A new obligation on UK companies to maintain a “register of people with significant control” comes into effect on 6 April 2016. This information will need to be filed at Companies House with the annual confirmation statement (which replaces the annual return) from 30 June 2016. The legislation is contained in the Register of People with Significant Control Regulations 2016 (the Regulations).
For most companies the new administrative burden should be a slight one only; however, for some it will be a problem. Non-compliance can result in criminal sanctions.
Which companies are covered?
UK incorporated companies (other than companies on the Official List or AIM – although the exemption does not extend to their subsidiaries) will have to maintain a register of people having significant control over them – the PSC register. The same will apply to LLPs (under different legislation). UK companies with shares admitted to trading on certain defined foreign markets, including the US, are not required to maintain a PSC register.
Overseas entities are not obliged to maintain a PSC register. However, importantly, having an overseas company in the group structure does not mean the trail of identification of the PSC stops at that company.
What actions must the company take?
- take “reasonable steps” to identify PSCs. UK companies (unless exempt) must maintain a PSC register even if they in fact have no PSC. The register will need to contain a statement to that effect. Failure to take reasonable steps to identify PSCs is a criminal offence and the company and officers in default will be punishable with an unlimited fine and/or up to two years’ imprisonment
- give notice to anyone whom it knows to be registrable or has reasonable cause to believe is registrable. Awareness of the existence of a shareholders’ agreement, for example, could be grounds for a reasonable belief. It may also give notice to another person where it knows or has reasonable cause to believe that such other person knows the identity of the PSC. Notices do not need to be sent if the company already knows that someone needs to be registered as a PSC and has confirmed all the information on them that needs to be shown on the register
- if the person believed to be a PSC fails to respond to a request for information, he or she will be guilty of a criminal offence, punishable by an unlimited fine and/or up to two years’ imprisonment. The company will also be able to put a restriction on their shares so that they cannot participate in dividends or share issues or be able to transfer them. The Regulations stipulate the procedure and notice requirements for doing this.
Identifying the PSC
A PSC of a company is someone who satisfies one or more of the following five criteria:
- holds, directly or indirectly, more than 25 per cent of the shares
- holds, directly or indirectly, more than 25 per cent of the voting rights
- holds, directly or indirectly, the right to appoint or remove directors holding a majority of the votes that can be cast at board meeting
- has the right to exercise, or actually exercises, significant influence or control over the company
- has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm which is not a legal entity and which meets any of the above conditions.
Some of these concepts require clarification.
A person holds shares “indirectly” if it has a majority stake in a legal entity that, in turn, holds the share or rights through a chain of legal entities each of which (other than the last) has a majority stake in the entity below it and the last of which holds the shares or rights in the UK company in question. This is not straightforward by any means and in many cases legal advice is likely to be necessary to help determine the existence or otherwise of a registrable interest.
Significant influence or control
Government guidelines have sought to clarify what this means. “Control” means the power to direct the policies and activities of a company and “significant influence” means that a person can ensure that the company adopts those policies or activities which are desired by the holder of the significant influence. For example, this would catch:
- shadow directors
- a person with veto rights over the company’s decision-making. There are exceptions, such as for the purpose of protecting minority interests or in a period between exchange and completion on a share sale (where the purchaser will normally have certain contractually agreed rights to safeguard its position)
- a person with control of the board
- a person whose recommendations are invariably followed by the board or the shareholders.
There is a “safe harbour” under the guidance which covers typical third-party, regulatory and advisory roles, such as lenders, suppliers, professional advisers, liquidators, regulators).It also covers directors and employees acting in the course of their employment. However, if the influence or control of that person exceeds what would be the norm for a “safe harbour” relationship they may be a PSC. The idea here is to capture people who use an apparently arm’s length relationship to conceal their actual influence or control over the company, such as where a supplier uses their relationship to dictate company policy.
An economic benefit need not accrue (or be intended to accrue) for someone to be a PSC.
Shares held by a nominee should be treated as if held by the person for whom the nominee is acting and, if that person is a PSC, they should be identified as such on the register.
How does the regime apply to companies controlled by other legal entities?
Legal entities may be put on the PSC register (a Relevant Legal Entity, or RLE).To be registered as a PSC, an RLE must be both relevant and registrable. This means that it must meet one of the five conditions listed above and it must itself be subject to a transparency obligation – e.g. by maintaining its own PSC register, by being a Main Market or AIM company or admitted to trading on an EU regulated market or on certain other specified markets, such as the US.A general English partnership, for example, cannot be an RLE (as they are not subject to disclosure requirements).It must also be the first relevant legal entity in the ownership chain.
A search for the ultimate owner will mean having to work up the chain, looking at the PSC register in each case. Entities do not need to be recorded on the PSC register if they hold their interest only via other entities each of which is subject to its own disclosure requirements. Therefore, a company that holds its interest through a chain of other companies will not need to be registered if every company in the chain is a UK company but it will need to be registered if there is a non-UK company in the chain below it.
If the above sounds convoluted it is no surprise. The keyword behind this legislation is “transparency” and the Government has deliberately made it as difficult as possible for “people with significant control” to shelter behind offshore or overseas entities. The application of the PSC regime in the group context may prove tricky to apply in practice and, if in doubt, advice should be sought.
As noted, Mark Market and AIM companies do not need to maintain a PSC register; however, their UK subsidiaries will have to. The subsidiary will need to name the quoted company (or an intermediate holding company) on its PSC register, though not the individual investors.
What must the PSC register contain?
The PSC register must not be empty. If there is no PSC this must be stated.
Where the company is still investigating who its PSCs are, a statement to this effect must be made.
The register must state the ground upon which the PSC is a PSC. Where one of the first three conditions is met, this is split into bands – more than 25 per cent to 50 per cent; more than 50 per cent to 75 per cent; 75 per cent. The appropriate band must be stated.
Where the PSC is identified, the following information must be stated:
- name, date of birth, nationality
- country, state (or part of the UK) where the PSC lives
- service address and usual residential address
- the date they became a PSC
- any restrictions on disclosing the PSC register to the public
- which of the five conditions the PSC meets
Relevant legal entities (RLEs)
- name of legal entity, registered office or principal place of business
- legal form of entity and governing law
- any register in which the RLE appears and its registration number
- the date it became an RLE
- which of the five conditions the PSC meets
It is possible to suppress information where there is a serious risk of violence or intimidation to the PSC as a result of the company’s activities.
A company’s PSC register must be accessible to the public from 6 April. This will either be at the registered office address or another address notified to Companies House. Anyone with a “proper purpose” (which is open to a broad interpretation) may have free access to the register; a £12 fee can be charged for copies. Residential addresses should not be disclosed (unless the same as the service address).