinions, instruments and certificates the general partner reasonably requests. Section 17.2.1.1 handles cost: one of the two parties undertakes to pay the fund's and the general partner's reasonable expenses whether or not the transfer is ever completed, and those payments are not treated as capital contributions and do not reduce either side's Remaining Commitment.

The model does not leave every transfer to discretion. Where a BHCA Partner's interest exceeds 24.99% of all interests, or it delivers an opinion of counsel setting out a reasonable belief that continuing to hold will violate the Bank Holding Company Act, the general partner shall consent, on full satisfaction of the same conditions. The drafters knew how to make consent mandatory when they wanted it.

Admission, and the record that follows

Acceptance is the moment that matters. Under §17.2.2, once the fund and the general partner accept the transferee's subscription agreement, the transferee is admitted as a Substitute Partner, succeeds to the transferor's rights and obligations with respect to that interest, and is listed in the Register. The Register carries each investor's name, contact details and commitment amount, sits outside the agreement itself, and is updated without any action by a limited partner. Any limited partner can ask for a complete copy.

A transfer not effected as the article permits is void ab initio, and the fund does not recognise the purported transferee's rights, including the right to receive distributions. The clause qualifies itself twice, both times with "to the fullest extent permitted by applicable law." Payment by the buyer does not cure the failure to satisfy Article 17.

A seller's file can be complete on the day the answer comes back no.