Background

1. With effect from April 6, 2016, all companies incorporated or formed under the UK Companies Acts, other than exempt companies (see paragraph 3), and all limited liability partnerships (LLPs) incorporated under the UK Limited Liability Partnerships Act 2000, will need to keep a register of people with significant control (PSC) over them. Failure to keep and maintain this register (the PSC Register) will be a criminal offence (on the part of the company/LLP and its officers). The PSC Register will be publicly accessible. Information on PSCs will also need to be filed at Companies House in an annual confirmation statement (which replaces the annual return) from June 30, 2016.

2. These PSC requirements should be considered by both UK and non-UK private equity and other investment funds; they will be relevant if any of its portfolio investments include any UK companies and/or LLPs (including UK subsidiaries of non-UK portfolio companies). This is because each of those UK companies and LLPs will need to maintain a PSC Register. Indeed, it may be necessary to “look through” the private equity/investment fund to identify any individual(s) above it who is/are PSCs of the UK company/LLP (and for the UK company/LLP to record such PSCs in its PSC Register accordingly). Alternatively, it may be that the fund itself must be entered in the PSC Register as a relevant legal entity (RLE).

3. A company is an exempt company for these purposes if it:

(a) is an issuer subject to Chapter 5 of the UK Disclosure and Transparency Rules (this includes a UK company listed on the LSE, AIM and the ISDX Main or Growth Markets);

(b) has voting shares admitted to trading in an EEA state (other than the UK); or

(c) has voting shares admitted to trading on certain markets in Israel, Japan, Switzerland or the USA (the US markets include the New York Stock Exchange and NASDAQ).

4. The requirements are, in general terms, similar in scope to the “know-your-client” regime. Indeed, the aim is to improve corporate transparency (and to tie in with the requirements of the EU Fourth Money Laundering Directive that member states hold a central register of corporate beneficial ownership).

PSCs, RLEs and the PSC Register

5. The PSC Register must contain details of PSCs and RLEs only.

6. A PSC is an individual who satisfies one or more of five conditions: 

(a) shares or rights are held "indirectly" where an individual holds the share or right through a chain of legal entities and each legal entity in the chain (other than the last) has a majority stake in the legal entity immediately below it in the chain; and

(b) the test for determining a "majority stake" is similar to the UK Companies Act 2006 test for a subsidiary undertaking: namely, holding or controlling a majority of the voting rights, having the right to appoint or remove a majority of the board of directors or otherwise having the right to exercise, or actually exercising, dominant influence or control.

7. Although a legal entity may have significant influence or control over a company or LLP, that legal entity can only be registered in the PSC Register of the underlying company where the legal entity is a relevant legal entity (or RLE). An RLE:

(a) is a body corporate or firm that is a legal person under the law by which it is governed; and

(b) would have come within the definition of a person with significant control over the company or LLP if it were an individual; and

(c) is subject to its own disclosure requirements (see paragraph 8).

8. A legal entity is subject to its own disclosure requirements if it is:

(a) itself required to keep a PSC Register; or

(b) an exempt company (i.e. it is a DTR5 issuer or has voting shares admitted to one of the non-UK markets identified under paragraph 3).

9. This means that, for example, an unlisted, non-UK company will not be an RLE. It therefore cannot be registered on the PSC Register of the underlying UK company or LLP. However, the requirement is then to look through (i.e. further up the chain of ownership) such an entity until an indirect PSC or RLE is identified (or it is determined that there are no PSCs or RLEs, in which case, the PSC Register must record that information). For a private equity/investment fund, this look through may continue all the way up to the relevant controlling individual(s) at the private equity firm/fund manager (assuming that the shares are held by or rights are exercised by the general partner/investment manager).

10. In practical terms, in identifying PSCs and RLEs, and completing the PSC Register:

(a) start with conditions 1, 2 and 3 (see paragraph 6). If an individual or legal entity meets one or more of these conditions, it is not necessary to analyse whether that individual or legal entity also satisfies condition 4;

(b) if conditions 4 or 5 are relevant, review the statutory guidance on the meaning of “significant influence or control” which has been published by the UK Department for Business, Innovation and Skills (there is separate guidance for companies and LLPs). It is important to note that the guidance is non-exhaustive and is written in very broad/general and “purposive” terms:

(i) the relationship between the company/LLP and the potential PSC needs to be considered as a whole (including the constitutional documents of the company or LLP, any shareholders’/members’ agreement, rights attached to shares/securities and the overall relationship, on a cumulative basis);

(ii) certain absolute decision/veto rights are identified which “might” constitute a right to exercise significant influence or control. These rights are not based on a positive control/parent undertaking test, but include rights commonly retained by the private equity/investment fund, including:

(1) veto or decision rights over adopting or amending the business plan;

(2) veto or decision rights over making additional borrowings from lenders;

(3) decision rights over appointing or removing the CEO;

(4) decision rights over establishing or amending a profit sharing, bonus or other incentive scheme of any nature for directors or employees;

(iii) however, the guidance also recognises that where veto rights in relation to certain fundamental matters are held for the purposes of protecting minority interests that would not, on its own, amount to significant influence or control. These include veto rights over:

(1) changing the constitution; and

(2) making additional borrowings from lenders outside previously agreed lending thresholds.

11. The PSC Register must never be empty.

(a) if there are no PSCs or RLEs, the PSC Register must record this fact;

(b) if investigations are ongoing, which means a company/LLP cannot complete its PSC Register at that time, that fact must also be recorded;

(c) the PSC Register must include details of:

(i) for each PSC, his/her name; service address; country or state (or part of the UK) in which he/she is usually resident; nationality; date of birth; usual residential address (although this is not ordinarily publicly accessible); the date on which he/she became a PSC; and the nature of his/her control;

(ii) for each RLE; its corporate or firm name; registered or principal office; its form and the law by which it is governed; if applicable, the register of companies in which it is entered, and its registration number in that register; the date on which it became an RLE; and the nature of its control; and

(iii) with regard to the nature of control, there is prescribed wording in the regulations for each relevant condition (see paragraph 6). For example, in relation to conditions 1 and 2, the wording is not required to set out the precise percentage of shares/rights held, but is “banded”: (i) more than 25% but not more than 50%, (ii) more than 50% but less than 75% or (iii) more than 75% of the shares or rights.

In Practice

12. Aside from the obligation to keep and maintain a PSC Register, there is an obligation on the company/LLP to investigate and obtain information on PSCs and RLEs. This includes taking reasonable steps to find out if there is any (and to identify any person who is a) PSC/RLE and giving notices to anyone that it knows or has reasonable cause to believe (i) is a PSC/RLE, or (ii) knows the identity of the PSC/RLE.

13. The failure by a company or LLP to keep a PSC Register (including the failure either to keep the PSC Register up to date or to seek information) is a criminal offence by both the company/LLP and its officers, punishable by a fine.

14. Moreover, from the perspective of the PSC/RLE:

(a) there is now a pro-active disclosure obligation on the PSC/RLE (to notify a company/LLP within one month where: (i) the PSC/RLE knows or ought reasonably to know that he is a PSC/RLE, (ii) the PSC’s/RLE’s particulars are not on the PSC Register in question, (iii) the PSC/RLE has not received a notice from the company/LLP requesting information, and the circumstances in (i), (ii) and (iii) have continued for at least one month). Similarly, there is an equivalent disclosure obligation on the PSC/RLE where there has been a “relevant change” (either that the PSC/RLE has ceased to be registrable or that the particulars in the PSC Register have become incomplete or incorrect);

(b) subject to certain safeguards and procedural requirements, a company/LLP can apply certain sanctions where an individual/legal entity fails to respond to a notice. These include restrictions on the sale/transfer of shares, exercise of share rights (including pre-emption rights) and the right to receive dividends; and

(c) failure either (i) to respond to a notice, or knowingly or recklessly giving a false statement in response (save where the alleged PSC/RLE proves that the requirement to give information was frivolous or vexatious) or (ii) to comply with the pro-active obligations referred to in paragraph 14(a) is also a criminal offence by the PSC/RLE and (if the PSC/RLE is a legal entity) its officers, punishable by imprisonment (of up to two years) or a fine (or both).

15. Groups with UK companies or LLPs should identify the entities within their corporate structure that are required to maintain a PSC Register. They should then analyse the registrable PSCs and RLEs for each such entity and obtain the relevant information. The potential consequences for non-compliance are severe (even though the more extreme criminal sanctions are likely to be imposed only in egregious circumstances); it is therefore important to act both expeditiously and on a thorough basis.