Written by Alon Domb
1) New rules relating to people with significant control
New rules are going to come into force soon which require UK companies and Limited Liability Partnerships to take steps to identify people who have significant control over them (PSCs) and pass the details to Companies House.
The UK government is introducing these new rules in order to make it harder for money launderers, criminals and terrorists to do business, as the new rules will provide the state with a much fuller picture of the ownership of businesses. Apart from that, the European Union has introduced these measures in its Fourth Money Laundering Directive which came into force on 25 June 2015, so the UK government has to implement such measures by 26 June 2016.
Briefly, the rules will require companies to:
- take reasonable steps to discover the identities of any PSCs they have;
- keep a register internally of their PSCs from 6 April 2016; and
- file information on PSCs with Companies House from 30 June 2016.
When the PSC register has been filed at Companies House, it will be available for public inspection and will be searchable online.
2) Which companies will the rules apply to?
These rules will apply to all UK companies except those which are publicly traded on the main market of the London Stock Exchange or AIM (and are therefore subject to the disclosure requirements of DTR 5), or companies which have voting shares traded on the exchange of other EEA states or those of certain other states. Such companies already have to comply with strict disclosure requirements regarding major shareholdings.
3) Who/what is a person with significant control?
Essentially, a PSC is somebody who has, or is able to exercise, dominance over a company.
For the purposes of the new rules, a PSC includes anybody who has, directly or indirectly:
a) control of more than 25% of a company’s voting rights;
b) control of more than 25% of a company’s shares;
c) the ability to appoint or remove more than half of the company’s directors;
d) significant influence or control (or the right to exercise significant influence or control) over a company; or
e) significant influence or control (or the right to exercise significant influence or control) over an entity such as a company or a trust which itself has one of a) to d) above.
- Point d) above is rather vague and could be very wide in its application. Statutory guidance has been set out on this point, including a list of the sorts of roles and relationships which would not ordinarily be expected to (but still in certain circumstances might, for example if the role or relationship is materially different from what would normally be understood or if it is just one of a number of ways in which the person has significant influence or control) result in a person or entity being held to be a PSC for the purposes of the new rules. These include professional advisors such as lawyers, accountants and consultants, third parties such as customers, suppliers and lenders, regulators or liquidators. Also included in the list are managing directors of companies, sole directors or companies or non-executive or executive directors who holds a casting vote.
- For the purposes of the guidance, a person has “control” over a company if they can direct its policies and activities; a person has “significant influence” if they can ensure that the company adopts such policies or activities as are desired by the holder of the person.
- A person might have the “right to exercise significant influence or control” as a result of the provisions of the company’s constitution, rights attaching to shares, a shareholders’ agreement or other agreement. The right to exercise significant influence or control is a right which, if exercised, would give rise to the actual exercise of significant influence or control. The fact that somebody has such a right will be enough to make them a PSC for the purposes of the new rules whether or not they actually exercise their rights.
4) Practical consequences for companies
- Once the new rules come into force, companies will have to take “reasonable steps” to find out who has control over the shares.
- For some companies this is likely to be a simple task; for many other companies, especially those with complex ownership structures, establishing the identity of PSCs is likely to be a very time-consuming and complex task. PSCs themselves may be unhappy about the loss of privacy involved in having the details of their company arrangements made publicly available.
- What constitutes “reasonable steps” for the purposes of the new rules will depend on the particular circumstances of any case. Given that failure to comply with the rules will be a criminal offence and has the potential to result in a fine or imprisonment, directors are likely to be thorough on this in order to minimize the risk of falling foul of the rules.
- Companies will be able to send out notices requesting information to shareholders, people they think might be PSCs or to people which the company has reasonable cause to believe might have information relating to the identity of PSCs.
- A company’s PSC register must record the names of individuals who have significant control over a company as well as certain other entities. A relevant legal entity for the purposes of the rules is one which both:
- would have been classed as a person with significant control had it been an individual; and
- is subject to its own disclosure requirements (that is, it has to have a PSC register of its own or is exempt because of being publicly traded on the main market of the LSE, AIM or similar as set out in part 2 above).
- The rules on whether or not an individual or entity must be put on the register or not are complicated. They try to prevent duplication of filings; for example, where Company A is wholly owned by Company B and an individual has significant control over Company B, the individual (unless he has control over Company A through some separate means than its shares owned by Company B) does not have to be recorded on the PSC register of Company A, though Company B has to be put on the register of Company A as a relevant legal entity.
- The details required by Companies House about any PSCs who are individuals include the name, service address, the country or state where they are usually resident, nationality, date of birth, address, date when they became a registrable person for the purposes of the PSC rules in relation to the company and the type of control that they have over the company.
5) Practical consequences for PSCs
- Anybody who is a PSC will be required to tell any companies of which they are a PSC about their interest in the company. If a PSC breaches this requirement then their rights in the company may be removed.
- Anybody who receives a notice from a company is required to respond properly; not doing so is an offence (though an exception is made for information which is legally privileged).
6) Penalties for non-compliance
- It will be a criminal offence for a company not to comply with the new rules; the company and its officers, in the event of non-compliance, may be subject to fines and/or imprisonment.
- If a company requests information from an individual or entity and they do not respond, the company will be allowed (without the need for an order from the courts) to place restrictions on any shares held by that person which may prevent the person from having a right to vote or receive dividends.
7) Safeguards for information
- The date of birth of PSCs will not be publicly searchable, only the month and year of birth.
- Companies will only be allowed to provide addresses of PSCs to public authorities and credit reference agencies.
- People will also be able to apply to protect all information on the PSC register if they consider themselves or those they live with to be at serious risk of violence or intimidation, whether as a result of the actions of the company or as a result of the actions of the company combined with the attributes or characteristics of the individual in question.
Thank you to Henry Evans, trainee solicitor in our Corporate Department, for his help in preparing this article.
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After graduating from Manchester University with a BA Hons in Economics, I trained at Saunders Sobell and qualified in 1988. Before joining Gordon Dadds in 2014, I was a partner at Frank Charlesly & Co and head of the corporate department at Davenport Lyons. I have extensive experience in advising on M&A, joint ventures, structured real estate, corporate finance, partnership law and business affairs. Outside of work, I enjoy hiking, visiting the theatre and cinema, and spending time with my family.