With the tax changes introduced by the Polish government from the beginning of 2021, the attractiveness of a limited partnership has decreased. This naturally leads to more transactions involving limited partnerships and creates a business need to conduct valuations of these entities.
Exactly... can we talk about the valuation of a limited partnership? In fact, the subject of the valuation may be:
- The entire enterprise of the limited partnership or its organized part and/or
- Capital shares of partners.
The valuation of the entire enterprise or its organized part of a limited partnership does not differ significantly in methodological terms from the valuation of enterprises of limited liability companies or general partnerships.
The situation with the valuation of partners' equity shares is slightly different. As we well know, we have two types of partners; in accordance with Art. 102 of the Commercial Companies Code (hereinafter referred to as "CCC"), a limited partnership is a partnership intended to run an enterprise under its own business name, in which at least one partner is liable without limitation towards the creditors for the partnership's obligations (general partner), and at least one partner (limited partner) is liable towards the creditors for the partnership's obligations. ) is limited. Obviously, the valuation of the general partner's capital share may differ from the limited partner's capital share.
It is worth adding here that in the legal world it is customary to talk about the general rights and obligations of a limited partner and a general partner, respectively, instead of a capital share. For the sake of clarity, this results from the wording of Art. 122 of the Commercial Companies Code, which uses the phrase "general rights and obligations" only in relation to a limited partner; nevertheless, it is customary to use this term also for a general partner.
Let us list the main aspects to be considered when valuing all the rights and obligations of partners in a limited partnership.
Share in profits and losses
Typically, the share of profits and losses is regulated by the partnership agreement. Practically, this means that the share of profits and losses does not have to reflect the contributions made by individual partners, nor do the partners have to share equally in the profits. It should also be added that the share in losses does not have to be equal to the share in the profits of a given partner. It is even possible to exclude a given limited partner from sharing in losses, which will, of course, translate into a higher share in the losses of other partners. If the partnership agreement does not provide for a share in profits and losses, this share is proportional to the partner's contribution actually made to the partnership.
If the contribution actually made by a limited partner is lower than the value of the agreed contribution, the profit accruing to that partner for a given financial year is allocated first of all to supplementing his contribution to the partnership. This obligation will be implemented in subsequent financial years until the agreed limited partner's contribution is reached in full.
A separate issue to consider is the level of receivables and liabilities between partners and the company. Apart from situations in which, due to the business activity conducted, there are economic contacts between a partner and the company and mutual receivables and liabilities naturally arise, we also have mutual settlements resulting from the partner's share in the profits and losses of the company. Thus, in a situation where the advances collected by a partner towards the profit exceed his share in the actual profit, the company will be liable to the partner. In the opposite situation - for example, when the partners decided to divide the profit for the past year and a given partner did not receive his share in the profit - we will be dealing with an obligation of the company towards the partner. Generally, these types of receivables and payables will be non-operating in nature and should be properly included in the valuation process.
Obviously, the regulations regarding the share of profits and losses are of key importance in the case of valuation of all the rights and obligations of a partner in a profitable limited partnership, where it is prudent to apply the income approach to enterprise valuation.
Representing and managing the company's affairs
Pursuant to Art. 117 of the Commercial Companies Code, the company is represented by general partners who have not been deprived of the right to represent the company by virtue of the partnership agreement or a final court decision. A limited partner may represent the company only as a proxy (Article 118 of the Commercial Companies Code). With regard to managing the partnership's affairs, a limited partner has no right or obligation to manage the partnership's affairs, provided that the partnership agreement may provide otherwise (Article 121 of the Commercial Companies Code). In matters exceeding the scope of ordinary activities of the partnership, the consent of the limited partner is required, provided, however, that the partnership agreement may provide otherwise. A very common solution is a situation in which only general partners represent and manage the company's affairs, and in matters that go beyond the ordinary activities of the company, the company agreement excludes the consent of the limited partner.
For understandable reasons, the issues of managing the company's affairs and the requirement for the limited partner's consent in matters exceeding the scope of the company's ordinary activities - i.e. control issues - affect the value of his capital share.
Partner's liability
The limited partner is liable for the partnership's obligations towards its creditors only up to the limited partnership sum, which should be specified in the partnership agreement (Article 105 and 111 of the Commercial Companies Code); the general partner's liability is unlimited. For the sake of clarity, the value of the limited partner's contribution does not necessarily have to coincide with the value of the limited partnership sum (it may even be lower), provided that the limited partner cannot be released from the obligation to make the contribution (Article 108 of the Commercial Companies Code). At this point it is worth knowing that in accordance with Art. 112 of the Commercial Companies Code, a limited partner is free from liability within the limits of the value of the contribution made to the company. Practically, this means that in the event of a contribution equal to or exceeding the limited partnership sum, the limited partner will not be obliged, in a hypothetical negative scenario of the company's poor financial situation, to cover the company's liabilities towards creditors. If the limited partnership sum exceeds the contribution, the limited partner's actual liability for the partnership's obligations is limited to the difference between the limited partnership sum and the contribution. It is worth making a reservation here - in the event of the return of the contribution in whole or in part, the limited partner's liability is restored in an amount equal to the value of the return.
Division of assets in the event of liquidation
In accordance with the reference to the regulation on general partnership (Article CCC 103) and the provisions of Art. 82 of the Commercial Companies Code, after repaying all the company's liabilities and leaving appropriate amounts to cover undue or disputed liabilities, the remaining assets of the liquidated company are divided among the partners in accordance with the provisions of the company's articles of association. In the absence of such provisions of the agreement, the partners' shares (contributions) are repaid and the surplus is divided among them in the same proportion as they share in the profit. What if there is a shortage of assets - i.e. lack of coverage for the repayment of liabilities and shares (contributions) of partners? Pursuant to Art. 83 of the Commercial Companies Code, the shortfall should be covered in accordance with the provisions of the partnership agreement, and in the absence of such provisions, the partners should cover the shortfall in the proportion to which they participate in the loss.
Regulations regarding the division of assets are of particular importance in the situation of valuation of all the rights and obligations of a partner in a company that is making losses, has a bad financial situation or when the company agreement was concluded for a fixed period. In such a situation, it is rational to consider liquidating the company and applying the asset approach to business valuation.
Transfer of all rights and obligations of the partner and termination of the contract
Generally, there are three situations for the possible transfer (sale) of all the rights and obligations of a partner - the agreement may:
prevent the transfer of all the rights and obligations of a partner,
give a partner full opportunity to transfer all his rights and obligations to another person (i.e. without the consent of the other partners),
provide a partner with the opportunity to transfer all his rights and obligations to another person, subject, however, to obtaining the consent of the remaining partners (or a certain part of the partners).
The third solution is often used and actually means limited ability of the partner to dispose of all his rights and obligations (limited liquidity).
With respect to the termination of a limited partnership agreement by a partner, such a possibility occurs when the agreement was concluded for an indefinite period or, alternatively, for the duration of the partner's life. In accordance with the provisions of Art. 103 of the Commercial Companies Code and, as a further consequence, Article 61 of the Commercial Companies Code, a shareholder has the right to terminate the partnership agreement six months before the end of the financial year. The six-month period may be amended accordingly by the partnership agreement. Pursuant to Art. 65 of the Commercial Companies Code, the value of the capital share of the withdrawing partner is determined on the basis of a separate balance sheet, taking into account the market value of the company's assets. The balance sheet date should be the last day of the financial year in which the notice period expired.
The above issues affect the assessment of the liquidity of all rights and obligations of a given partner (liquidity discount/premium).
Change of the partnership agreement
Generally, the company agreement itself determines the possibilities of changing it. The most frequently used contractual provisions are the requirement for the consent of all partners (expressed in a shareholders' resolution) to amend the contract or the requirement to adopt a resolution on amending the contract with the participation of all partners, subject only to an absolute majority of votes.
Access to information
General partners, generally because they represent the company and manage its affairs, have full access to information about the company's operational activities. The scope of access to information for a limited partner is, by definition, limited by the very fact of limitations in representing and managing the partnership's affairs. At the same time, in accordance with Art. 120 of the Commercial Companies Code, the limited partner has the right to request a copy of the financial report for the financial year and to review the books and documents to check their accuracy. Additionally, at the request of the limited partner, the registry court may, for important reasons, order at any time to provide the financial report or submit other explanations, as well as allow the limited partner to review the books and documents.
For understandable reasons, the issues of representing and managing the company's affairs, amending the company's articles of association and access to information - i.e. control issues - affect the value of all rights and obligations for individual partners.
To sum up, the provisions of the partnership agreement are crucial for the valuation of all the rights and obligations of partners. And of course common sense...