Introduction

The Small Business, Enterprise and Employment Bill has completed its third reading in the House of Commons.  It will now proceed to debate in the House of Lords.

What’s changing?

For companies and business owners, the key change will be the new requirement for companies to keep a register of persons who have ‘significant control’ over the company.  This is part of a major push by the UK Government towards transparency in business entities.

Who is affected?

Every UK company will be required to publicly disclose details of all persons who can appoint more than 25% of the company’s shares, directly or indirectly hold more than 25% of its voting rights or a majority of its board, or exercise other ‘significant influence or control’ over the company.

Companies that are subject to the Disclosure and Transparency Rules (i.e. those on AIM, the Main Market or an EU regulated market) will be exempt. The position for UK companies listed on non-EU exchanges and subject to similar disclosure requirements is yet to be clarified.

The register will be public and will contain each controller’s name, month and year of birth and nationality, as well as details of their holding in the company. Private companies will also be given the option to file the required information at a central register at Companies House, rather than keeping their own register.

Why does it matter?

UK companies will be required to actively pursue people they believe hold significant control and obtain their details. Persons with significant control will be required to actively proffer that information.

Failure to provide the necessary information could result in the relevant shares becoming non-transferable and losing their voting and dividend rights.

What’s next?

The Bill will make several other changes to the UK companies regime. If approved by the Lords, the new changes are expected to take effect before May 2015.

Background

The Small Business, Enterprise and Employment Bill has completed its third reading in the House of Commons.  It will now proceed to debate in the House of Lords.

The Bill covers various topics, including access to finance, public sector procurement, and insolvency and employment matters.  However, the change of most interest to people in the corporate world is the new requirement on UK companies to publish details of their ‘beneficial owners’.  This requirement could be in place before the next UK general election in May 2015.

Current law and proposed changes

Currently, UK companies must publish information on their shareholders by making filings at Companies House, including through an annual return.

However, this is limited to the registered shareholders, who hold the legal title to the company’s shares.  Companies do not currently have to recognise or publish details of any separate beneficial interest in or control over their shares.  Consequently, ultimate control of a UK company can still be hidden using nominees and trust structures.

The UK Government is concerned this could allow UK companies to be misused for illicit activity, such as tax evasion, money laundering and terrorist financing.  In response, the Government has introduced the Bill, a key proposal of which is the establishment of a public register of ‘persons with significant control’ over UK companies (known as the ‘PSC register’).

Who is affected?

Generally, each UK company will be required to keep its own PSC register.

Companies subject to the Disclosure and Transparency Rules (the ‘DTR’) will be exempt, as they already have to publish the required information under DTR 5.  This captures companies whose shares are traded on AIM, the Main Market of the London Stock Exchange or another EU regulated market. The position for UK companies listed on non-EU exchanges and subject to similar disclosure requirements is yet to be clarified.

Private companies will also be given the option to file the required information at a central register at Companies House, rather than keeping their own register.

What would be contained in the PSC register?

The register will contain specific details relating to each ‘person with significant control’ over the company.  These include the person’s name, date of birth, nationality, and residential and service addresses, as well as details of their interest in the company (including when they acquired it and how they hold it).  The residential address and specific day (rather than month or year) of birth will not be publicly disclosed, but the rest would be publicly available.

For this purpose, a person will have ‘significant control’ in various circumstances, including if he or she (alone or jointly with someone else):

• holds more than 25% of the company’s shares by nominal value (directly or indirectly)
• holds more than 25% of the voting rights in the company (directly or indirectly)
• can appoint or remove a majority of the company’s board (directly or indirectly)
• can exercise ‘significant influence or control’ over the company

If control is held by a trust, the register will contain details of individuals who can exercise significant influence or control over the trust.  For a true discretionary trust, this is likely to be the trustees.  However, for a bare trust, this could include the settlor or protector, and any beneficiaries who can or do exercise influence or control over the trust.

‘Significant influence or control’ is not defined.  BIS is expected to publish guidance on this after the Bill is enacted – it is unclear at this point how far the regime could extend.

Who can see the register?

Access to the PSC register is modelled on the current mechanism for accessing a company’s register of shareholders.  Anyone will be entitled to inspect or (for a fee) take a copy.

A company could apply to court if it thinks the request to see the register is not for a proper purpose.  Otherwise, it must provide access.  There is no definition of ‘proper purpose’, although existing case law and ICSA guidance on the ‘proper purpose’ test for registers of members would no doubt be informative.

However, this may be of limited use, as the company will be required to provide the information to Companies House annually in any event.

What obligations would be imposed on UK companies?

Companies will be required to actively investigate and record up-to-date information on persons with significant control.  In particular, a company will be required to serve notice on someone if it reasonably believes that person has significant control, asking them to provide the required information.

If the company and its officers do not take these steps, the company and any officers in default will commit a criminal offence and could be subjected to two years’ imprisonment or a fine.

In addition, a company may serve notice on a person if it reasonably believes that person knows who has significant control, although this does not appear to be mandatory.

What obligations would be imposed on individuals?

Failure to respond to a notice from the company, or responding with false information, will be a criminal offence punishable by two years’ imprisonment or a fine.

In addition, after a 14-day grace period, the company could issue a ‘restriction notice’.  This would prevent any transfer of the relevant interest in the company or exercise of any voting rights.  In addition, no dividends could be paid on the relevant interest and no new shares issued to the interest-holder.  Ultimately, the company could apply to court for a forced sale of the relevant interest.

Numerous criminal offences are contemplated to prevent breaches of a restriction notice.  In particular, any attempt to transfer or vote the interest would be void, and intentionally attempting to do so would be an offence.

Finally, individuals and certain companies will be under a positive obligation to provide their details if they know (or ought reasonably to know) that they should be noted on the company’s PSC register.  They will also be under an active obligation to report any update to that information.  Again, failure to do this would be an offence.

Are there any exemptions?

BIS will be able to make regulations excluding certain information from public disclosure.  These will likely be limited in scope and aimed at protecting people at risk of violence or intimidation (for example, because of the nature of the business they have invested in).  This may be relevant to pharmaceutical companies and life sciences companies.  Although the information will not be available to the general public, law enforcement agencies could still access it.

As noted above, companies subject to DTR will not need to keep a register.  Also, to avoid duplication, subsidiaries with a UK holding company subject to DTR 5 only need to note their immediate holding companies in the PSC register, and not the person with ultimate significant control over them, if that person also has significant control over the holding company. The position is yet to be clarified with regard to UK subsidiaries of overseas holding companies that are subject to similar disclosure requirements but not DTR 5 itself. BIS will have the power to extend the regime to these situations.

What else is happening?

The Bill contemplates several other changes to the UK companies framework.  These include:

• Abolishing bearer shares.  In the UK, this is currently achieved by issuing ‘warrants to bearer’, which entitle the physical holder of the warrant subscribe for shares.  The Bill will abolish these.  Existing warrants will be converted or cancelled in due course.
• Abolishing corporate directors.  Currently, a UK company must have at least one natural person as a director but can also appoint corporate bodies as directors.  Going forward, corporate bodies will be prohibited from being company directors.  BIS will be able to make exceptions, but, based on previous guidance, these are likely only to cover charities, group companies and certain open-ended investment companies.
• Simplified filing.  The requirement to file an annual return with full company details will be abolished.  Instead, companies will file an annual confirmation statement detailing only any changes that have occurred since the last confirmation statement.
• Central registers.  Private companies will be permitted to keep certain information in a ‘central register’ at Companies House, rather than maintain their own registers.  This includes details of shareholders, directors and (as explained above) ‘persons with significant control’.
• Accelerated strike-off.  The process for striking companies off the register and dissolving them will be accelerated by around two months for compulsory strike-offs and one month for voluntary strike-offs.

Will the requirements apply outside the UK?

The Government has persuaded the UK's overseas territories and crown dependencies to produce action plans on similar reform in their jurisdictions.  Commentators have unsurprisingly raised concerns about the potential impact this could have on the competitiveness of offshore jurisdictions where shareholder and controller information is currently relatively opaque.

The requirement to keep a PSC register and produce it to the authorities descends in part from the Fourth EU Anti-Money Laundering Directive, so other EU Member States will need to implement similar measures.  However, the Directive only requires the register to be made available to the authorities.  Public disclosure might therefore not be required in other Member States.

How burdensome will the new requirements be?

The new regime is unlikely to present a significant burden.  UK companies will still have to file details of their shareholders annually.  We anticipate that changes to the PSC register would be filed at the same time, possibly on the same form.

In addition, companies with differing legal and beneficial owners already have to identify their beneficial owners to access financial and professional services in the EU.  Many companies will therefore already have the necessary information to hand.

The Government estimates that over two million companies will be affected, although the vast majority are likely to have the same legal and beneficial ownership.

Many of the approximately 400,000 companies with differing legal and beneficial ownership have probably been structured that way to preserve privacy.  Their ultimate owners are unlikely to want to publish their details and may look to restructure their holdings to avoid the disclosure obligations.

An obvious way to achieve this would be to transfer the UK company’s business to an overseas entity that is not subject to similar disclosure.  The UK company could then be wound up.  That desire would need to be set against any tax-specific requirements.