Department for Business, Innovation and Skills guidance on the meaning of 'significant influence or control' over companies in preparation for the implementation of the requirement to maintain a PSC Register

The Small Business, Enterprise and Employment Act 2015 amends the Companies Act 2006 by inserting a new Part 21A into that Act. From 6 April 2016, companies and LLPs will be required to maintain a register of people who have significant control over them (PSC Register). Those people who have significant control are determined by the satisfaction of specified conditions, such as holding more than 25% of the shares or voting rights.  The fourth and fifth specified conditions require a person to have 'significant influence or control' which could be more difficult to identify.

Draft statutory guidance on the meaning of 'significant influence or control' in the context of companies has been published by the Department for Business, Innovation and Skills. The guidance can be viewed here. BIS published separate guidance for LLPs, not dealt with in this article.

Who is a person with significant control?

A person with significant control over a company, and therefore required to be included in the PSC Register, is defined in Schedule 1A to the Companies Act 2006 as an individual (X) who meets one or more of the following conditions:

  1. X has direct or indirect ownership of more than 25% of the shares of a company; 
  2. X holds, directly or indirectly more than 25% of the voting rights in a company;
  3. X has the direct or indirect right to appoint or remove a majority of the board of directors of a company;
  4. X exercises or has the right to exercise significant influence or control over a company; or
  5. X exercises or has the right to exercise significant influence or control over the activities of a trust or firm the trustees or members of which meet one or more of the conditions set out above in relation to a company or would do so if they were individuals.

Status of the guidance

Regard must be had to the guidance in interpreting references to significant influence or control in Schedule 1A to the Companies Act 2006. The guidance is confined to the meaning of "significant influence or control" within Schedule 1A to the Companies Act 2006. The guidance does not provide an exhaustive statement of what constitutes "significant influence or control" but provides a number of principles and examples indicative of having the right to or actually exercising significant influence or control over a company, or the activities of a trust or firm which itself meets a specified condition in relation to the company.

Meaning of significant influence or control

The guidance provides that:

  •  control is the 'power to direct the company's, trust's or firm's polices and activities';
  • significant influence enables the person exercising it to ensure that the company or trust adopts those polices or activities which are desired by the holder of the significant influence; and
  • "control" or "significant influence" need not be directed towards the financial and operating policies of the company or trust and do not have to be exercised by a person with a view to gaining economic benefits.

Who has significant influence or control?

Conditions 4 and 5 require either a right to exercise or the actual exercise of significant influence or control and the guidance provides examples of circumstances which would be indicative of each category. 

Right to exercise significant influence or control over a company (fourth specified condition)

A person may have a right to exercise significant influence or control over a company as a result of a variety of circumstances, such as:

  • the company's constitution; 
  • the rights attached to shares or securities; or
  • a shareholders' agreement (or some other agreement).

The examples given in the guidance of what might constitute a right to exercise significant influence or control, although not an exhaustive list, are where a person has absolute rights of veto or absolute decision rights relating to the running of the business of the company, for example:

  • adopting or amending business plans;
  • changing the nature of the business; 
  • additional borrowing;
  • establishing or amending profit-sharing, share option, bonus or other incentive schemes for directors or employees.

Also, where a person holds absolute veto rights over the appointment of the majority of directors.

However, note that where:

  • veto rights are for the purpose of protecting minority interests in the company, such as a right to veto changing the company's constitution or to prevent dilution, then this is unlikely, on its own, to constitute significant influence or control;
  • the absolute decision or veto rights are temporary and derive solely from being a prospective vendor or purchaser of the company (eg. pending a competition clearance) this is unlikely to constitute significant influence or control.

Other points to note are:

  • the right to exercise significant influence or control over a company may result in that person being a PSC in relation to the company regardless of whether or not that person actually exercises that right;
  • the right can be exercised directly or indirectly;
  • the term 'absolute' is used in relation to decision rights or a veto to mean that the right can be exercised without reference to or collaboration with anyone else.

Actual exercise of significant influence or control over a company (fourth condition)

Examples of situations in which a person would actually be exercising significant influence or control include:

  • a director owns important assets or has key relationships that are important to the running of the business (eg. IP rights) and uses this to influence business related decisions;
  • involvement in the day to day management and direction of the company such as where a person who is not a director, regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board; or 
  • a person whose recommendations are always or almost always followed by shareholders who hold the majority of the voting rights, such as where a founder no longer has a significant shareholding in the company, but makes recommendations to the other shareholders on how to vote and the recommendations are generally followed. 

All relationships which the person has with the company or individuals who manage the company should be taken into account so as to establish whether the cumulative effect of these places the person in a position where they exercise significant influence or control.

Significant influence or control over a trust or firm (fifth specified condition)

A person has the right to exercise significant influence or control over a trust if that person has the right to direct or influence the running of the trust's activities, for example:

  • an absolute power to appoint or remove trustees;
  • a right to direct the distribution of funds or assets; 
  • a right to direct investment decisions of the trust; or
  • a power to amend the trust deed or revoke the trust.

A person is likely to exercise significant influence or control over a trust if that person is regularly involved in the running of the trust, for example:

  • being a trustee of a trust; or
  • issuing instructions as to the activities of the trust (whether or not binding) to the trustees or to any person who exercises significant influence or control over the trust. 

In relation to a firm (such as a limited partnership) people who control the management or activities of the limited partnership, usually the general partner in a limited partnership, would be considered a person with significant control.  Again, the right to exercise significant influence or control over a company may result in that person being a PSC in relation to the trust regardless of whether or not they actually exercise that right.

Safe Harbours – significant influence or control over a company

The guidance provides 'safe harbours', where a person would not normally be considered to be exercising significant influence or control, as follows:

  • where the person provides advice or direction in a professional capacity (eg. lawyer, accountant, management consultant/company mentor, financial adviser);
  • where the person is engaged with the company as a result of a third party commercial or financial agreement (eg. supplier, customer or lender);
  • a regulator;
  • where the person is an employee acting in the course of his or her employment, including an employee or director of a third party, which is treated as a person with significant control over the company; where the person exercises a function under an enactment, for example:
    • a regulator; or
    • a liquidator or receiver appointed under the Insolvency Act 1986.
  • where the person is a director of a company, including:
    • a managing director;
    • a sole director; or
    • a non-executive or executive director who holds a casting vote.
  • Ÿa person who makes recommendations to shareholders on a single one-off issue, which is subject to a vote.

Safe Harbours – significant influence or control over a trust

The examples given in the guidance are more or less the same as for companies with the exception of examples which are specific to companies, such as the reference to a liquidator or receiver, to specified officers of a company or to influencing how shareholders vote.

However a person who appears to fall within a safe harbour may still be a person with significant influence or control if the role or relationship differs materially or contains significantly different features from how the role or relationship is generally understood or if the role or relationship forms one of several opportunities through which the person could exercise significant influence or control.