Dividend Distribution in Limited Liability Partnerships
In Delek Trust Drilling Ltd. v. Delek Drilling L.P. the Tel Aviv District Court issued a precedent ruling regarding the distribution of profits in limited liability partnerships (which is a common incorporation in investment funds and other investment vehicles). In question was a clause of the Israeli Partnerships Act which prohibits the withdrawal of a limited partner’s investment during the term of the partnership.
Honorable Judge Brun, presiding over the Delek case, permitted the distribution of Delek’s profits subject to certain limitations. Judge Brun reasoned that the rational of the clause in question is similar to the limitations set on dividend payments according to the Israeli Companies Act – preventing shareholders and limited partners from withdrawing their investment in situation that the incorporated entity can not fully pay its debts when due.
Since the Partnerships Act, which is decades old, does not include guidelines for approving distributions to limited partners, Judge Brun ruled that the criteria set forth in the Companies Act shall apply to limited partnerships. These criteria are (i) the distribution is made out of profits; and (ii) the distribution does not impair the entity’s ability to repay its debts. If the partnership does not meet the first criteria, any distribution to the limited partners requires, as is with limited liability companies, the prior approval of the court.
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