Wolf in Sheep’s Clothing: New UK Register of Persons With Significant Control
From 30 June 2016 all United Kingdom companies (other than most listed companies) and LLPs will need to include details of persons with significant control or influence (“PSC”) on their annual confirmation statements filed with Companies House (replacing the current annual return). This information will be publically available and searchable by company and LLP name (but not by the individual PSC’s name) for free. Since April 2016 UK companies and LLPs have been under the obligation to maintain a register of PSCs, which the public have a right to access.
The PSC Register regime marks a radical departure from previous disclosure rules, and dramatically increases the transparency required of individuals involved in UK companies and LLPs. This note reveals why these rules need to be taken seriously. The rules directly affect individuals including those outside of the UK who have direct or indirect interests and influence over UK companies and LLPs.
There are significant criminal penalties for companies (and their officers), LLPs (and their designated members) and individual PSCs (wherever they are based) that fail to ensure an accurate register is maintained. Companies and individuals are obliged to ensure the information is accurate. In relatively rare cases companies and/or individuals may also wish to take steps or make applications to restrict the availability of this information on the few grounds permitted for doing so, principally a serious risk of violence or intimidation.
All UK companies and LLPs preparing their annual confirmation statements should ensure they have completed appropriate due diligence to identify and confirm the details of their PSCs. They should also consider whether or not their PSCs have grounds for restricting the publication of the information.
Individuals who are concerned they may be a PSC in relation to a UK company or LLP, but have not yet been approached by that company or LLP, ought to contact it immediately to confirm the position and in any event before 30 June 2016. The bar for determining whether or not a person has significant control or interest is set very low, and notwithstanding a number of exceptions individuals might easily be caught by rules they would not, from experience, expect to apply to them. Individuals who have prominent roles or extensive indirect interests or involvement with UK companies or LLPs should seek advice to confirm whether or not they are PSCs and to determine if there are any grounds for restricting the publication of this information.
Security holders and others who have interests over someone else’s holding in a UK company or LLP need to ensure that such holding is not subject to a restriction notice that can affect the transferability of the holding and the exercise of rights relating to the holding, including the receipt of dividends and exercise of voting rights.
Family office arrangements and trusts with UK interests can result in individuals being required to be entered into a UK company or LLP PSC Register where “intuitively” people with experience only of the “old” rules would not imagine that this is likely to be the case. Family offices should ensure individuals are aware of the new rules and know how to fulfil their obligations under them.
Since 6 April 2016 UK companies and LLPs have been obliged to identify and keep a register of individuals who have significant control (“PSC”) over the company. This note focuses principally on the obligations on UK companies, although almost identical rules apply to UK LLPs.
The PSC Register must include the following information about a PSC: their name, service address, country of residence, nationality, date of birth, usual residential address, the date when the person became a PSC, and the nature of the PSC’s control over the company (the “particulars”).
The PSC Register must be available for public inspection without charge and copies can be requested (for a £12 fee). Formal notice must be given to the company stating why the information has been requested. A straightforward failure to comply with a request is an offence, but if the company considers inspection is for an improper purpose the company can apply to court seeking an order that it not comply. Otherwise, all the information will be public, except the PSC’s usual residential address.
As of 30 June 2016, the contents of the register must be provided to Companies House with the company’s annual confirmation statement. Companies House will make the contents of each company’s register available to the public, searchable by company or LLP name, but not searchable by PSC name. All the information will be public except the PSC’s usual residential address (unless this has been provided as a service address) and the day of the PSC’s date of birth.
Individuals (or companies on their behalf) can also apply to prevent public disclosure of information held by Companies House where there is serious risk that the PSC, or someone who lives with them, will be subject to violence or intimidation because of the activities of the company or the characteristics/attributes of the individual when associate with the company.
Once an entry has been made on the PSC register, it must remain there for ten years from the date it stops being relevant, for example when an individual ceases to qualify as a PSC, or even if the entry was made in error. Companies and individuals should therefore conduct thorough due diligence and proceed with caution when preparing their registers and considering amendments.
The Obligations in Preparing and Maintaining the Register
If a company fails to prepare and maintain a PSC Register an offence is committed by the company and each officer in default.
Individuals who know or reasonably should know they are PSCs must proactively inform a company of this fact if that company has not approached them to confirm their PSC status. Failure to do so is a criminal offence.
Generally, a PSC is an individual who:
holds (directly or indirectly) more than 25% of the shares in the company;
holds (directly or indirectly) more than 25% of the voting rights in the company;
has the right or ability to replace more than half the board of the company;
has the right to or does in fact exercise significant influence or control over the company; or
has the right to or does in fact exercises significant influence or control over trustees (or members of a firm), such trustees meeting one of the foregoing criteria.
A company must take reasonable steps to identify PSCs. It must write directly to anyone the company believes to be a PSC and seek confirmation of this fact and the particulars; and may write to anyone who the company believes may know (or knows someone who knows) the identity of PSCs for further information on PSCs and corresponding particulars. Whether the company should consider the second option is a question of fact depending on the circumstances of each case. In the context of a family owned company it may be possible to identify a family member or adviser to the family who could be contacted.
In each case, the recipient of the request has a month to comply with request notices. Where a notified person holds shares, voting rights or the right to appoint/remove the majority of the board of directors, the company has additional means to enforce compliance with such notices. If such a recipient of such a notice does not comply with it for reasons the company considers invalid, the company may issue a warning notice repeating the request. This second notice will permit the company within one month of the date thereof to issue a restriction notice.
Once a person’s interest is subject to a restriction notice any purported transfer of the interest is void, no rights may be exercised in relation to the interest, no shares may be issued in right of the interest and no payment may be made of sums from the company in respect of the interest (except in the event of liquidation). Actions in contravention of a restriction notice can amount to an offence.
Restriction notices could have significant implications for an interest holder’s secured financing or warranties. Third parties – not the defaulting party – affected by a restriction notice have the right to apply to court for relief from these rules if they satisfy the court they unfairly affect their rights. However, this is unlikely to be satisfactory protection and interest holders in companies will need to ensure they take all reasonable steps to comply with requests for information to avoid the possible complications.
Contents of the Register
The PSC Register must record the nature of a persons’ PSC status. Once an entry has been made on the PSC register it must be kept up-to-date. If the company becomes aware of any change in the recorded information (especially the nature of the PSC’s influence over the company) it must contact the PSC requiring confirmation of the change and new particulars.
Regulations prescribe the precise wording that must be used on the register and require the identification of a PSC’s interest in or influence on a company with reference to the five categories above. The prescribed language identifies the category and in relation to shareholdings/voting rights whether the individual is directly or indirectly interested in more than 25 percent, more than 50 percent, or more than 75 percent thereof. Further details are not required (or permitted).
Where a person meets categories 1, 2 or 3 and also 4, their influence as a category 4 PSC does not need to be recorded in addition to any of the other three categories.
Companies and individuals may be concerned about the disclosure required to be made where a PSC qualifies under the more nebulous categories 4 and 5. Where these apply the precise nature of their right to exercise or actual exercise of significant influence or of control is not detailed, merely the fact of it.
The fact of non-compliance with notices or the existence of a restriction notice must be recorded on the PSC register.
Finally, where relevant, a company must also positively affirm if there are no PSCs, there is an as yet unidentified PSC, there is an identified individual but their PSC particulars have not been confirmed, or that the company’s investigations are ongoing.
Penalties for Non-Compliance
Where a company fails to take reasonable steps to identify PSCs or keep an up-to-date register it, and every responsible officer in default, is guilty of an offence.
Similarly, an individual who either fails to comply with their obligations or recklessly makes a statement which is false as to a material fact is guilty of an offence.
Both offences are punishable by up to two years’ imprisonment or a fine or both.
“Significant Influence or Control”
Category 4 above is likely to give rise to the most difficulties. The concept of ‘significant influence or control’ is defined only loosely and the government’s guidance is expressed to be indicative and not conclusive. Whilst each company’s reporting will turn on the facts of its own circumstances, it is clear that the bar is set low: an individual who “regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board” is a PSC.
Whether or not a person has significant influence or control must be ascertained from the totality of their relationships with the UK company and/or its holding structure. This may be particularly difficult to assess in family owned/operated companies, where it is typical for family members (or their representatives) to be actively involved as officers and directors of operating and/or top-level holding companies. Careful consideration must be given to the reasons for the appointment of such people to these roles, the regularity with which such people’s views are canvassed and given effect to, and whether or not they speak for themselves or other people or members of the family.
Finally, group structures with significant stakes held by trusts require further, potentially complicated inquiry. The rights, powers and duties of the ‘actors’ in the trust (including trustees, protectors, enforcers, settlors and beneficiaries) must all be considered to understand whether anyone has the right to wield significant influence or does in fact do so. Obtaining specialist advice on these trust law questions is prudent, especially where the trust is held for the benefit of a family, regardless of whether or not members of the family are actively involved with the underlying companies.