Sam Pearse and Megan McNutt on the news that UK Companies Must Disclose Beneficial Owners
From April 2016, UK companies will be required to maintain a publicly available register of people who have “significant control” over them. Sam Pearse, Partner, and Megan McNutt, Associate at Pillsbury talk us through the consequences.
The new rules will apply to all public and private companies incorporated in the UK, other than those already subject to transparency requirements, or whose shares are admitted to trading, in certain specified countries. The rules also apply to limited liability partnerships.
Persons of Significant Control (PSC)
For the purposes of the PSC register, a person who holds “significant control” over a company is any person who, either alone or as one of a number of joint holders:
- ultimately holds, directly or indirectly, 25% or more of the company’s shares or voting rights;
- has the right, directly or indirectly, to appoint or remove the majority of the board of directors;
- has the right to exercise, or actually exercises, significant influence or control over the company; or
- has the right to exercise, or actually exercises, significant control over a trust or firm that is not a legal entity but which itself satisfies one or more of the above conditions.
“Ultimately” means looking up through the chain of ownership until the last person satisfying one of the above criteria is identified (if any). It is not necessarily enough to identify just the immediate controllers.
The meaning of “significant influence or control”
The statutory guidance confirms that significant influence and control are alternatives. A person has control of a company, or of the activities of a trust or firm, if they have the power to direct activities. A person has significant influence if he or she can ensure that the company or trust adopts those policies or activities that they desire to be adopted. The control or significant influence does not need to be directed towards the financial and operating policies of the company or trust, nor exercised with a view to gaining economic benefits from the policies or activities of the company or trust.
A person may hold a right to exercise significant influence or control over a company as a result of a variety of circumstances including, but not limited to, the provisions of a company’s constitution, the rights attached to shares or a shareholders’ agreement. The guidance includes the following examples:
- veto rights or absolute decision rights over decisions related to the running of the business e.g. adopting or amending a company’s business plan, changing the nature of a company’s business or making additional borrowing;
- veto rights over the appointment of the majority of the board of directors.
The guidance notes that a veto right for the purpose of protecting a minority interest (e.g. amending the constitution or dilution of shares) is unlikely, on its own, to constitute significant influence or control. It also includes confirmation that a person would not have significant influence or control where the veto rights derive solely from being a prospective seller or purchaser in relation to the company, for a temporary period of time.
The guidance also sets out specific safe harbours which will not usually constitute significant influence or control, including:
- a person providing advice or direction in a professional capacity;
- a person engaging in a third-party commercial or financial agreement (such as a supplier, a customer or a lender);
- an employee acting in the course of their employment; and
- a director of a company.
In the case of firms such as limited partnerships, anyone who controls the management or activities of the partnership or firm will be considered a PSC, which in most cases will be the general partner.
A person exercises significant influence or control over the trust if they have the right to direct or influence the running of the activities of the trust. For example:
- an absolute power to appoint or remove any of the trustees;
- a right to direct the distribution of funds or assets;
- a right to direct investment decisions of the trust;
- a power to amend the trust deed;
- a power to revoke the trust.
The guidance notes that a person is likely to exercise significant influence or control over a trust if they are regularly involved in the running of the trust or firm. For a discretionary trust, this will most likely be the trustees whereas for a bare trust the settlor or protector may also need to be included on the PSC register, as well as any beneficiaries actively involved in directing the activities of the trust.
Limited liability partnerships
For limited liability partnerships, the guidance largely follows the guidance for companies. Broadly, the guidance only varies to take into account the differences between the structures of companies and LLPs. For example:
- holding a 25% ownership interest or right to vote will be determined by reference to rights in respect of the surplus assets of an LLP on winding up and and rights to vote on matters which are decided by a vote of the members; and
- in determining if someone holds a right to exercise control, the terms of the LLP or other agreement should be considered.
Generally entities must take reasonable steps to identify their PSCs. Entities should consider who may meet one or more of the conditions by reviewing documents such as their constitution, register of shareholders or members, shareholder agreements and other agreements concerning appointment and removal of directors. Any other relevant information should also be investigated; the key test is what a reasonable person would do if they were aware of that information.
Companies must serve notice on those who they know or have reasonable cause to believe should be recorded on their PSC register or who might have knowledge of such persons. If the company does not receive a response to such a notice within one month, it may send a warning notice giving the recipient another month to respond, followed by a restrictions notice if the recipient fails to respond.
Consequences of Non-Compliance
The new rules provide for sanctions against those who do not declare their interests in UK companies. These affect both the company and its PSCs. First, the company in question, and its directors and officers, and the individuals or legal entities which have significant control over the company may face criminal penalties for non-compliance.
Second, PSCs who do not comply with the requirements may become disenfranchised by means of a “restrictions notice” issued by the company, which will freeze the shares from transfer and rights of the person in question (including the receipt of dividends).
There are extremely limited exceptions to the obligation to publicly disclose PSCs, e.g. if they believe that there is a serious risk that they or someone they live with will be subjected to violence or intimidation.
The new rules apply equally to UK companies sitting within corporate structures with overseas holding companies (either directly or indirectly). UK companies will therefore be required to disclose details of their PSCs, regardless of jurisdiction. This may be challenging for UK companies with overseas holding companies, particularly as those overseas entities will be within their rights to refuse to be compelled to comply with UK law.
Timetable for Implementation
Companies are obligated to keep a PSC register from 6 April 2016, which must be kept available for inspection at the company’s registered office, or for private companies, on the public register at Companies House. In addition, companies will be obligated to deliver the information contained in the PSC register to Companies House with all confirmation statements (which are replacing the annual return) filed on or after 30 June 2016 and the information will also need to be provided on incorporation of companies after 30 June 2016.
Companies should bear in mind that compiling the PSC register could be a lengthy and time-consuming process, particularly those which are members of complex and/or multi-jurisdictional corporate structures. Companies should begin now to consider how they will approach compiling their PSC registers in order to ensure they are compliant with the new rules in time. UK companies with overseas shareholders may also find it helpful to brief their overseas shareholders on the new obligations and the potential consequences of non-compliance.
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