Israeli investment funds are incorporated as limited partnerships under the Israeli Partnerships Ordinance. Investors are “limited partners” and the fund manager (or another corporation acting on its behalf) is the “general partner” of these limited partnerships.
The document that establishes a limited partnership is the limited partnership agreement. This agreement prescribes the legal and commercial terms and conditions of the limited partnership.
However, many investors and fund managers are unaware that a simple reading of the relevant partnership agreement is not sufficient to get the “full picture” of the legal conditions that apply to their specific limited partnership.
Dispositive Arrangements
The Partnerships Ordinance defines several arrangements pertaining to the relationship between the limited partner and the general partner. These include arrangements called “dispositive” arrangements, which constitute default arrangements that shall apply unless otherwise agreed upon in the contracts between the parties. This differs from “cogent” arrangements in various laws, which apply to contracts regardless of the wishes of the parties.
Section 63(d) of the Partnerships Ordinance is very important in this regard, since this section addresses several dispositive arrangements. It is important to familiarize yourself with the contents of the list below because, if the limited partnership agreement does not stipulate any other arrangement, these provisions apply as if they had been expressly included in the limited partnership agreement.
The Five Arrangements
- The first arrangement is that limited partners have no veto power in relation to the addition of additional limited partners. This means that if you are a limited partner in the fund and your specific agreement does not stipulate otherwise, the general partner may add additional limited partners to the fund even if they are not to your liking, and you have no right to object to this.
- The second arrangement is that limited partners are unable to dissolve the partnership by issuing notice of dissolution. This arrangement means that, unlike the situation whereby a partner may withdraw from a partnership by way of issuing notice of its dissolution, if your specific partnership agreement does not stipulate otherwise, a limited partner may not dissolve the partnership.
- The third arrangement ensures a limited partner’s right to transfer its share of the partnership to another party (which in legal lingo is called an “assignment”), in a manner that entitles that party to the same rights held by the original limited partner. In other words, let’s assume you are a limited partner in a partnership and you want to transfer your rights in the partnership to another party. You are entitled to do so even if the partnership agreement does not specifically address such assignments.
- The fourth arrangement is that a lien imposed on a limited partner’s share as a result of that limited partner’s personal debts does not constitute justified grounds for dissolving the partnership. Here, too, if you are a partner in a limited partnership and prefer another arrangement, you must stipulate this explicitly in the agreement.
- The fifth and final arrangement addresses the requisite majority for passing resolutions if there is more than one general partner in the partnership. The Partnerships Ordinance prescribes an arrangement whereby, unless otherwise agreed, a majority vote of the general partners shall settle differences of opinion. Naturally, if you want some other arrangement (such as the majority being according to the general partners’ ratio of the total investments in the partnership), you must stipulate this in the agreement.
Considering the various provisions in the Partnerships Ordinance and the precedents set in case law, it is not enough to read the relevant limited partnership agreement, since it does not reflect all of the legal conditions that apply to your limited partnership. You should also consult with an attorney specializing in partnerships.
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Barnea Jaffa Lande’s investment funds team is at your service if you have any questions in this regard.
Adv. Roy Engel heads the firm’s investment funds practice.
Adv. Yakov Vilenski is an associate on the team.