Company Law

Register of beneficial owners of overseas entities - Government response

The government has published a response to its April 2017 call for evidence on proposals for a new beneficial ownership register of overseas companies (similar to the Persons with Significant Control (PSC) Register) that own UK property or participate in UK government procurement.

The call for evidence originally suggested that overseas entities that owned or wanted to buy UK property would be required to supply beneficial ownership information to Companies House and apply for a registration number, which would be required in order to register title to such property. For overseas entities that already owned UK property, a grace period of 12 months was proposed to allow time to obtain a registration number. Information on the register would need to be updated at least every two years and failure to do so would be a criminal offence.

In its response, the government appears to have softened some of the original proposals. The timetable for the introduction of the regime has also slipped with the government intending to publish a draft Bill to create the new register later in 2018, with the register itself becoming operational in 2021.

Issues of note in the response include:

  • subject to some exemptions, all entities capable of holding/owning property or that can bid on central government contracts will be within the scope of the new registration requirements. Trusts will not be subject to the regime;
  • the definition of "beneficial owner" will be aligned with the PSC regime definition;
  • overseas entities that already own UK property will have longer than the originally suggested 12 months to comply, although the time period for compliance has yet to be determined;
  • the new registration requirement will apply to freehold property and all leases of registrable duration (rather than only those where the original term exceeds 21 years);
  • a system of statutory restrictions will be put in place to ensure compliance. This will include adding notes on the relevant land register where the regime has not been complied with. The proposal to block the transfer of a beneficial interest to an overseas entity that does not have a valid registration has been dropped, although there will still be a block on the transfer of legal title in such circumstances;
  • updates to the register will be required more frequently than the two year cycle originally proposed, but will not go as far as requiring event driven updates. Failure to comply will be a criminal offence; and
  • in relation to procurement, the government has dropped the proposal that all overseas bidders provide beneficial ownership details, and instead will require only the preferred bidder to supply this information.

AGMs

Pre-Emption Group expectations for disapplication thresholds

When the Prospectus Regulation was partially implemented in 2017 it introduced a new exemption from the obligation to publish a prospectus provided that the new securities represented, over a 12 month period, less than 20% (up from 10%) of the number of securities already admitted to trading on the same regulated market (see PR 1.2.3 R(1)). In light of the new threshold, the Pre-Emption Group has confirmed that no change to the flexibility permitted by their 2015 Statement of Principles was expected as a consequence of the Prospectus Regulation, and that the Group continues to support the overall limit of a 10% disapplication of pre-emption rights. As a result, we do not expect companies to depart from the Pre-Emption Group Principles and seek increased disapplication authorities during the 2018 AGM season.

Corporate Governance

Inquiry will examine gender pay gap and executive pay in private sector

The Business, Energy and Industrial Strategy (BEIS) Select Committee has launched an inquiry into the gender pay gap and executive pay in the private sector. The Committee will examine:

  • whether the current reporting requirements are sufficient and whether further information should also be disclosed;
  • the extent of compliance and whether information disclosed is accurate; and
  • what requirements, if any, there should be on companies to address gender pay gaps.

The Committee is also seeking written evidence on executive pay, including:

  • what progress has been made on implementing the recommendations on executive pay by the previous Committee in its 2017 report on corporate governance;
  • what improvements have been made to reporting on executive pay in the last 12 months; and
  • what steps have been taken by remuneration committees and institutional investors to combat excessive executive pay in the past 12 months.

BEIS and Insolvency Service launch consultation on insolvency and corporate governance

BEIS and the Insolvency Service have published a consultation paper which aims to reduce the risk of major company failures occurring, and to strengthen directors' responsibilities, when companies are in or approaching insolvency.  Various potentially significant proposals have been made, including:

  • deterring reckless sales of businesses in distress - directors of parent companies should be held to account and penalised (for example, disqualified or held personally liable) where they make a decision to sell an insolvent subsidiary resulting in harm to creditors and, at the time of the decision to sell, the directors could not have reasonably believed that the sale would lead to a better outcome for creditors than liquidation or administration;
  • reversal of value extraction schemes - inappropriate asset stripping from companies in financial difficulties by "rescue" investors should be reversible in the event that the target company subsequently enters liquidation or administration thereby clawing money back for creditors (including staff and small suppliers);
  • strengthening corporate governance in pre-insolvency situations – for example, revisiting the legal and technical framework within which decisions are made on payment of dividends; and
  • granting the Insolvency Service new investigative powers into the conduct of directors of dissolved companies.

Responses are required by 11 June 2018.

Boardroom diversity

Two reports were published to coincide with International Women’s Day highlighting the progress being made on board positions being held by women.

The Quoted Companies Alliance published research showing that publicly quoted companies are actively looking to appoint women to top roles to achieve a better boardroom balance and address concerns about diversity in business. Of the 52 companies which were recruiting for board positions in 2017 (out of a sample set of 103 companies), 40% explicitly sought out female candidates for their long-list, compared to 36% in 2015. 67% also included female candidates on their shortlist—up from 59% in 2015.

BEIS has also published statistics which reveal that almost 29% of FTSE 100 board positions (309 in number) are held by women, the highest figure to date. This highlights that FTSE 100 businesses are on track to hit the Hampton-Alexander review target of a third of board positions filled by women by 2020.

Equity Capital Markets

AIM publishes revised AIM Rules for Companies 

The London Stock Exchange (LSE) has published AIM Notice 50 which provides feedback on the consultation launched by AIM Notice 49 and confirms changes to the AIM Rules for Companies and to the AIM Rules for Nominated Advisers. The rule changes proposed in the consultation have been implemented subject to some minor alterations.

The most significant change for AIM companies already admitted to the market is the amendment of AIM Rule 26. This will require AIM companies to apply a recognised corporate governance code and to comply or explain against its chosen code – currently AIM companies have the choice of either noting on their website which code they follow or stating that they do not follow a code and instead disclosing its current corporate governance arrangements. The LSE has chosen not to define those codes it "recognises" for this purpose believing it preferable that AIM companies have a choice of code to suit their specific stage of development, sector and size.

The revised rules require AIM companies to review their statement of compliance annually and, as part of its website disclosure, state the date upon which its last review took place and update its AIM Rule 26 disclosure in light of that review. In its feedback on the consultation, the LSE reminds companies and Nomads of its belief that good corporate governance is supported by "meaningful" explanations of a company's practices against the principles of a chosen code, rather than "simply identifying areas of non-compliance".

The Quoted Companies Alliance (QCA) has announced that it will release a new and updated version of its Corporate Governance Code, which will cover: (a) what good corporate governance is; (b) the 10 corporate governance principles to follow; and (c) step-by-step guidance on how to effectively apply the principles within a company. Whilst Main Market companies are required to follow the FRC's UK Corporate Governance Code (currently the subject of its own recently closed consultation) and many larger AIM companies choose to do so, smaller companies may find that the QCA Corporate Governance Code is more suitable.

The new rules came into force on 30 March 2018, although the requirement to comply with the amended AIM Rule 26 for Companies will take effect from 28 September 2018, to allow companies adequate time to prepare. Clean and marked-up versions of the rules are available from the LSE website.

EMI Tax Relief

Withdrawal of Enterprise Management Incentives (EMI) tax reliefs from 7th April 2018

HMRC issued an announcement on 4 April 2018, the effect of which is that the tax reliefs for EMI options granted on or after 7th April 2018 may be withdrawn due to a failure to renew EU state aid approval of EMI. This announcement was somewhat unexpected, as although the 6th April deadline for renewing the EU state aid approval was well known, it had been widely assumed that it would be given in time (as had been the case on previous occasions when it was due to be renewed).

The government has said that it is working to ensure that the period until the state aid approval is renewed will be as short as possible, but it is not yet known what that might mean in practice. It is possible that that the EU state aid approval may ultimately not be renewed, though this is considered unlikely.

Practical implications

Companies that are due to grant EMI options in the near future should consider granting them on or before 6th April 2018. If it is not possible to grant EMI options until after 6th April 2018, companies should consider waiting until EU state aid approval has been given. The announcement states that existing EMI options granted on or before 6 April 2018 are unaffected.

Case Law

Factors for businesses to consider when deciding where to establish corporate entities

The case of E.ON Czech Holding AG v Michael Dědouch and others has provided some clarity as to the jurisdiction in which shareholder disputes are to be resolved where establishment and control of corporate entities runs across national boundaries. 

Article 22(1) of Brussels I contains slightly contrasting wording – although it states that a person should usually be sued in the Member State in which they are domiciled (unless any regulation provides otherwise) it goes on to say that proceedings concerning the constitution of a company and the validity of its decisions should be determined in the Member State in which the company was incorporated. The Court of Justice held that a dispute of this nature between shareholders will be subject to the jurisdiction of the Member State in which the company is established. Businesses should take this into account when looking at jurisdictions in which to incorporate entities.