On 6 April 2016 a new regime relating to "people with significant control" (the PSC Regime) came into effect1.

UK companies already subject to transparency and disclosure rules (through trading on a regulated market, for example) do not need to comply. However, most UK companies and LLPs must establish, maintain and keep available for public inspection a register (the PSC Register) of any individual who is a registrable "person with significant control" (a PSC) and/or any registrable "relevant legal entity" (an RLE). From 30 June 2016, this information must also be filed at Companies House as part of the new annual return process.

A UK company or LLP subject to the PSC Regime must take "reasonable steps" to find out who its registrable PSCs and registrable RLEs are. This includes giving notice to actual and suspected PSCs and RLEs seeking relevant information. A company or LLP which fails to comply risks committing a criminal offence.

PSCs and RLEs also have notification obligations, including providing certain information if asked by the company, and telling the company within a month of becoming a registrable PSC or registrable RLE. Failure to satisfy the notification obligations can be a criminal offence.

The rest of this article focuses on the PSC Regime as it applies to companies, but similar rules apply to LLPs.

When will a person have significant control?

Under the PSC Regime a person has significant control if that person:

  1. holds, directly or indirectly, more than 25 per cent of the shares in the company;
  2. holds directly or indirectly, more than 25 per cent of the voting rights in the company;
  3. holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
  4. otherwise has the right to exercise, or actually exercises, significant influence or control over the company; or
  5. has the right to exercise, or actually exercises, significant influence or control over an arrangement such as a trust, which is not a legal entity, but which would satisfy any of the other conditions set out above if it were an individual.

The Department for Business, Innovation & Skills has also issued statutory guidance to help decide if a person can or does exercise "significant influence or control" of a company (the BIS Guidance).

Impact on due diligence in banking transactions

Financial institutions will inevitably start to use PSC Register information as part of their KYC checks. In some transactions lenders may also find that information useful to help draft change of control clauses, or – where the transaction involves share security – to cross-check information about major shareholdings.

Impact on share mortgages

When a lender or a security trustee takes security over shares, could it become a registrable PSC or registrable RLE of the company that issued the shares as a result? Lenders typically take equitable, rather than legal, mortgages over shares in English companies, with title to the shares staying with the mortgagor. As such, the security holder is unlikely to be treated as "holding" the shares. However, a security holder is likely to be treated as "holding" the shares if it takes a legal mortgage up front or upgrades its security to a legal mortgage later (for example, as a prelude to exercising its power of sale).

Could a security holder's voting rights make it a registrable PSC or registrable RLE? Probably not. Paragraph 23(a) of new Schedule 1A to the Companies Act 2006 contains a useful exclusion for the holders of security. It provides that rights attached to shares held by way of security are to be treated as being held by the security provider where, apart from the right to exercise them for the purpose of preserving the value of security, or of realising it, the rights are only exercisable in accordance with the instructions of the security holder. In reality, it is difficult to see when a security holder would be exercising, or directing the exercise of, voting rights other than to preserve the value of security, or to realise it.

Holders of share mortgages will also want to ensure that their mortgagors comply with the PSC Regime. If they do not the company may be able to apply restrictions on the transfer of the shares until the relevant information is provided. Before imposing these restrictions, the company must consider if they would have an unfair effect on third parties. Imposing restrictions on the transferability of shares could well be viewed as having an unfair effect on a mortgagee. However, mortgagees will probably not want to rely on this alone. They may also want a mortgagor to undertake in the share mortgage to comply with any obligations to provide information to the company under the PSC Regime.

Exercising significant influence or control

Could a lender ever satisfy the "significant influence or control" test? The BIS Guidance suggests that a routine lender/borrower relationship should not result in the lender having "significant influence or control" over a company. However, sometimes, particularly in distressed situations, a lender's involvement in a borrower's business goes beyond the routine. Lenders who have meddled too closely in the affairs of their company borrowers have been found to be shadow directors of those companies in the past. The same behaviour could potentially now also result in them exercising significant influence or control of a company under the PSC Regime.