Companies: disclosure of beneficial ownership - what you need to know

Posted: 19/04/2016

From 6 April 2016, UK companies (other than those that are listed or quoted on the Main Market of the LSE, ISDX, AIM, a regulated market in another EEA state or on certain markets in the USA, Switzerland, Israel or Japan) need to record details of their ultimate beneficial owners and controllers. From 30 June 2016, that information will need to be filed on the public register at Companies House with the new annual confirmation statement. UK LLPs and UK-incorporated ‘European Companies’ (an EU form of public company also known as Societas Europaea or SEs) are also subject to these requirements.

Companies, LLPs and SEs need to ensure that they are compliant. Non-compliance is a criminal offence by a company, LLP or SE (and its directors or designated members, as applicable).

From the point of view of individuals who are PSCs, (see below), and who fail to provide the required information to the company, their interest in the company may be frozen (meaning that they would be unable to receive dividends or transfer the shares), and they will have committed a criminal offence.

This note primarily considers the requirements as they will apply to companies (including SEs), rather than LLPs, (although we do touch on them below). In many cases, companies are likely to require professional advice to be sure they are compliant. Companies with more complex ownership structures – particularly where trusts or partnerships or overseas companies are involved – will need to take particular care.

Who is a PSC?

The criteria for being a PSC in relation to a company are broadly that, whether directly or indirectly, a person:

• owns or has the right to exercise more than 25 per cent of the shares or voting rights in the company;
• has the right to appoint or remove a majority of the board of directors;
• has the right to exercise, or actually exercises, significant influence or control over the company (whether directly, or by exercising significant influence or control over a trust or firm that is not a legal entity and which satisfies one or more of the other criteria) - we consider what this means in more detail below.

A legal entity that would fulfil one or more of the criteria for being a PSC if it were a natural person, and which is itself either required to keep a PSC register, (eg a UK company, UK LLP or UK SE), or is exempt from that requirement by virtue of being a listed or quoted company, is known as a ‘relevant legal entity’ (an RLE). An RLE can be entered in a company’s register of members in the same way as a PSC can.

Shares and rights are regarded as being held by a person (or an RLE) ‘indirectly’ where they are held by that person or RLE through one or more legal entities (that are not RLEs), and the relevant person or RLE either has a majority stake in the entity that holds the share or right, or the share or right is held through a chain of legal entities, each of which has a majority stake in the entity beneath it and the last of which has a majority stake in the entity that holds the share or right. Direct and indirect interests must be aggregated for the purposes of determining the extent of a person’s control.

Where the shares or voting rights held by two or more people are subject to a ‘joint arrangement’ (ie an arrangement between them that they will exercise rights jointly in a way that is pre-determined, whether or not legally binding), each of them will be regarded as holding their combined interest for the purpose of working out whether they are a PSC. An ‘arrangement’ for these purposes need not be formal and can include a ‘convention, custom or practice’, although one-off agreements to exercise rights in a particular way, for example, to exercise voting rights to defeat a particular company resolution, are unlikely to be caught.

What companies need to do now

• As a first step, review the register of members to identify whether any registered member holds more than 25 per cent of the share capital (by nominal value) or voting rights. If that member is an individual, they may be a PSC; if the member is a company, then it may be an RLE.
• Look at any shareholders’ agreements and other legal agreements to understand whether anyone has rights of control or veto over the appointment or removal of a majority of the board of directors (or directors who hold a majority of the voting rights at board meetings).
• Look at any shareholders’ agreements, other legal agreements and the overall circumstances and relationships of the company to work out whether anyone else has the right to exercise, or actually exercises, ‘significant influence or control’ over the company and also to ascertain whether there might be any ‘joint arrangements’.
• If there is anyone who appears to satisfy the criteria for being a PSC and is a nominee, an overseas company, a partnership or a trust, then further investigation will be needed to establish whether behind them, there is either:
  • an individual who meets the criteria for being a PSC; or
  • an RLE.
• Where PSCs are identified, contact them to confirm the relevant details to be included on the register (see below).
• Take any other reasonable steps to identify PSCs and find out the relevant details, including by serving notice on anyone they believe is, or may be able to identify, a PSC. If a shareholder (or other person of whom enquiry is made) is uncooperative, companies have powers to impose restrictions over the relevant shares.

From 6 April, the relevant details of PSCs and RLEs have to be included in a new statutory register, known as the ‘PSC register’. The PSC register sits alongside the other statutory registers that the company maintains (eg the register of members and the register of directors).

Companies House has produced a short video to help companies in identifying PSCs. The video can be accessed here.

What must go into the new PSC register

The PSC register must record details of:

• all individuals who meet one or more of the criteria to be PSCs - unless their only interests in the company are held through one or more RLEs, or they only meet the criteria by reason of being, or having an interest in, a limited partner in a limited partnership (this is likely to be an important exception for participants in investment funds); and
• any RLEs - all UK companies will fall into this category, but many foreign companies (and in particular, privately-owned foreign companies), will not.

Broadly, the register must:

• include the following information in respect of each PSC: name, service address, country or state of usual residence, nationality, date of birth (although the day of the date of birth will be omitted from the public register in most circumstances), usual residential address and the date on which the person became a PSC in relation to the company;
• include the following information in respect of an RLE: name, registered or principal office, legal form of the entity and the law by which it is governed, the date on which it became an RLE in relation to the company, and, if applicable, where it is registered and its registration number;
• indicate which of the PSC criteria the relevant individual or RLE satisfies;
• indicate the extent of their control;
• state, if there are no PSCs (or RLEs), that this is the case; and
• state, if the company thinks there are PSCs but hasn’t managed to identify them or confirm their details, that this is the case.

In fact, there are over 30 specific forms of statement that might need to be entered in the register, depending on the circumstances!

What companies need to do with the PSC register

Companies must:

• keep the register up-to-date;
• permit members of the public to inspect the register (provided this is for a proper purpose); and
• from 30 June 2016, file the information at Companies House. This will be done in the new confirmation statement and companies must confirm annually whether there have been any changes to the information. In fact, companies can elect to keep the register only at Companies House, rather than also maintaining their own version – though this will mean PSCs’ full dates of birth will appear on the public register, whereas otherwise they would not.

Subject to very limited exceptions, (namely where there is a significant risk of a person being subjected to violence or intimidation and an application is made by or on that person’s behalf) and, with the redaction of some personal data, the information will be included on the public register at Companies House.

Companies House has published guidance about the circumstances in which disclosure may be restricted and how to apply for this protection. This guidance can be found here.

What ‘significant influence or control’ means

In practice, while in many cases it may be relatively straightforward to work out who owns or controls more than 25 per cent of the shares or voting rights of a company, or who can appoint or remove a majority of the directors, it may be more difficult to work out if someone otherwise has the right to exercise, or actually exercises, significant influence or control over a company (‘significant influence’ and ‘control’ are different things for these purposes).

The Government has published statutory guidance (currently before Parliament for approval), that must be referred to in determining whether or not a person exercises, or has the right to exercise, ‘significant influence or control’ and what is meant by that expression. The guidance includes a non-exhaustive list of roles and relationships that will not, of themselves, result in a person being considered to exercise significant influence or control. That guidance, together with general guidance for companies and owners to explain the new duties, can be found here.

The guidance states:

‘Where a person can direct the activities of a company, trust or firm, this would be indicative of ‘control’. 

Where a person can ensure that a company, trust or firm generally adopts the activities which they desire, this would be indicative of ‘significant influence’.

The ‘control’ and ‘significant influence’ do not have to be exercised by a person with a view to gaining economic benefits from the policies or activities of the company, trust or firm.’

An example of someone who has a right to exercise significant influence or control over a company might be a person with absolute decision or veto rights over key matters relating to the company’s business. Examples of someone actually exercising significant influence or control, (without any formal legal right to do so), might include:

• a director who owns key assets used by the company, (eg a building or intellectual property), which gives him the ability to influence decisions;
• a person who is regularly consulted on, and influences decisions of a significant section of the board (this could catch a significant shareholder, perhaps with observer rights);
• or a person, (perhaps a former founder shareholder), whose recommendations are always, or almost always, followed by shareholders when they decide how to vote.

Whilst the guidance is helpful in understanding some of the parameters of the concepts of ‘significant influence’ and ‘control’, it is clear that each situation will be different and will need to be considered in light of all relevant facts. As well as considering any legal agreements (eg shareholders’ agreements), companies will need to think about the background, surrounding circumstances and what happens in practice. This may not be an easy task.

Application to Limited Liability Partnerships

The requirement to maintain a PSC Register will apply to LLPs in broadly the same way as to companies. The criteria for determining whether someone is a PSC (or RLE) will be slightly different, being satisfied where a person or legal entity, directly or indirectly:

• holds rights to more than 25 per cent of the surplus assets on winding up, or more than 25 per cent of the voting rights;
• has the right to appoint or remove the majority of those entitled to take part in the management of the LLP; or
• has the right to exercise, or actually exercises, significant influence or control over the LLP (whether directly, or by exercising significant influence or control over a trust or firm that is not a legal entity and which satisfies one or more of the other criteria).

Draft statutory guidance on the concepts of ‘significant influence’ and ‘control’ in the context of LLPs can be found here.

The small print

The detail of the legal requirements is set out in section 21A of the Companies Act 2006 (inserted by the Small Business Enterprise and Employment Act 2015), and supplemented by statutory regulations - the Register of People with Significant Control Regulations 2016, the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 and the European Public Limited-Liability Company (Register of People with Significant Control) Regulations 2016.

This article was prepared by James Went and Angela Ragnauth.

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