The Small Business, Enterprise and Employment Act 2015 (SBEE) materially reforms UK company law. One of the confirmed changes and which is perhaps the most controversial is the introduction of a central public registry of those individuals who have significant control of UK companies (known as PSCs). This note is intended to give a broad overview of the provisions in SBEE which set out how to identify whether companies have, or may have, any PSCs. The Government has confirmed that the PSC regime will also be extended to apply to UK limited liability partnerships (LLPs). For further details on the content and procedural aspects of the PSC register, please click here.

WHY IS IT IMPORTANT?

Broadly, SBEE requires details of those individuals who ultimately own or control more than 25 per cent of a UK company’s shares or voting rights, or who otherwise exercise significant influence or control over the company or its management, to be included on a private and a public register (the PSC register). The obligation on companies within scope to keep a register is currently expected to be implemented in April 2016. From June 2016 PSC information will also need to be included in companies’ annual confirmation statements (currently known as annual returns). The Government has confirmed that the public register will be freely available online and searchable by individual name, as well as by company name.

Companies must take reasonable steps to find out if there is anyone who is a PSC and if so, to identify them. The company must give notice to anyone whom it knows or has reasonable cause to believe to be registrable. A criminal offence may be committed by the company and every defaulting officer if the company fails to take reasonable steps to identify any registrable person or fails to give notice to anyone whom it knows, or has reasonable cause to believe, to be registrable. The offence is punishable by imprisonment for a term not exceeding two years and/or an unlimited fine.

WHO IS A PSC?

A PSC is an individual who meets one or more of the conditions set out below. “Individual” specifically includes some entities including corporations sole, governments or government departments and local authorities.

What are the conditions?

One of the following conditions must be met by an individual (X) in relation to a company (company Y). The conditions are that:

  • X holds more than 25 per cent of company Y’s shares (either directly or indirectly) (Condition 1);
  • X holds more than 25 per cent of company Y’s voting rights (either directly or indirectly) (Condition 2);
  • X holds the right, directly or indirectly, to appoint or remove the majority of the board of company Y (Condition 3);
  • X has the right to, or does, exercise significant influence or control over company Y (Condition 4); or
  • the trustees of a trust or members of a firm that is not a legal person meet any of Conditions 1 to 4 (in their capacity as such) in relation to company Y or would do so  if they were individuals and X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm (Condition 5 and together with Condition 1 to Condition 4, the Conditions).
  • Condition 1

Holding more than 25 per cent of the share capital of company Y means holding more than 25 per cent of the nominal value of company Y’s issued share capital. If company Y does not have a share capital, this means holding a right or rights to share in more than 25 per cent of the capital or profits of company Y.

  • Condition 2

“Voting rights” means the rights conferred on shareholders or members to vote at general meetings of company Y on all or substantially all matters. If company Y does not have general meetings at which matters are decided by the exercise of voting rights, Condition 2 is satisfied where X holds rights equivalent to those of a person entitled to exercise voting rights in a company to block changes to the overall policy of company Y or to the terms of company Y’s constitution.

  • Condition 3

The right to appoint the majority of company Y’s board (or equivalent management entity if company Y has no board) means the right to appoint or remove directors holding a majority of the voting rights at board meetings on all or substantially all matters.

  • Meaning of “indirectly”

Shares and rights are only held indirectly if the entity directly above company Y meets any of Conditions 1 to 3 and each entity above it in the chain holds a majority stake in the entity immediately below it in the chain. “Majority stake” extends beyond holding (or controlling) a majority of voting rights. It includes appointing or removing the majority of the board of the relevant entity or otherwise exercising dominant influence or control over that entity. Holding a majority of the economic rights alone, without meeting one of the other criteria, is excluded.

  • Condition 4

Statutory guidance on the meaning of “significant influence or control” is expected this autumn. Until this guidance is available it is difficult to draw any firm conclusions on the application of SBEE to group structures.

Can a company, the trustee or beneficiary of a trust, or a partner in a partnership, be a PSC?

  • Trusts and partnerships – Condition 5

Trustees should be listed on the PSC register if they are an individual and meet any of Conditions 1 to 4 set out above. Trustees are not treated differently from other persons in this respect. Corporate trustees are also treated the same as any other corporate shareholder (see “Companies and other bodies corporate” below).

In addition, where the trustees of a trust meet any of Conditions 1 to 4, or would meet any of those Conditions if the trustees were treated as individuals, Condition 5 looks through the trustees to any person who has the right to exercise, or actually exercises significant influence or control over the activities of that trust and also treats those persons as PSCs. This may include protectors, settlors, and beneficiaries which have the necessary degree of control over the activities of the trust.

Where the members of a firm that is not a legal person (for example, an English partnership) would meet any of Conditions 1 to 4 if the partnership was treated as a legal entity, any person that has the right to exercise, or actually exercises significant influence or control over the activities of that firm will be treated as a PSC. The partnership itself cannot be a PSC as it is not a legal person.

An English limited partnership is not a separate entity but due to the provisions on joint interests and arrangements described below, each limited partner would ordinarily be deemed to  have an interest in all of the assets of the limited partnership and need to be recorded as a PSC. SBEE contains a saving provision that effectively states that a limited partnership is treated the same as a general partnership.

  • Companies and other bodies corporate

If the shareholder of company Y:

  • is a body corporate or a firm that is a legal person (including a company or LLP); and
  • it would have come within the definition of a person with significant control over company Y if it was an individual (i.e. it meets one of the Conditions set out above); and
  • it is subject to its own disclosure requirements (i.e. it is a UK company that is required to keep a PSC register or it is, broadly, a company that is listed on certain UK or EEA markets),

this entity is known as a relevant legal entity (or RLE).  It should be included on company Y’s PSC register as a RLE  if it holds shares in or rights in relation to company Y directly. Its shareholders may also, as described above, have to be included on company Y’s PSC register if they satisfy any of the Conditions.

“ANTI-AVOIDANCE”  MECHANISMS

Shares held by way of security

Rights attached to shares held by way of security provided by a person (the borrower) are treated as held by the borrower where: (i) apart from the right to exercise them for the purpose of enforcing the security, the rights are exercisable only in accordance with the borrower’s instructions and in the borrower’s interests; and (ii) the shares are held in connection with the granting of loans as part of normal business activities.

Nominees and rights treated as held by person who controls their exercise

Shares held by a person (A) as a nominee for another person (B) are treated as held by B and not by A.

Where a person controls a right, the right is treated as held by that person.  A person “controls” a right if  by virtue of an arrangement between that person and others, that right is exercisable by that person, in accordance with that person’s directions or instructions or with that person’s consent or concurrence.  “Arrangement” is very widely defined and encompasses any scheme, agreement or understanding, whether or not it is legally enforceable and any convention, custom or practice of any kind but there must be at least some degree of stability about the arrangement (whether by its nature or terms, the time it has been in existence or otherwise).

Joint interests and arrangements

If two or more persons hold a share or right jointly, each of them is treated as holding that share or right. This would be likely to catch, amongst other things, trustees holding trust property jointly.

If shares or rights are the subject of joint arrangements between two or more persons, each of those persons is treated as holding the combined shares or rights of both of them. A “joint arrangement” is an arrangement between holders of shares or rights that they will exercise all or substantially all the rights conferred by their shares or rights in a way that is pre- determined by that arrangement.

Rights exercisable only in certain circumstances

Rights that are exercisable only in certain circumstances are only to be taken into account when the circumstances have arisen (and for so long as they subsist) or when the circumstances are within the control of the person having the rights. If rights are temporarily incapable of exercise, they continue to be taken into account.

WHAT HAPPENS NEXT?

The obligation to keep a PSC register (which will be publicly available) is in addition to any obligation to disclose details of ultimate beneficial owners to professional service providers working in the regulated sector. It is not yet clear how all of the provisions will be implemented. In particular, statutory guidance on the meaning of “significant influence or control” and other non-statutory guidance is not expected to be published until  the autumn and the secondary legislation that will extend the regime to UK LLPs has not yet been formally published. It is therefore difficult to fully consider SBEE’s impact on group structures. However, all UK companies may wish to start considering whether they are within the scope of this legislation and whether they have, or are a PSC or RLE.