Simon Says: How to Limit Your Investment Risk

Published
03/08/2017 by

This is the second in a weekly series of legal advice provided in a short and entertaining story format.

 

This week's areas of Interest: Contract Law, Investment Law

 

This week's keywords: Partnership, Liability of Partners, Limited Partner, Limited Liability

 

Alex and David Invest Together: How to Limit your Investment Risk

Watch this introductory video first and/or read the complete story below before seeing what "Simon Says"


It was a cold night when Alex met up with his old friend David at the bar. ‘How’s it going mate?’ David asked with a sigh. He hated his current job and his boss. ‘Not good either pal’ Alex answered while sipping his beer. Recently fired from his job, Alex is not exactly in the position he ought to be.

 

The two friends went on to talk about old times until an idea entered David’s mind. They could invest together and be their own bosses.

 

They both took 50,000 each from their savings and joined a Japanese restaurant under partnership as silent partners. Business went well for their first year and they turned over in no time.

 

However, things started taking a turn for the worse. A few people got food poisoning and had to be sent to the hospital. They sued the restaurant for a grand sum of 200,000, and needless to say, among others, David and Alex did not have that money. They had no choice but to close the restaurant down, thinking it was the worst that could happen.

 

That wasn’t the end. Far from the end. They still had to pay the sum of money, because they were general partners and bore unlimited liability.

 

 

 

So could Alex and David have avoided losing more than their initial investment?

 

Prof Simon Says:


Yes. This wouldn’t have happened if they were limited partners. Losing 50,000 each would be the worst case scenario.

 

I guess you have bought stocks before, haven’t you? Say you buy Samsung stocks, as a shareholder, and their entire line of Galaxy 7 phones blows up in people’s faces. Samsung can’t afford to pay billions of compensation, so they have to close down. But you don't lose more than the initial 1,000 that you paid as a shareholder.  A limited partner, similar to a shareholder, has limited liability only, which means he will not lose any more than the money he invested in the partnership at the first place.

 

The optimal choice would be to be a limited partner. So what if you are joining an already-established general partnership? Say Alex wants to be the new partner in his friend’s restaurant, other than the statutory protection under Limited Partnership Act, he can also get a lawyer to draft a contract to protect himself, to specify that the general partners have to bear any debts themselves if the above happened. Alex would be excluded from any additional losses.


 

 

For more about this or to contact Professor Simon Choi at www.acmeardent.com, simonhkchoi@163.com, +86 13823677853 or by WeChat: simonhkchoi

 

ACME Ardent's Simon Choi WeChat QR Code

 

"This article was originally written in Chinese by Mr Huanyu Li and rewritten into English by Acme Ardent Legal Studio."

 

Simon Choi

About the Author: Professor Simon Choi

Prof Simon Choi, solicitor and linguist, is an international lawyer, qualified to practise law in England & Wales and in Hong Kong, China. Simon graduated from law schools of the Peking University, the University of London and the University of Hong Kong respectively, with an in-depth knowledge of Chinese laws and common laws and with more than 20 years experience in China practice and international trade, investment, finance, merger & acquisition. He is an adjunct professor of laws at the Zhongnan University of Economics and Law. Simon is the founding partner of Acme Ardent and can be reached at simonhkchoi@163.com or +86 13823677853.

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