Persons with Significant Control – the new requirements


Author: Ella Leonard


Introduction

This briefing highlights company law changes which impose material new obligations on UK companies and limited liability partnerships (LLPs). The changes are also significant for those who hold interests in such entities, as they will be required to supply information to the company or LLP and, in some circumstances, there may be an impact on their ability to exercise their rights or alter or dispose of their interests.

Most of this briefing discusses requirements which apply to both companies and LLPs, and so should generally be read as applying to both even though, for simplicity, the briefing generally refers to “companies”. However, this is, arguably, an even bigger change for LLPs than for companies, as information regarding LLP members which was previously confidential will now be in the public domain. This briefing gives a general overview. A subsequent Fladgate briefing will look in detail at the contents of the new requirements and the procedures that companies must follow.

Most of the new requirements come into effect on 6 April 2016, so UK companies should take steps to prepare for them now. The changes will require UK companies:

  • to take steps to identify the persons who have significant control over them;
  • to establish certain particulars relating to those persons; and
  • to keep a register of those persons and their interests (PSC register).

Any person who is interested in a UK company which is subject to the new regime and who meets the “significant control” tests (see below), or who may have information about people who meet those tests, is also potentially affected. Investors, fund managers and nominee shareholders should familiarise themselves with the new requirements. Failing to respond to notices requiring information about persons with significant control is an offence and may also result in restrictions being placed on shares and interests, which will mean that shares cannot be transferred and rights cannot be exercised.

Sources

The requirements are set out in a new Part 21A of the Companies Act 2006 (CA 2006) and in new Schedules 1A and 1B. The detail of how the PSC register will work, and the exemptions, are to be found in the Register of People with Significant Control Regulations 2016 (PSC Regulations). For LLPs, the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 (LLP Regulations) set out a new Part 8A to the Limited Liability Partnerships (Application of Companies Act) Regulations 2009. The new Part 8A will modify the provisions of Part 21A and Schedules 1A and 1B of CA 2006, so that they apply to LLPs.

Exemptions

DTR 5 issuers (i.e. companies whose shares are listed on the Official List or traded on a prescribed market such as AIM or ISDX Growth Market) are exempt from the requirement to keep a PSC register. The PSC Regulations also specify other companies which are exempt. These are companies with voting shares admitted to trading on certain markets in Israel, Japan, Switzerland and the US, in addition to companies with voting shares admitted to trading on a regulated market in an EEA state. Schedule 1 to the PSC Regulations provides a definitive list of these markets. The companies admitted to trading on these markets are subject to sufficiently similar disclosure requirements to DTR issuers and this information is publicly accessible.

The new requirements

From 6 April 2016, UK companies which are not exempt (see above) must keep a register of persons with significant control over the company (referred to as a PSC register). The purpose of the PSC register (and a number of other measures being introduced) is to increase transparency and therefore improve trust in UK business. From 30 June 2016 onwards, companies will need to send their PSC information to Companies House with the new confirmation statement, which replaces the annual return. At present we have little information on the form of this new confirmation statement. Companies House will maintain the information in a central public register.

The meaning of “significant control” is set out in a new schedule to the Companies Act 2006 (CA 2006). A person (X) will have significant control over a company if one or more of the following apply:

  • X holds, directly or indirectly, more than 25% of the shares in the company;
  • X holds, directly or indirectly, more than 25% of the voting rights in the company;
  • X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
  • X has the right to exercise, or actually exercises, significant influence or control over the company; or
  • X 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 itself meets one of the conditions above.

In the context of an LLP, a person (X) will have significant control if one or more of the following apply:

  • X holds, directly or indirectly, the right to share in more than 25% of the LLP’s surplus assets on a winding up;
  • X holds, directly or indirectly, more than 25% of the rights to vote on matters to be decided by a vote of members of the LLP (including rights only exercisable in certain circumstances);
  • X holds the right, directly or indirectly, to appoint or remove the majority of persons entitled to take part in the LLP’s management;
  • X has the right to exercise, or actually exercises, significant influence or control over the LLP; or
  • X 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 itself meets one of the conditions above.

The Secretary of State is required to issue statutory guidance about the meaning of “significant influence or control” in the context of both companies and LLPs. Final draft statutory guidance has now been published. The guidance does not provide an exhaustive statement of what constitutes “significant influence or control”. Instead it provides a number of principles and examples which would be indicative of holding the right to exercise, or actually exercising, significant control. It also provides a non-exhaustive list of the kind of roles and relationships which a person may have in or with a company or LLP, as the case may be, which would not on their own result in that person being considered to have “significant influence or control”. The guidance is available here.

The upshot of the “significant control” tests and of other amendments to CA 2006 is that a UK company (A) will in certain circumstances have to “look through” the individuals and/or corporate entity or entities which hold shares or interests in it (B). In these circumstances, A will have to require B to supply information, in turn, about persons who hold significant holdings or interests in B. This enquiry may need to be repeated through several levels of shareholding, with the aim of identifying persons who meet one or more of the significant control tests and who are “registrable” in respect of the company. The meaning of “registrable” is discussed below.

In addition to the statutory guidance referred to above, the Government has issued non-statutory guidance for companies and LLPs which is addressed to directors and secretaries of companies, members or designated members of LLPs and those acting for or advising them. The guidance is very helpful in understanding the new requirements. It is available in draft form here.

Meaning of “registrable” and “non-registrable” and other key terms

A number of key terms are set out in new section 790C CA 2006. An individual or “relevant legal entity” who meets one or more of the significant control tests is “registrable” unless they hold their interest through one or more other legal entities (a) over each of which they have significant control and (b) which is also a “relevant legal entity” in relation to the company (or, where there is a chain of companies, at least one of which is a relevant legal entity). A “relevant legal entity” is a body corporate or a firm which is a legal person, which has significant control over a company, and which is subject to its own disclosure requirements because it is itself subject to the new regime, or because it complies with DTR5 or is in another category specified in the PSC Regulations. These are companies with voting shares admitted to trading on certain markets in Israel, Japan, Switzerland and the US, and companies with voting shares admitted to trading on a regulated market in an EEA state.

If company A is owned by company B and B is a “relevant legal entity”, then A may enter B’s particulars on the new PSC register and will not need to require information about entities further up the chain of ownership. Even if another legal entity, company C, has a significant shareholding in B, there is no need for A to record C in its PSC register.

However, if B is not a “relevant legal entity” because it is not subject to its own disclosure requirements, then A may not enter B’s particulars on the new PSC register and instead will need to give notice to B requiring it to supply particulars of any person or legal entity which meets the “significant control” tests in relation to A, or any person likely to have that knowledge.

For UK companies with simple holding and ownership structures, the new requirements should be reasonably straightforward. For companies which are part of complex groups or structures, particularly where offshore entities are involved, the requirements may be much more difficult to apply. The non-statutory guidance is helpful in understanding and applying these requirements.

Investigating and obtaining information

A company which is subject to the new PSC requirements must take “reasonable steps” to find out if there is anyone who is a registrable person or a registrable relevant legal entity in relation to the company and, if so, to identify them. The company must give notice to anyone whom it knows or has reasonable cause to believe is such a person or legal entity. The only exception to this is that the company need not take steps or give notice with respect to a registrable person or relevant legal entity if it has already been informed of that person’s status as a registrable person or registrable relevant legal entity and been supplied with all the particulars and, in the case of a registrable person, the information and particulars were provided either by the person concerned or with his or her knowledge. The notice must require the addressee to state whether or not it is a registrable person or registrable relevant legal entity in relation to the company, and if so to confirm or correct any particulars included in the notice and supply any that are missing.

The company may also give notice to any person it knows, or has reasonable cause to believe knows, the identity of a registrable person or relevant legal entity (or entity that would be a relevant legal entity but for the fact it is not subject to its own disclosure requirements) or a person likely to have such knowledge. Any notices must give the addressee a period of one month from the date of the notice to comply.

A company must also give notice to a registrable person or registrable relevant legal entity as soon as reasonably practicable if the company knows or has reasonable cause to believe that the person or entity has ceased to be a registrable person or relevant legal entity or there has been a change in their particulars. However, even when a person or relevant legal entity confirms that it has ceased to be registrable and the PSC register is updated, their particulars will not actually be removed from the public register.

If the company fails to comply with a duty to take steps or give notice, an offence is committed by the company and every officer who is in default (punishable by imprisonment or a fine). For LLPs, the reference to “officer” is read as a reference to a designated member.

An offence is also committed by any person to whom a notice is addressed who fails to comply with the notice, or who makes a statement in purporting to comply with the notice which is knowingly or recklessly false in a material particular.

Supplying information

There will also be a proactive disclosure obligation on persons who have significant control in certain circumstances. This will apply if the person knows or ought reasonably to know that they are registrable in respect of the company, their particulars are not already on the company’s PSC register, they have not received a notice from the company, and all these circumstances have continued for at least one month. Once these conditions are satisfied, the registrable person or entity has one month to notify the company. There is a similar duty to notify the company of relevant changes.

Sanctions for failure to comply

If a person who has a “relevant interest” fails to respond to a notice from a company under the information-gathering provisions, or fails to comply with the duties to supply information, the company may apply sanctions. For these purposes, a “relevant interest” is any holding of shares or voting rights in the company or the right to appoint or remove a director, which means that the sanctions can be applied to the shares or interests of any holder or beneficial owner, even if they are not a person with significant control. Following a failure to respond to a request under the information-gathering provisions, the company may issue a warning notice and, if the information is not forthcoming by the end of a one-month period, a restrictions notice. If a restrictions notice is served, any transfer of the relevant interest is void and no rights may be exercised nor any shares issued in respect of that interest. Purporting to dispose of the interest or exercise any right associated with it will be an offence. A person guilty of such an offence is liable to a fine.

The PSC register

The “required particulars” to be included in the PSC register are set out in CA 2006. For individuals, these are: name, a service address, country or state of usual residence, nationality, date of birth, usual residential address and, if there are restrictions on disclosing information about the PSC in force, that fact (see below on withholding information from the PSC register). For relevant legal entities, the required particulars are: corporate or firm name, registered or principal office, legal form of the entity, governing law, register of companies in which it appears, and registration number if applicable.

In all cases, the PSC register must also contain details of the date on which a person became a registrable person or registrable relevant legal entity and the nature of his or its control. The PSC Regulations require the company to indicate on its PSC register which of the significant control conditions each person with significant control satisfies. As well as the type of control, the PSC Regulations require, where appropriate, an indication of the extent of control, by reference to three bands – more than 25% – 50%, more than 50% – 75% or 75% or more.

Amongst other things, the PSC Regulations also set out the information that a company should put in its PSC register if it has no persons with significant control or has not yet been able to identify them or get their details confirmed. The PSC register must also indicate any restrictions placed on shares or interests held by a person or entity that has not complied with an information gathering request.

Withholding information from the PSC register

As under the current regime for directors, the residential addresses of all persons with significant control will be kept by the company but will not appear on the registers that companies make available to the public or the central public register. Again, as with company directors, persons with significant control who consider that they or somebody they live with would be at serious risk of violence or intimidation due to the activities of a company they are involved with may apply to Companies House to prevent their residential addresses being disclosed to credit reference agencies. The draft Regulations also provide for a second type of protection available to people who consider themselves to be at risk, either because of the activities of the company they are involved with or because of a particular characteristic or attribute of the applicant taken together with the activities of the company. These people will be able to apply to Companies House to stop all of their significant control information from appearing on any public register. Details will be suppressed from the register until the outcome of the application and any appeal. If the application is granted, the details will continue to be suppressed.

Action to take

UK companies which are subject to the new regime should review their register of members with the significant control tests in mind, with a view to identifying:

  • individuals who have significant control;
  • relevant legal entities (see above);
  • legal entities which are not “relevant legal entities”.

Although the statutory obligation to keep the PSC register is not in force until 6 April 2016, there is no reason why companies should not contact shareholders in advance of this date. The company can ask any shareholder who it knows or has reasonable cause to believe is a registrable person or registrable relevant legal entity to confirm this and confirm or correct their particulars. If a shareholder does not respond, however, the company will have to wait until 6 April 2016 in order to give a formal notice under section 790D CA 2006.

Investors, fund managers and nominee shareholders should familiarise themselves with the requirements. As UK companies start to gather information about their registrable persons and relevant legal entities, they can expect to receive information-gathering notices. Although not required to do so under the new regime, investors, fund managers and nominees may wish to be proactive in identifying such persons and, with their knowledge, supplying their particulars to the companies in question.

Shareholders and beneficial owners who consider that they may be persons at risk should ensure that they take advice on their situation and make any application to keep their significant control information off the public register as early as possible.

All those involved in buying and selling shares will need to be aware of the new regime and in particular the new ability of companies to place restrictions on shares and other interests without needing to obtain a court order. Checking the company’s PSC register as well as the central public register will be a vital part of the due diligence process on any transaction.

Ella Leonard, Partner, Fladgate LLP (eleonard@fladgate.com)

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