Introduction

This is the second in our three-part series on the PSC Register and summarises how the PSC Register applies to limited liability partnerships (LLPs). This Legal Long concentrates solely on the differences between the application of the PSC Register to LLPs as opposed to companies and should therefore be read in conjunction with our first Legal Long in this series relating to companies for a fuller understanding of the PSC Register and its purpose.

Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016

The Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 apply an adapted version of the new Part 21A of the Companies Act 2006 to LLPs so as to require LLPs to keep a PSC Register and amend the specified conditions in Part 21A to ensure that the provisions are relevant in the context and structure of an LLP. The adapted version is set out as a new Part 8A to the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009.

Who is a PSC?

In the context of an LLP, a PSC is an individual who meets any of the following specified conditions:

  1. he/she holds, directly or indirectly, the right to share in more than 25% of the LLP’s surplus assets on a winding up;
  2. he/she holds, directly or indirectly, more than 25% of the rights to vote on matters to be decided by a vote of members of the LLP (including rights only exercisable in certain circumstances);
  3. he/she holds, directly or indirectly, the right to appoint or remove the majority of persons entitled to take part in the LLP’s management;
  4. he/she exercises, or has the right to exercise, significant influence or control over the LLP; or
  5. he/she exercises, or has the right to exercise, significant influence or control over the trustees or members of a trust or firm that is not a legal person, where those trustees or members would  meet one or more of the preceding conditions (or would do if it were an individual).

The Secretary of State has similarly published guidance as to the meaning of ‘significant influence or control’ in the context of LLPs and the guidance largely duplicates the guidance for companies, which can be briefly summarised as follows. 

Meaning of ‘significant influence or control’

The guidance does not provide an exhaustive statement of what constitutes ‘significant influence or control’, but provides a number of principles and examples which would be indicative of holding the right to or actually exercising significant influence or control over an LLP or the activities of a trust or firm which itself meets a specified condition in relation to the LLP.

The guidance states that control and significant influence are alternatives and that neither has to be exercised by a person with a view to gaining economic benefits from the activities or policies of the LLP, trust or firm.

Control – where a person can direct the activities of the LLP, trust or firm, this would be indicative of control.

Significant influence – where a person can ensure that an LLP, trust or firm generally adopts the activities or policies they desire, this would be indicative of significant influence.

Right to exercise control or significant influence over an LLP - the above conditions in (iv) and (v) require the person to have the right to exercise or actually exercise control or significant influence. In the context of an LLP, a person may hold the right to exercise in a variety of circumstances, such as under the provisions of the LLP agreement or some other agreement, through rights attached to a financial interest or otherwise. The person exercising significant influence or control might or might not be a member of the LLP. 

The guidance provides examples of such right, including the following:

  1. where a person is likely (more likely than not) to receive more than 25% of the profits of the LLP, including profits allocated automatically or otherwise;
  2. where a person has absolute decision or holds absolute veto rights over decisions related to the running of the business of the LLP, such as amending the LLP agreement, adopting or amending the LLP business plan, changing the nature of the LLP’s business or establishing or amending any financial incentive scheme; or
  3. where a person holds veto rights over the appointment of the majority of the persons entitled to take part in the management of the LLP.

The guidance notes that where a person holds absolute veto rights in relation to certain fundamental matters for the purposes of protecting their own or a minority interest, then this is unlikely, on its own, to constitute significant influence or control. The above examples do not constitute an exhaustive list. The right to exercise control may result in that person being a PSC regardless of whether they actually exercise that right.

Actually exercise control or significant influence over an LLP - the guidance provides a list of situations which would be indicative of a person actually exercising control or significant influence over the LLP for the purposes of condition (iv) above. All relationships that a person has with the LLP or other individuals who have responsibility for managing the LLP should be taken into account, to identify whether the cumulative effect of those relationships places the individual in a position where they actually exercise significant influence or control, such as a member, who also owns important assets and has key relationships that are important to the running of the business, and uses this additional power to influence the outcome of decisions.

The guidance provides an example of a person exercising significant influence or control, including the following:

  1. where a person is involved in the day to day management and direction of the LLP i.e. not a member of the management body, but a person who regularly or consistently directs or influences a significant section of management or is regularly consulted on management decisions and whose views influence management decisions  – this would include a person who falls within the definition of ‘shadow member’ in the Limited Liability Partnerships Regulations 2001, but is not confined to shadow members; or
  2. a person whose recommendations are always or almost always followed by members who hold the majority of voting rights in the LLP, such as an LLP’s founder who no longer has a formal interest.

Excepted roles with relation to LLPs - the guidance gives a non-exhaustive list of roles and relationships which would not, on their own, result in that person being considered to be exercising control or significant influence for the purposes of condition (iv) above, provided however, that a person may still be a PSC if the relevant role or relationship differs in material respects from how that role or relationship is usually understood.  Examples listed include:

  1. a person providing professional advice, such as a lawyer, accountant, financial advisor etc.
  2. a third party dealing under a commercial or financial agreement with the LLP, such as a supplier, customer or lender;
  3. a person who is an employee acting in the course of their employment, such as an employee, director or CEO of a third party which is treated as a person with significant control over the LLP;
  4. a person who is a designated member of the LLP; and
  5. a person in relation to any association, professional standards organisation or network of companies or firms which promulgates common rules, standards or policies to be adopted by members of the network.

Right to exercise control or significant influence over a trust or firm – for the purpose of condition (v) above, the guidance notes that a person has the right to exercise significant influence or control over a trust or firm if that person has the right to direct or influence the running of the activities of the trust or firm e.g. (i) an absolute power to appoint or remove any trustee or partner; (ii) a right to direct the distribution of funds or assets; (iii) a right to direct investment decisions of the trust or firm; (iv) a power to amend the trust or partnership deed; or (v) a power to revoke the trust or terminate the partnership.

Actually exercise control or significant influence over a trust or firm – for the purpose of condition (v) above, the guidance notes that a person is likely to exercise significant influence or control over a trust or firm if that person is regularly involved in the running of the trust or firm, such as a settlor or beneficiary who is actively involved in directing the activities of the trust, or a general partner in the case of a limited partnership.

Excepted roles with relation to trusts or firms - the guidance gives a non-exhaustive list of roles and relationships which would not, on their own, result in that person being considered to be exercising control or significant influence for the purposes of condition (v) above, which are substantially similar to those for companies. Again, a person may still be a PSC if the relevant role or relationship differs in material respects from how that role or relationship is usually understood. 

Next Steps

The Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 will come into effect on 6 April 2016.

Our third and final Legal Long in this series will provide a summary of the PSC Register in relation to Societas Europaea registered in the UK.