US Fund Managers: Clearing The Mist On Luxembourg General Partner And Director Liabilities – New York Office Snippet

When US fund managers (USFM) raise capital in Europe, they often do so through a Luxembourg special limited partnership (SCSp). An SCSp requires a general partner (GP) that is liable for all obligations of the SCSp, and it must appoint a manager responsible for the management of the SCSp.  

To comply with the substance principles of Luxembourg company law, the manager should be Luxembourg-based. As the GP usually assumes the management function, it is the GP that should be Luxembourg-based. To contain liability for the obligations of the SCSp, the GP is usually organised as a Luxembourg private limited liability company (LuxCo) with a limited amount of capital.

While the GP is the SCSp’s manager for company law purposes, the GP itself acts through its own board of managers (BOM), which means that its BOM indirectly manages the SCSp. Given this, the USFM typically seeks representation on the GP’s board in order to retain day-to-day control over the SCSp. It usually appoints a board member whose vote and participation is required for board decisions. That board member is often US-based and part of the USFM’s legal team.

US-based board members may be held personally liable by the GP for management errors based on an action brought by the GP’s general meeting of shareholders. In this context, a fault may arise from a breach of the duty of care expected of a diligent and careful manager. Luxembourg courts do not take this lightly and will generally consider the manager’s margin of appreciation and the information available at the relevant time, condemning only obvious errors outside that margin. In practice, the GP is unlikely to pursue claims against board members appointed from within its own organisation.

Claims by third parties are usually more in focus, so the question arises whether investors in the SCSp can seek to hold the GP’s board members liable for losses they suffer. For losses caused by management errors this is only possible based on tort law, which requires that the fault of the board member is of such gravity that it is deemed incompatible with the normal exercise of corporate functions. For losses caused by a breach of Luxembourg company law or the GP’s articles of association board members can be jointly and severally liable towards the GP, but also towards third parties such as investors in the SCSp. In both cases, the investor must prove a personal loss that is distinct from the loss suffered by the SCSp, which is difficult to establish in practice.

The board member’s liability is usually further restricted under the SCSp agreement to contractually defined liability standards (i.e. cases of gross negligence and willful misconduct, fraud and bad faith). In addition, under SCSp agreement it is usually agreed to indemnify the board members for claims beyond such standards. It is also good practice for the USFM to provide director and liability insurance covering board member’s potential liability risks.

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