UK Beneficial Owner Disclosure and Its Potential Impact on Global Financial Businesses
As part of the continued international focus on combatting cross-border tax evasion and other financial crimes, during the June 2013 Lough Erne Summit presided over by the United Kingdom (G8 Summit), the G8 countries agreed to a set of principles intended to increase the level of transparency of ownership of companies.
Following the G8 Summit, the Department for Business, Innovation and Skills (BIS) published the discussion paper “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and increasing Trust in UK Business” (Discussion Paper), which articulated a number of proposals intended to achieve the principle of enhanced transparency in relation to UK company ownership.
On June 4, the UK Small Business, Enterprise and Employment Bill was announced during the Queen’s Speech to Parliament, and on June 5, the Small Business, Enterprise and Employment Bill (Bill) was introduced to the House of Commons (Commons).
The Bill is currently going through the Parliamentary process; the second reading in the Commons took place on July 16 when, for the first time, the main principles of the Bill were debated by members of Parliament. The Bill has now been passed to the Public Bill Committee and is available for public comment. For further information, please see Providing Comments to the UK Parliament, below.
If enacted into law as it currently stands, the Bill will introduce a number of changes to transparency of ownership and corporate governance and, in doing so, amend, among other laws, the Companies Act 2006 (Companies Act) and the Company Directors Disqualification Act 1986 (CDD). A number of the proposed changes outlined in the Bill are highlighted below. It should also be noted that while the changes contained in the Bill appear to be limited to UK companies, it is anticipated that some of these changes could be imposed on limited liability partnerships (LLPs) and also impact companies formed in UK Crown Dependencies (e.g., Isle of Man, Guernsey and Jersey) and the UK Overseas Territories (e.g., Bermuda, British Virgin Islands and the Cayman Islands). These specific points are also briefly discussed below.
Summary of Certain Changes
The Bill’s proposed changes to the Companies Act and the CDD include:
(a) requiring companies to (i) identify persons with significant control over the company and (ii) keep publicly available registers of those persons (Transparency Amendments);
(b) introducing a general prohibition on the use of corporate directors by companies;
(c) preventing the use of bearer shares; and
(d) expanding the types of activity a court can consider when determining whether a person should be disqualified as a director.
This summary is principally focused on (a) and (b), above.
If adopted, subject to certain limited exceptions concerning companies whose shares are listed on a regulated or prescribed market in the United Kingdom or as otherwise prescribed by the Secretary of State for BIS (Secretary) in the future, a company will be required to maintain a publicly available register (PSC Register) of persons with significant control over the company (PSC).
Significant control is broadly defined as: (i) owning, directly or indirectly, more than 25 percent of the shares in the company; (ii) the ability, directly or indirectly, to exercise or control the exercise of more than 25 percent of the voting rights in the company; (iii) the ability to appoint a majority of the board of directors to the company; or (iv) having the right to exercise “significant influence or control” over the company (Significant Control). The Secretary has been granted the power to determine what is meant by “significant influence or control” as used in (iv), above.
Once it is determined that a person has Significant Control (and is therefore a PSC), the company is required to register certain information if such PSC is registrable on the PSC Register. A PSC is considered to be non-registrable if he or she has significant control over the company as a result of having significant control over a relevant legal entity (RLE). An RLE is defined as a legal entity which would be a PSC if it had been an individual. An RLE is subject to its own disclosure requirements substantially similar to those which apply to companies regarding PSCs.
A company is obliged to take reasonable steps to investigate, obtain and update information on registrable PSCs and RLEs. Once a company is aware of or has reason to believe that a person is a PSC, it is required to notify the PSC or RLE. Failure to comply with these obligations can result in the company and any officer committing an offense and could result in imprisonment, a fine or both.
In addition to the duties imposed on the company, the Bill also imposes an obligation on registrable PSCs and RLEs to supply the information to a company. This disclosure obligation arises if, for a period of 28 days, the PSC or RLE knew or should have reasonably known that it is registrable and the company has not registered the details or has not provided a notification to such PSC or RLE. Failure to comply with a PSC’s or RLE’s obligation or failure to respond to a notice received by the company can result in a number of sanctions including, without limitation, a fine, imprisonment or a combination of sanctions.
The PSC Register will require the following information about PSCs and RLEs: (i) name or corporate name; (ii) residential and service address or, in the case of an RLE, the registered or principal office; (iii) country of residence or, in the case of an RLE, the legal form of entity and governing law; (iv) nationality or, in the case of an RLE, the register of companies and its registration number; (v) date of birth; (vi) the date in which the PSCs or RLEs became registrable; and (vii) a description of the nature of their control over that company.
Prohibition on Corporate Directors
The Bill states that all directors must be natural persons and would generally prohibit the appointment of a corporate director unless certain exceptions apply. These exceptions still have not been specified by the Secretary. If adopted, companies will have a one-year transition period to comply with these changes.
Other Notable Amendments
Other notable proposed changes to the Companies Act introduced by the Bill include: (i) provisions to protect a registrable PSC’s residential address and such person’s date of birth; (ii) an option for private companies to elect to keep the required information on the public register at the Registrar of Companies (Registrar), rather than a separately maintained PSC Register; (iii) replacing the requirement to file an annual return with the Registrar with a confirmation statement stating that the company has provided all required information during the period in question; and (iv) a reduction in the period after which the Registrar can strike off a company from the register.
The proposed changes to the CDD would allow the Secretary of State to seek disqualification of a director on the grounds that such director was convicted of certain offenses overseas. The types of offenses would include those committed outside of Great Britain that correspond to indictable offenses under the law of England and Wales. In addition, the Bill expands the types of conduct that a court can consider when determining to disqualify a director and allows the courts to consider conduct taken by the director in relation to overseas companies, and would include whether such person was responsible for the company becoming insolvent.
Potential Impact on LLPs
On April 16, the BIS issued a formal response to its Discussion Paper in which it suggested that the proposals should be extended to LLPs as well. It is important to note that when the Bill was introduced it did not include any provisions that would extend the central registry or the prohibition on corporate members to LLPs. However, this does not mean that the government’s view on extending these provisions to LLPs has been finalized.
While it is too early to tell whether the government will extend these provisions to LLPs, the proposal that causes most concern relates to the prohibition on using a corporate member, given the accepted practice of including a corporate member in the group ownership structure of an LLP for efficacy, tax and regulatory reasons. If the government were to extend this prohibition on LLPs then it would have a significant impact on operating businesses within the United Kingdom.
Impact on Crown Dependencies and Overseas Territories
While the focus on the Bill directly impacts UK companies, the G8 Summit principles will also impact Crown Dependencies and Overseas Territories; participants involved in global finance should also look to understand how these jurisdictions will implement these principles. The importance of these principles was underscored on April 22 when the Prime Minister wrote to the Chief Ministers of the Crown Dependencies confirming the United Kingdom’s position on creating a publicly available registry of beneficial ownership and reaffirming his view that a public registry is important to demonstrate a commitment to improve corporate behavior and set a new standard of transparency of company ownership.
Providing Comments to the UK Parliament
As stated above, the Public Bill Committee is now accepting written evidence from the public. Providing comments to the Public Bill Committee as early as possible will ensure more time for the Public Bill Committee to consider those comments. Once the Public Bill Committee reports—is expected to be approximately November 6—comments will no longer be considered.
Written evidence submissions should be emailed to email@example.com and should be in the form of a Word document which does not exceed 3,000 words. Further details about how the submissions should be presented can be found here.