When a Regulatory Concern Arises, Who Has to Prove It?

A limited partner is told that its participation creates a regulatory problem. Under one section of ILPA's model agreement the general partner has five business days to hand that partner an opinion of counsel, and both the opinion and the counsel who wrote it must be reasonably satisfactory to the partner receiving it. Under another, that partner has a reasonable time to produce an opinion at its own expense, in a form the general partner finds acceptable, stating that no problem exists. The same facts may raise both concerns; the allocation of proof is different.

Related concerns, separate routes

The two sections do not share a trigger. Section 6.7 turns on a Material Adverse Effect, a definition with six limbs, reaching from a violation of a statute, rule or regulation applicable to a partner to a violation of that partner's own written policy — the latter only where the general partner agreed in writing, before admission, that the policy should entitle it to be excused. One of those limbs is an occurrence reasonably likely to result in a Regulatory Issue, which is the term §8.6 runs on. The definitions meet at that limb.

Regulatory Issue has two limbs of its own, and both must hold. The general partner must believe, in its reasonable judgment, that a Regulated Partner's investment may produce a violation of law applicable to that partner, treatment of the fund's assets as that partner's assets, or treatment of the fund or the general partner as a fiduciary under a law applicable to it — and that one of those will or may result in adverse consequences to the fund or the general partner. Harm to the investor alone does not reach the section.

Regulated Partner covers governmental plans, foreign plans and other regulated entities. Benefit Plan Investors are excluded from it by name. A Benefit Plan Investor may instead reach §6.7 through Limited Partner Regulatory Problem where the fund's assets are deemed to include its Plan Assets, a term that separately picks up any limited partner that would be in material violation of applicable law by continuing in the fund.

Three routes, three standards of proof

An investor invoking §6.7 for itself produces no opinion of counsel at all. It delivers a notification and a certificate of one of its executive officers, within five business days of the drawdown notice. The certificate rests on that partner's own reasonable determination that making the investment is reasonably likely to have a Material Adverse Effect on it.

When the general partner invokes the same section, the instrument changes. It has to advise the limited partner in writing within five business days of the drawdown notice and deliver an opinion of counsel confirming that the partner's participation is reasonably likely to result in a Material Adverse Effect. Both the opinion and the counsel must be reasonably satisfactory to that limited partner, which is an approval right over the lawyer chosen rather than a right to appoint one.

Section 8.6 reverses the arrangement. The general partner may, in its discretion, require the Regulated Partner to provide an opinion of counsel — at that partner's expense — reasonably acceptable to the general partner in form and substance, stating that no Regulatory Issue exists. Here the investor must establish an absence rather than the general partner a presence, against a standard that answers to the general partner, and within a reasonable time the section never defines.

The expense point is narrower than it looks. Section 8.6 says in terms that the Regulated Partner pays for its opinion, while §6.7.2 requires the general partner to deliver one and says nothing express about who ultimately bears the cost.

What non-delivery opens

The remedies in §8.6 are not expressly gated on an unfavourable conclusion. They become available if "such an opinion" is not delivered within a reasonable time after being requested. That wording leaves a question: whether an opinion the general partner finds unacceptable in form or substance counts as an opinion delivered, or as a failure to deliver the required opinion. No further determination beyond the general partner's initial reasonable judgment is expressly required.

What opens is a list. The general partner may amend the agreement, amend or terminate or restructure then-existing or contemplated arrangements, redeem the interest in whole or in part at a price reasonably acceptable to that partner, require its transfer to one or more limited partners, or dissolve the fund and wind up its affairs. The detailed redemption mechanics that follow in §8.6.3 are bracketed in their entirety in the model, so the payment timing, the pricing rule and the valuation-dispute route are drafting placeholders rather than settled terms.

A redemption under this section is partial in effect as well as in amount. Under §8.6.2 the partner ceases to be a partner for the withdrawn portion only. On what remains it keeps its capital-account allocations, its distributions, and its right to approve, consent or vote as the agreement provides.

The same facts can enter the agreement through different provisions, and the provision determines who must establish what.