The Department for Business and Innovation (BIS) has published its proposals for exemptions to the planned prohibition on corporate directors.

The Small Business, Enterprise and Employment Bill, currently progressing through Parliament, requires that directors of UK companies must normally be individuals and not corporates. This is one of a number of measures contained in the Bill aimed at increasing transparency and reducing the risk of opaque corporate structures being used to facilitate illicit activities. (Our earlier briefing explains some of the other measures).

Whilst not contained within the Bill, BIS had also suggested that the ban on corporate directors be extended to LLPs - meaning that LLPs would not be able to have corporate members. In June this year we responded to a request from BIS for comments on this proposal, emphasising that such a ban would fail to recognise the fundamentally different nature of a member of an LLP and the director of a company.

The proposed exemptions

The government can provide for exemptions to the general ban set out in the Bill and BIS has now published a consultation on the subject.

BIS maintains its stance that, for the majority of UK companies, a corporate director will not be an option. However, it also acknowledges that corporate directors can perform legitimate business functions and may continue to be useful in situations where there is a low risk of illicit activity. BIS has asked for comments on the following situations where the use of corporate directors could be allowed:

UK companies with shares traded on regulated or prescribed markets (such as the LSE and AIM). Due to high standards of corporate governance and transparency, BIS sees a good case for an exception.

It also considers whether subsidiaries in a group could benefit from a parent’s exemption and, if so, whether other factors such as the the relationship between the parent and subsidiary and the status of the subsidiary should come into play.

Corporate members of LLPs. Acknowledging that any limitation could affect legitimate investment due to the economic stake a member has in an LLP, BIS does not see a strong case for prohibiting corporate members of LLPs. It intends to review the position on a five yearly basis to ensure LLPs do not become the popular choice for masking illicit activity.

Large non-traded public or private companies. BIS considers a range of possibilities here, stating the need for an exemption is more finely balanced in both cases. It asks for comments on possible exemptions based on the size of the entity or whether it forms part of a group of companies.

Charitable companies. BIS considers that a complete exemption is not appropriate but that exceptions could apply in certain circumstances. For example, where the corporate director is a public body or another charity. It also considers exemptions based on size or regulator evaluation.

Corporate trustees of pension funds. BIS is in favour of an exemption for corporate trustees (not least because they are subject to regulation by the Pensions Regulator) but does ask whether more should be done to increase transparency.

Open Ended Investment Companies. BIS does not propose any change to the status quo. OEICs operate under a system where authorised corporate directors are subject to FCA approval.

What happens next?

The consultation closes on 8 January 2015.

It is not yet clear when its provisions will come into effect but the Small Business, Enterprise and Employment Bill is expected to receive Royal Assent in March 2015.