Public scrutiny of company ownership

Public scrutiny of company ownership – will you be ready?

Government proposals for greater corporate transparency are about to come to fruition. Changes to company law will require the first-time public disclosure of people who ultimately own and control most UK companies. This may affect both shareholders and others who can materially influence company decisions.

From April this year, a new compulsory register of people with ‘significant control’ will have to be kept in a set format, and (from June onwards) the particulars on the company’s register will have to be filed on a public central register. Anyone will be able to search the central register online for free at Companies House and build up a picture of a company’s ownership and control structure.

A person with ‘significant control’ (called a ‘PSC’) is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercises control over a company or its management. The new rules lay down a standardised approach to identifying a PSC, based on a framework of five, stand-alone, conditions. This framework is then used to record the actual nature of a PSC’s control in the company’s new PSC register.

Unless exempt, UK companies will need to be proactive and plan for this additional layer of compliance, both initially and on an ongoing basis. They will need to take action by early April, even if there is no-one who meets the ‘significant control’ thresholds or if investigations are ongoing: the company will still have to note that this is the case in its PSC register, using official wording. Reasonable steps will have to be taken to check the facts. There will be an annual ‘check and confirm’ process from June onwards (replacing the annual return), requiring confirmation of the company’s PSC particulars for the new public central register at Companies House.

Which companies are affected?

With some exceptions (such as UK-listed and AIM companies with their own transparency rules), all UK companies will be required to keep their own PSC register. This includes companies limited by guarantee as well as companies limited by shares. Even dormant companies are affected.

Separate regulations will also apply the PSC rules to limited liability partnerships (LLPs).

When do the new rules take effect?

The requirement to keep a PSC register will apply as from 6 April 2016, and companies can then be required to make their register available for public inspection on request (residential addresses will, however, remain protected information). As already noted, the PSC register will have to be kept whether or not there is someone with significant control. The applicable official wording must be used to record the company’s status as at 6 April 2016, and the PSC register must then be updated on an ongoing basis as and when the particulars change. The company’s PSC register can never be blank.

From 30 June 2016 onwards, the PSC information will have to be filed at Companies House when the company makes its annual ‘confirmation statement’.

Who is a person with ‘significant control’?

A PSC is an individual who meets one or more of the five conditions set out in the table below in relation to the company:

The significant control conditions

  • Condition 1: The individual holds, directly or indirectly, more than 25% of the shares (taking nominal share value).
  • Condition 2: The individual holds, directly or indirectly, more than 25% of the voting rights.
  • Condition 3: The individual holds the right, directly or indirectly, to appoint or remove a majority of the board of directors (meaning directors who hold a majority of votes at board level).
  • Condition 4: The individual has the right to exercise, or actually exercises, significant influence or control (for the meaning of this, see below).
  • Condition 5: The individual has the right to exercise, or actually exercises, significant influence or control over a trust or firm which itself meets one of the first four conditions.

Each condition is independent of the others, but if a person has significant control by meeting one or more of conditions 1, 2 or 3 (say, by having a shareholding over 25%), there is no need to consider whether they also have, or can have, significant influence or control by virtue of the fourth condition. However, the company would still need to consider whether there are others who do meet the fourth condition by having significant influence or control (they could be minority shareholders – a 25% shareholding or less – or someone else altogether). A director whose influence extends beyond the normal understanding of that role might be seen to satisfy the fourth condition.

Rights may be held by a variety of means that are ultimately controlled by the same person. For example, a simple nominee shareholding arrangement would be caught. Other potential situations are touched on below.

What are the practical implications?

The new rules should not pose any problems for a typical owner-managed private company with ordinary shares of one class and two or three individuals who are equal shareholders. The company’s own PSC register will need to be set up, and the prescribed particulars of the shareholders (as registrable PSCs) recorded in in it. Separate entries will have to be made as to both the shareholding and voting rights. If the shareholders are already directors, this will not be particularly onerous (much of the information will already be on file). The PSC register will also have to show the extent of each shareholder’s control as falling within one of three broad bands of share ownership and voting rights (in our example, more than 25% but not more than 50%).

If, instead, the company in our example has four or more equal shareholders, different considerations will arise. At face value, none of the shareholders will be a PSC by reference to the first two conditions as none holds more than 25% of the shares or voting rights (and it may be unlikely that any shareholder controls board voting in order to meet the third condition).

However, each of these scenarios assumes that there is no-one else behind the scenes (or even a shareholder, in the last example) who would be a PSC because they exercise, or can exercise, significant influence or control over the company (the separate fourth condition).

Indirect ownership through a majority stake

A person who does not hold shares or rights directly but rather by means of a majority stake in another company which is the actual share or rights holder can still satisfy the significant control conditions. A person has a ‘majority stake’ not only if they hold or control a majority of the voting rights of the other company, but also if they can appoint or remove a majority of the board of the company or have the right to exercise, or actually exercise, dominant influence or control over it.

The same principle applies where a person with a majority stake holds shares or rights through a chain of companies. If each company in the chain (other than the last) has a majority stake in the company immediately below it, the assessment of whether the person has significant control (and is therefore indirectly a PSC) takes place in relation to the last company in the chain.

Collaborative voting

If two or more persons exercise their share or voting rights under a pre-determined ‘joint arrangement’, they could each be treated as holding the combined shares or rights of all of therm. If the 25% shareholding threshold for the first condition is then exceeded on the combined basis, all those involved would be PSCs.

The term ‘arrangement’ is given a specific meaning: it could be a mere understanding, or any kind of convention, custom or practice. Importantly, however, there must be at least some degree of stability about it whether by its nature or terms, the time it has been in existence or otherwise. A one-off decision to vote on a particular issue in a pre-agreed way is not likely to be seen as an arrangement. However, an established pattern of collaborative voting would give rise to different considerations.

What does ‘significant influence or control’ mean?

For an individual to be a PSC in relation to a company under the fourth condition, that individual must have ‘significant influence or control’ over the company.  This is an entirely unique concept, and reference will have to be made to statutory guidance for an explanation of its meaning. Draft statutory guidance has been laid before Parliament and is expected to be approved without change. Although the legislation requires that regard is had to the statutory guidance in carrying out the assessment, careful consideration should always be given to the particular facts.

The draft guidance provides a number of principles and examples. It emphasises that a person may hold a right to exercise significant influence or control as a result of a variety of circumstances including the provisions of the company’s constitution, the share rights, a shareholders’ agreement, some other agreement or otherwise. Veto rights designed to protect minority interests may not, on their own, be enough to amount to significant influence or control.

The guidance also emphasises that all relationships that a person has with the company, or with other individuals who have responsibility for managing the company, should be taken into account in order to identify whether the cumulative effect [emphasis added] of those relationships places the individual in a position where they actually exercise significant influence or control. An example given is of a person (not a director) who is significantly involved in the management and direction of the company. Another example is where majority shareholders always (or almost always) follow the recommendations of someone else when deciding how to vote.

A non-exhaustive list of excepted roles and relationships is set out which would not, on their own, result in the fourth condition being satisfied. They include a managing director or a sole director, or a non-executive or executive director who holds a casting vote. Nevertheless, the position may be different if the role or relationship differs in material respects from the general understanding of it, or if it forms one of several opportunities a person has to exercise significant influence or control.

What if we need to ask for more information?

Companies will have a duty to take reasonable steps to find out if there is anyone who should be entered in their PSC register (known as a ‘registrable person’). The register must be made up with the required particulars (see, further, below) as soon as they have been confirmed (and not before). The particulars will be considered to be ‘confirmed’ if the person supplied or confirmed them to the company (and this whether voluntarily, pursuant to a legal duty or otherwise). The rules allow another person to supply or confirm the particulars with the knowledge of the person concerned.

Non-statutory guidance will outline the steps a company should typically take to identify its PSCs (and whether they are registrable). The company should first of all consider all the documents and other information already available to it. The register of members, the articles of association and latest statement of capital will be key documents, as well as any shareholders’ agreement. Other aspects that should be considered (among anything else relevant) would include the individuals, legal entities and trusts and firms that may have interests, nominee and joint arrangements, and any evidence of indirect control. The statutory guidance referred to above will have to be consulted on the question whether someone may have significant influence or control.

If a company knows or has reasonable cause to believe that someone is a registrable person who has not provided the requisite particulars, the company must serve notice requiring that person to provide the necessary information within one month. An offence may be committed if the notice is not complied with or a false statement is made. Warning and restrictions notices may follow if there is no co-operation. A restrictions notice would, if served, freeze the person’s interest in the company.

Who has to be entered on the PSC register?

An individual with significant direct control over a company becomes a ‘registrable person’ on the company’s own PSC register. However, the position may be different where the company is owned and controlled not by the individual but by an intervening ‘relevant legal entity’ (perhaps another UK company). A relevant legal entity will be one which is required to keep a PSC register, or will be a certain type of publicly-traded company subject to its own transparency rules, so that in either case the real owner can be traced up through it.

If, for example, the individual has a majority stake in UK private company A which in turn has, say, more than 25% of the shares of the entity beneath it (UK private company B), that individual will be registered on company A’s PSC register, but (to avoid duplication) will not be registered on company B’s PSC register. Company B will not have to look further than the legal entity immediately above it, and will therefore only enter company A on its PSC register. The real owner can then be found by looking at company A’s PSC register.

Similarly, where there is a chain of relevant legal entities (such as a wholly-owned UK group company situation), only the first entity directly above a company in the chain will be registrable in relation to that company.

What information must be recorded on the PSC register?

The particulars of registrable persons on the PSC register must include their full name, service address, country/state of usual residence, nationality, date of birth, usual residential address and date they became a PSC (the date will be 6 April 2016 for PSCs in existence when the new rules first apply). This is in line with the information that a director must provide, but the PSC register goes further and requires the nature of the person’s control to be disclosed. For control through share ownership and voting rights, three broad bands will be used to record this, showing whether the PSC owns, directly or indirectly more than 25% but not more than 50%, more than 50% but less than 75%, or 75% or more of the shares or rights.

The PSC register must also record whether application has been made for the individual’s information to be protected from public disclosure (see, further, below). As protected information, the usual residential address must not be disclosed when the PSC register is made available for inspection.

Protection regime

People with significant control will be able to apply to Companies House to have some or all of their PSC information (called ‘secured information’) omitted from the central register if they, or a person living with them, reasonably believe they are at serious risk of violence or intimidation. Rather than apply for full protection, those at risk may still apply to suppress their usual residential address from credit reference agencies (residential addresses would not be made public on the company’s PSC register or on the central register at Companies House, unless used as a service address, but Companies House does share them with credit reference agencies).

The protection regime will be in place for April 2016, when companies are required to start keeping a PSC register. Someone at serious risk who is, or will be, a registrable person may wish to consider making a prompt application to Companies House on or after 6 April for the non-disclosure of their secured information so that (if granted) the application takes effect before the company’s first confirmation statement (with PSC information) is filed on or after 30 June.

Protected information would, however, remain available to law enforcement agencies and specified public authorities.

What happens if we do not comply?

The new requirements cannot simply be ignored. If companies do not comply with their various duties in relation to obtaining PSC information or keeping the PSC register, or fail to deliver an annual confirmation statement, they (and their directors) may be liable to prosecution.

Further information

This briefing provides general information only and not legal advice. For further information or advice in any particular circumstances, please speak with your usual contact or a member of our corporate team.