Background This is the third in a series of client alerts published about the Small Business, Enterprise and Employment Act 2015 (SBEEA) - the impetus for a number of changes to the Companies Act 2006. Previous client alerts in this series can be found here.
From 6 April 2016, most UK companies will be required to hold, and to keep available for inspection, a register of people with significant control or influence (the PSC register). On 25 January 2016, the draft Register of People with Significant Control Regulations 2016 (PSC Regulations) were published and laid before Parliament for approval.
When the draft PSC Regulations are approved in their final form, we will publish a further update. In the meantime, this client alert will help you prepare for the changes and, crucially, inform you of who must be included on a PSC register.
Who does the PSC regime apply to? The PSC regime will apply to all UK companies, except those subject to the disclosure requirements of DTR 5 (e.g. LSE main market and AIM companies) and legal entities with voting shares admitted to trading on a regulated market in an EEA state other than the UK. This is because these companies are already required to make details of major shareholdings public.
Who is a “person with significant control”? According to the SBEEA, a person with significant control is an individual that (either alone or as one of a number of joint holders of the share or right in question):
- Holds, directly or indirectly, more than 25 per cent of the shares in the relevant entity.
- Holds, directly or indirectly, more than 25 per cent of the voting rights in the relevant entity.
- Holds the right, directly or indirectly, to appoint or remove a majority of a board of directors of a company or a majority of management of an LLP.
- Exercises (or has the right to exercise) significant influence or control over the entity.
- Exercises (or has the right to exercise) significant influence or control over activities of a trust or firm which itself meets one or more of the first four conditions.
What is the meaning of “significant influence or control”? The Department for Business, Innovation & Skills (BIS) has published guidance on the meaning of “significant influence or control” in conditions 4 and 5:
- Significant influence enables the person exercising it to ensure that the relevant entity adopts those polices or activities which are desired by the holder of the significant influence.
- Control is the power to direct the relevant entity’s policies and activities.
- “Significant influence” or “control” need not be directed towards the financial and operating policies of the entity and do not have to be exercised by a person with a view to gaining economic benefits.
What is a right to exercise “significant influence or control”? The BIS guidance suggests that where a person has absolute rights of veto or absolute decision rights (i.e. without reference to anyone else) relating to the running of the business of a company, this would constitute a “right to exercise significant influence or control”. Such business might include adopting/amending business plans; changing the nature of the business; additional borrowing decisions; or establishing or amending profit-sharing, share option, bonus or other incentive schemes for directors or employees. Such rights can be exercised directly or indirectly.
In addition, where a person has absolute rights of veto over the appointment of the majority of a board or management (as applicable), this would constitute a “right to exercise significant influence or control”. However, note that veto rights for the purpose of protecting minority interests (such as anti-dilution rights) are unlikely to constitute significant control alone. Nor are rights derived solely from being a prospective vendor or purchaser of an entity.
Where a trust is concerned, the guidance suggests that if a person has an absolute power to appoint or remove trustees, a veto right over funds or asset distribution, a right to direct investment decision or the power to amend the trust deed, then they are likely to be considered as having a right to exercise significant influence or control.
What is “actual exercise of significant influence or control”? The guidance provides the following examples of instances which would constitute an actual exercise of influence or control of different entities:
- A director owns key IP rights in relation to the business and uses this to influence business-related decisions.
- A non-director is regularly consulted on board or management decisions and their views influence such decisions.
- A founder is no longer a significant shareholder but their voting recommendations are generally followed by the other shareholders.
- An individual has the power to amend or revoke the trust.
This list is non-exhaustive and all relationships that an individual has with a corporate entity and individuals running such an entity should be considered, so as to establish any cumulative effect on the control of it.
Where a trust is concerned, the guidance suggests that a person who is regularly involved in the running of the trust by way of being a trustee or issuing instructions to the activities of the trust to the trustees, is likely to be considered to be exercising significant influence or control.
Who is NOT normally considered as having significant control? The guidance also provides various “safe harbours” where a person would not normally be considered as exercising significant control:
- Lawyers, accountants, management consultants, company mentors and financial advisers
- Suppliers, customers or lenders (i.e. where the person is engaged in a third party commercial or financial arrangement)
- A regulator, liquidator or receiver
- An employee acting in the course of employment
- Directors with casting votes
- A person making recommendations to shareholders or members on a one-off issue which is subject to a vote of all interest-holders
- A designated member of an LLP
If the role contains elements that differ materially from the usual course of conduct, or if it forms one of several opportunities which that person has to exercise significant control, then these safe harbours may not apply.
How do I prepare?
- Take reasonable steps to identify and notify the people you think do/may have significant control in your corporate entity and all of its affiliates.
- Obtain the required registrable information from them and populate a company PSC register with this information.
- Provide this information to Companies House as part of the annual Confirmation Statement (formerly Annual Return).
- Keep the PSC register at the entity’s registered office or other inspection address and make it available for public inspection on request (while redacting residential addresses).
- Update the PSC register when information changes.
- Service address
- Date of birth
- Residential address
- Date on which individual became registrable in relation to the company in question
- Nature of his/her control
Further information Failure to deliver a Confirmation Statement within 14 days of the end of the review period is an offence committed by the company and its officers, although they may have a defence if they have taken “reasonable steps” to do so. Where for some reason the PSC information cannot be provided, the company will need to provide an explanation on its Confirmation Statement (for instance, the person concerned has failed to respond to requests).
Failure by an individual to respond to information requests or to provide accurate information for the PSC register is a criminal offence and can be punishable by a fine or imprisonment of up to two years.