Summary

This Ph.D. thesis examines the statutory rule prohibiting a limited partner from participating in the management of the limited partnership in which he is a partner.

Chapter 1 defines the research question and the research structure, as well as the methodology used. Next, by way of introduction, this chapter sets out the characteristics of the limited partnership and the place the limited partnership occupies in the spectrum of Dutch legal business forms. It then gives an overview of the means and ends to which a limited partnership is used in practice and of the disadvantages associated with the current legislation concerning the limited partnership. The main disadvantage would seem to be the rule referred to above, which implies that a limited partner cannot participate in the management of a limited partnership. This rule will be referred to here as ‘the management prohibition rule’. This leads to the following primary research question: Is the management prohibition rule still justified, particularly in the light of the legal grounds that are advanced for its existence and the experience gained with it in foreign jurisdictions? If this primary research question is answered in the affirmative, the first secondary research question will be whether the disadvantages of the current management prohibition rule can be obviated. Should the primary research question be answered in the negative, the second secondary research question will be whether the management prohibition rule can be abolished altogether without detriment to third parties. Next, the practical and academic relevance of these research questions is discussed, as well as the theoretical framework underlying this study. After describing the research structure, some of the methodological choices made and sources selected for the research are explained. Finally, a number of terminology issues are discussed.

Chapter 2 provides a critical review of the interpretation of the management prohibition rule as it has developed since its introduction in Dutch law in 1838. First, the legal grounds on which the management prohibition rule is based are discussed. These are twofold. Firstly, the rule aims to prevent a person contracting with the partnership from taking the limited partner for the general, and thus jointly and severally liable, partner. Secondly, it is intended to prevent the limited partner from acting recklessly on behalf of the limited partnership, secure in the knowledge that his liability is limited to his contribution to the partnership. The research into the current state of the law regarding the management prohibition rule shows that it has – and has had ever since its inception – two drawbacks: (i) the scope of the rule is unclear, and (ii) the consequences the law attaches to violation of the rule are severe: the limited partner who violates the rule becomes jointly and severally liable for all debts and obligations of the partnership. In this thesis such a violating limited partner is referred to as ‘the industrious limited partner’. As to the scope of the management prohibition rule, two theories exist. The first states that the rule prohibits the limited partner only from taking part in management activities that manifest themselves externally. This is referred to here as ‘the limited view’. According to the second theory, the scope of the rule is wider. In this, the ‘broad view’, the rule prohibits the limited partner not only from taking part in external management activities but also from taking part in the internal management and business of the partnership, which is not perceptible to third parties. It is not clear which of these views is the prevailing one. This means that it is impossible to establish with sufficient certainty the scope of management participation that the limited partner is allowed. The attempts undertaken in the past to improve this situation have been without success. As regards the consequences the law attaches to violation of the management prohibition rule, this study concludes that the joint and several liability for all the partnership debts and liabilities is being upheld strictly and unrelentingly by the Dutch Supreme Court. This court interprets the law in such a way that circumstances which in theory could result in mitigating the liability cannot be taken into consideration at all. The only alleviation the Dutch Supreme Court accepts is that an industrious limited partner is not jointly and severally liable for partnership debts if the violation of the management prohibition rule is not attributable to him. After this description of the law as it currently stands, the various amendments to the management prohibition rule that were proposed in the context of the work on the New Dutch Civil Code are examined. From this examination it appears that the final one of these proposals – and the only one that was submitted to Parliament as a bill – opted, contrary to earlier proposals, for a codification of the broad view, which met with fierce resistance in legal doctrine. With regard to the consequences of violation of the rule, this bill to a large extent removed the main objections raised in legal doctrine. The bill was withdrawn in December 2011.

Chapter 3 examines the legal design of the management prohibition rule in a number of foreign jurisdictions – France, Germany, England and the United States. It appears that significant differences exist both in the scope of the management prohibition rule and in the consequences of its violation. In France, it was established quite soon after the management prohibition rule had been introduced there that only management activities that manifest themselves externally are covered by the rule. Also with regard to the consequences of the rule being violated, a nuanced system of liability for the industrious limited partner was created at a relatively early stage, providing for a certain balance between the seriousness of the violation and the severity of the consequences of such violation. In Germany, the management prohibition rule appears to be framed much more generously than in the Netherlands. This is mainly due to the fact that, for the greater part, the German statutory rules on the management prohibition rule are of a non-mandatory nature. To a very large extent parties are therefore free to allocate managerial powers to a limited partner. Under German law a violation of the management prohibition rule results less often in liability or other consequences for the industrious limited partner than under Dutch law. And where it does, such consequences are less draconian. English law, on the other hand, is stricter than Dutch law. It has been firmly established under English law that not only external but also mere internal management interference is prohibited to the limited partner. The industrious limited partner is jointly and severally liable for partnership debts if he violates the management prohibition rule, but it has not been authoritatively clarified yet whether this liability extends to all partnership debts or only to those incurred during the period in which the violation of the rule took place. In the United States, finally, the legislation regarding the management prohibition rule has, over time, become more and more lenient towards the limited partner. Initially, the rule was interpreted strictly, but in each successive model law the scope of the rule was restricted further. This development culminated in the complete abolition of the management prohibition rule in the most recent model act. Should a limited partner violate any management prohibition rule applicable to him in a federal state where such a rule still exists, he will be liable for any resulting damage only if he holds himself out as a general partner or if his behaviour can be qualified as tortious.

Chapter 4 examines the history of the Dutch management prohibition rule. It would appear to go back to the late medieval legal form of the accomandita, in use at the time in some trading cities in northern Italy. Those communities felt the need for a legal form which – contrary to traditional liability regimes – allowed for a limitation of liability for a mere investor who did not play a role in the management of the investee company. At a later stage, the tie between limited liability and management prohibition loosened, particularly in Italian case law. It was accepted by the courts that limited partners could interfere in management without losing their prerogative of limited liability. From there, history takes us in a straight line to France, where in the seventeenth century a statutory set of rules for a legal form based on the accomandita was introduced – the société en commandite. Although this legislation did not contain any express rules prohibiting the limited partner from taking part in management, by the end of the eighteenth century it was being interpreted by the French courts as meaning that management participation was not compatible with the position of a limited partner. The French Code de Commerce of 1808, which was based on the earlier French legislation referred to above, contained a rule expressly prohibiting the limited partner from taking part in the partnership’s management. Inclusion of this rule had been prompted by numerous scandals surrounding the use of the limited partnership. The various drafts for the Dutch Civil Code and Dutch Commercial Code drawn up from 1798 did not include a management prohibition rule. In 1808, however, under French pressure, or at least French influence, a draft for a Dutch Commercial Code was conceived which included a management prohibition rule for the limited partner, closely patterned on the French rule. After the Netherlands regained its independence, the rule survived and was incorporated into the Dutch Commercial Code. The sole reason given in Dutch parliamentary history for this was the need to prevent a limited partner, secure in the knowledge that his liability for partnership debts was limited, from engaging in reckless trading for the account of the partnership.

Finally, in Chapter 5, based in part on the research findings reported in the preceding three chapters, first a number of proposals are developed aimed at improving current legislation regarding the management prohibition rule. For this exercise it is accepted as a hypothesis that the legal grounds traditionally advanced for its existence are still valid. The exercise shows that it is possible to rephrase the management prohibition rule in such a way that its scope becomes considerably clearer and the consequences of violation more commensurate with the severity of the violation. Next, this chapter examines whether the hypothesis on which the exercise was based is indeed still valid. This appears not to be the case. The legal ground that aims to prevent a person contracting with the partnership from taking the limited partner for the general, and thus jointly and severally liable, partner has become obsolete. By a simple trade register check parties contracting with the limited partnership can see who are general partners, and thus also who are not. Furthermore, over the past century and a half the use of legal forms in which all owners have limited liability has become so commonplace that it can no longer be maintained that parties contracting with a firm do not reasonably need to expect any limitation of liability. The second legal ground, aimed at preventing the limited partner from acting recklessly on behalf of the limited partnership, knowing that his liability is limited to his contribution to the partnership, does not appear to be sound either. It is an inordinately severe means to combat a risk that exists also with limited liability companies and which in that case is restricted by much more advanced means – the manager or owner of a limited liability company who abuses the liability shield is personally liable for any damage that may result from such abuse. Furthermore, continuation of the management prohibition rule negatively impacts the Dutch investment climate. In view of all of the above, this thesis proposes that the Dutch management prohibition rule be abolished completely. Possible objections can be overcome by acknowledging that a managing limited partner can be held liable for any damage that creditors of the partnership or fellow partners might suffer as a result of his tortious behaviour on the same grounds as a director of a limited liability company can be. As an additional measure, a rule could be enacted requiring that the name of the limited partnership include a reference to its legal form and that the personal details of the limited partners who have been granted the power to manage the partnership, including their capacity as limited partner, be recorded in the trade register.