Termination and Removal Rights
Termination and Removal Rights Generally
When fund investors lose confidence in a fund’s general manager or in the investment strategy of the fund, such investors often turn to the various termination or removal rights that they may have negotiated for in the fund’s limited partnership agreement. These rights provide fund investors with the ability to remove and replace a fund’s general partner, terminate the fund’s investment period and/or terminate the fund (i.e., cause the general partner to commence liquidation of the fund’s investments). Termination and removal rights fall into two categories:
• No-fault termination or removal rights that can be triggered by investors for any or no reason
• For “cause” termination or removal rights that are triggered only by a finding of cause
No-fault termination and removal rights are often triggered by a vote of a supermajority in interest of fund investors who are unaffiliated with the general partner. Common voting thresholds include votes by unaffiliated (to the general partner) investors whose capital commitments constitute at least 66 2/3%, 70%, 75%, or 80% of the aggregate capital commitments of all such unaffiliated investors. For cause removal or termination rights may require a vote by a small supermajority in interest of investors, but more often, require only the vote of a simple majority in interest of investors (i.e., unaffiliated investors whose capital commitments constitute in excess of 50% of the aggregate capital commitments of all such unaffiliated investors).
For Cause Removal and Termination
The definition of cause is often one of the lengthier negotiations general partners have with investors when investors are making an investment in a fund. The baseline definition of cause almost always includes some determination by a court that the general partner has engaged in conduct that constitutes fraud, gross negligence, willful misconduct, or material breach of the fund’s limited partnership agreement. Investors will often try to include in the cause definition any indictment for a felony (other than a charge of driving under the influence), of any of the founding or senior principal(s) as well as any charge of violating securities laws by the founding or senior principal(s). A key point of contention in the negotiations between investors and general partners over the cause definition is whether the determination by a court needs to be a final non-appealable determination. Investors’ concern is that litigating a dispute with the general partner regarding the conduct or actions of general partner is already likely to be a lengthy process. If one adds the requirement that a court’s ruling needs to be final and non-appealable, that could make any such litigation even lengthier.
No-Fault Removal and Termination Rights
General partners are often hesitant to agree to no-fault termination rights because such rights can be triggered by investors for any or no reason. From an investor’s perspective, the right to, on a no-fault basis, terminate a fund’s investment period, cause the fund to commence liquidation of its investment portfolio or remove the general partner is an important limit on the general partner’s power. There are many instances where investors may want to replace a general partner following misconduct by such general partner even if such misconduct does not rise to the level of cause. Investors may also not necessarily want to expend the time and resources necessary to litigate against the general partner in order to obtain a finding of cause. This is particularly relevant in the case where the determination of cause must be made pursuant to a final non-appealable decision by a court. Investors may also be concerned that if they were to file a claim against a general partner alleging conduct by the general partner that constitutes cause, the fund’s investment portfolio could suffer a significant impairment in value if the general partner is spending time defending itself in court in connection with investors’ claim of misconduct by the general partner instead of focusing on managing the fund.
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