Recently, more private fund limited partner sponsors appear to be including limited partner “negative consent” provisions in their fund limited partnership agreements. The negative consent clause can be a very helpful tool for the private fund sponsor: when a matter is submitted to the limited partners for approval (for example extending the fund’s investment period or waiving the fund’s investment concentration limit for a particular portfolio company), the negative consent provision allows the fund sponsor to treat limited partners who don’t respond to the proposal as having voted in the proposal’s favor. An example of a negative consent provision in a recent private fund limited partnership agreement is as follows:
“Wherever in this Agreement the consent or approval of a Limited Partner is required (including, without limitation, under Section 10.2 governing amendments to this Agreement), such consent shall be deemed given by a Limited Partner if (i) such Limited Partner affirmatively grants such consent, or (ii) such Limited Partner fails to respond within the allocated time period, which period, unless otherwise required by law or regulation, shall be at least seven (7) days after the date on which a written notice containing information regarding the matter to be consented to or approved is sent to such Limited Partner.”
Many limited partners sympathize with the difficulty sponsors have in obtaining affirmative written consent from limited partners to proposals that may be non-substantive in nature, but still technically require limited partner consent. As the number of limited partners in many private funds has grown, the process of obtaining limited partner consent sometimes can seem akin to a proxy solicitation effort for a public company.
However, negative consent language that is not thoughtfully tailored can, in practice, result in substantive proposals being approved that do not reflect the true intent of the fund’s limited partners. For example, some limited partnership agreements allow negative consent to be declared on abbreviated deadlines, or based only on a single notice being delivered to the limited partner, possibly by regular mail. These types of negative consent provisions do not reflect the reality that the investment and operations staff of many institutional limited partners spend much of their time out of the office and even out of the U.S., making it more challenging to receive, evaluate and respond to sponsor proposals in short time frames.
In addition, it seems counterintuitive that negative consent could be used to approve a proposal that was materially adverse to the limited partners or relates to a material conflict of interest of the fund sponsor. However, rarely do negative consent clauses prevent this result.
Many private fund limited partners can sympathize with the dilemma that sponsors face when seeking affirmative written consent from scores of separate limited partners. And certainly, no investor wants to pay for unnecessary administrative effort spent soliciting limited partners to sign and return an affirmative consent to technical or corrective proposals or proposals that are investor-friendly in nature. However, negative consent provisions in a fund limited partnership agreement can sometimes swing too far in the other direction. When a fund sponsor can use a negative consent clause to effectively rubber stamp proposals that may not necessarily be in the best interests of limited partners and may not be narrowly crafted to address their unique tax and regulatory situations, fund sponsors would be well advised to limit their use of this powerful tool in keeping with their overarching fiduciary responsibilities to their investors.
Stephanie A. Hood