The department for Business, Innovation and Skills (BIS) has published the government's response to the discussion paper, Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business (the discussion paper) which was issued in July 2013.  We reported on the range of proposals in our August newsletter.

The most significant proposal to enhance transparency suggested in the discussion paper was for the introduction of a central registry of beneficial ownership of all companies incorporated in the UK.   The UK's G8 Action Plan in June 2013 committed to implementing this idea and the discussion paper sought views on key questions involved in actioning this plan, one of which was whether the information on such a registry should be available to the public.  In December 2013 the Prime Minister confirmed that the information would be publicly accessible.  The BIS response paper sets out the government's position on other implementation issues.

Key points are:

  • there will be a central registry of company beneficial ownership information held by Companies House.  The definition of beneficial ownership used in the Money Laundering Regulations 2007 will be used as the statutory definition in this context.  Information on individuals who ultimately own or control 25% of a company's shares or voting rights, or who otherwise exercise control over a company or its management, will need to be obtained and held by the company and provided to the central registry
  • where a qualifying beneficial interest in a company is held through a trust arrangement, the trustee(s) or any natural person exercising control over the activities of the trust  will required to be disclosed as the beneficial owner of the company (this could be the settlor, beneficiary or protector of the trust)
  • UK bodies corporate that currently register information on their members at Companies House will be required to obtain and hold beneficial ownership information and provide it to Companies House.  This will include companies limited by guarantee and Limited Liability Partnerships
  • BIS does not intend to apply beneficial ownership requirements to corporate or legal entities which do not currently provide information to Companies House such as those regulated and/or registered by other government agencies, for example building societies and credit unions which are regulated by the Financial Conduct Authority (FCA)
  • the requirement will not extend to non-UK companies because of EU company law directives and because of the risk of applying UK law extra-territorially
  • companies which comply with relevant disclosure rules under the FCA's Disclosure and Transparency Rules, or which have securities listed on a regulated market which are subject to equivalent disclosure requirements, will be exempt
  • companies will be required to identify and obtain information on beneficial ownership.  The current provisions of Part 22 of the Companies Act 2006 (CA 2006) which allow public companies to obtain information on share ownership will be adapted to apply to all companies so that private companies are able to find out this information
  • individuals with a qualifying beneficial interest will be required to disclose this to the company (as significant investors in listed companies are already required to do) and to inform companies of any changes as they occur
  • companies will be required to keep and update a register of beneficial owners including set information which will be available for public inspection (save for residential addresses).  If a private company opts out of keeping registers, which is a proposal under the Company Filing Requirements consultation (see later article in this newsletter), the information provided to Companies House will need to include residential addresses
  • all the information held by the company will have to be provided to Companies House and will be available to the public (save for residential addresses and full dates of birth – only month and year of birth will be recorded to address fraud concerns).  Applications to the Registrar of Companies to protect beneficial ownership information from public disclosure will be allowed in exceptional circumstances. Some UK and overseas enforcement authorities will be able to access protected information however
  • on incorporation companies will be required to provide an initial statement of beneficial ownership before they can be registered.  They will then need to confirm the information is correct on a yearly basis, detailing any changes that have happened although this information can be updated as it changes.  Given one of the proposals in the response to the Company filing requirements consultation (see later article) some companies may choose only to have registers at Companies House, in which case information on changes to beneficial ownership will need to be made to Companies House when they occur
  • where companies or individuals fail to comply with their obligations the sanctions will be criminal offences
  • both primary and secondary legislation will be required to put in place the arrangements for the central registry of beneficial ownership.  It is also intended that there will be a statutory duty on the Secretary of State to publish a review of the efficacy and proportionality of the registry within three years of implementation which will include consultation.

Other changes

  • bearer shares - the creation of new Bearer shares will be prohibited and a period of time will be allowed for existing bearer share holders to surrender their shares for conversion to registered shares.  After the set period for surrender companies with bearer shares remaining will have to apply to court to have them cancelled
  • corporate directors -the discussion paper proposed the abolition of corporate directors altogether.  As a result of responses received, this has been watered down so that there will be a ban on corporate directors in most cases but there will be exemptions which currently are likely to be for group structures including large listed companies, group structures including large private companies, charities, the use of corporate directors by OEICs (when licenced by the FCA) and the use of corporate trustees.  A one year transitional period is proposed for existing companies to comply with the new regime
  • nominee or 'front' directors – the discussion paper proposed various options in relation to nominee directors including the possibility of introducing a Companies House register of nominee directors and creating a criminal offence if a director tried to take formal legal steps to divest his powers.  As a result of the responses received as to the workability of both these suggestions, neither option is being pursued. Instead it is planned to increase directors' awareness of their duties and liabilities.  Legislation will be passed to enable individual directors to be contacted to ensure they understand their duties. This will be done by the Registrar of Companies. The government is also considering new ways to increase the accountability of those who seek to control a front director possibly by extending the shadow director concept.  The definition of shadow director in section 251 of the CA 2006 defines a shadow director as one who controls the whole or a majority of the board of directors.  It is intended to change the position so that having control of a single director will not be a means of avoiding accountability
  • directors' disqualification – amendments are to be made to the Company Directors Disqualification Act 1986 (CDDA).  The discussion paper suggested some additional factors that could be added to Schedule 1 of the CDDA (which sets out the matters determining unfitness).  Having viewed all the responses the government's view is that Schedule 1 is now outdated and will be replaced completely with a new, broader and more generic provision which sets out the factors which will be considered and providing for consideration of the materiality of a director's conduct, culpability and track record and the impact of their behaviours – all of which will need to be taken into account in determining whether a director should be disqualified and for how long
  •  the time limit for bringing disqualification proceedings in insolvency cases will increase from 2 to 3 years.  The courts will be able to consider overseas misconduct when deciding whether to disqualify in the UK.  The Secretary of State will also be empowered to disqualify an individual from acting as a director in the UK where that individual has been convicted of a criminal offence in connection with the promotion, formation or management of a company abroad
  • one proposal from the discussion paper which is not being taken forward is the suggested amendment of directors' statutory duties to introduce a primary duty for bank directors to promote financial stability over the interest of the shareholders.

Next steps

As mentioned above, most of the proposed changes will require primary and secondary legislation.  It is intended that legislation will be introduced as and when the Parliamentary timetable allows with the registry of beneficial ownership being introduced as soon as practicable. Transitional arrangements will also need to be put in place in some instances.  The proposed changes will mean, particularly for some private companies, a great deal of administrative upheaval and we will continue to report on the upcoming changes, their implication and timing in the coming months.

To see the BIS response paper in full please click here.  The BIS press release can be found here.