M&A WEEKLY UPDATE
8 - 14 APRIL 2017
There have been several developments of particular interest over the past few days, so this week's update is slightly longer than usual.
The government has published its proposals for a register of beneficial ownership for overseas entities we take a look at what is being proposed and what this might mean for businesses and individuals.
The parliamentary committee charged with reviewing UK corporate governance has also produced its recommendations. We have reviewed the committee's report and given our thoughts.
Finally, we review some developments on modern slavery and calculating distributable profits, PIRC's shareowner voting guidelines, and a fine for two individuals for committing market abuse.
REPORT FROM CORPORATE GOVERNANCE INQUIRY PUBLISHED
The Business, Energy and Industrial Strategy Parliamentary Committee has published its eagerly anticipated recommendations, following its September 2016 inquiry into the governance of UK companies.
thoughts on how these might develop in practice. That note can be found here.
We have also produced a separate note with more detailed comments on the Committee's recommended proposals to reshape executive remuneration, which can be found here.
CONSULTATION ON BENEFICIAL OWNERSHIP REGIME FOR FOREIGN ENTITIES
The Department for Business, Energy and Industrial Strategy ("BEIS") has published a paper on the proposed new register of beneficial owners for overseas legal entities ("OLEs"). BEIS refers to this as the "OEBO register" (which presumably stands for "overseas entity beneficial ownership").
BEIS first proposed this idea in March 2016, prompted by concerns about the potential for OLEs to pursue illegal activity by investing in UK property and the public sector. The new register, which BEIS claims would be the first of its kind in the world, aims to tackle this.
A copy of the paper can be found here. BEIS is requesting feedback by 15 May 2017.
The Committee's report, which can be found here, touches on numerous areas of law and policy that collectively, have the potential to impact companies of various size. This includes both listed and unlisted, and public and private companies across the gamut of industry sectors. Its key recommendations are to:
Abolish long-term incentive plans (LTIPs) and replace them with deferred stock awards vesting over a five-year period.
Require a binding vote on the directors' annual remuneration report if there is significant (75%) opposition to it on the non-binding vote.
Who will be affected? In principle, the new regime would apply to all kinds of legal entity that are not incorporated in the UK. This includes limited companies but would also extend to certain types of overseas partnership. In theory, it could also extend to overseas government bodies, such as local authorities and state-owned bodies, but this will depend on the final detail.
How will the regime apply? The regime would be modelled substantially on the current UK regime for disclosing beneficial ownership and control (known as the "persons with significant control" or "PSC" regime).
Expand the role of the Financial Reporting Council and enable it to bring direct action against directors for breach of their general duty in section 172 of the Companies Act 2006.
Require worker representation on remuneration committees (but not the full board).
Institute a new code of corporate governance for large private companies.
We have prepared a note setting out the Committee's key conclusions and recommendations, along with our own
"Beneficial owners" would be identified by the same criteria currently used to identify persons with significant control under the PSC regime. The OEBO regime would also incorporate the same provisions as the PSC regime to deal with voting and nominee arrangements.
OLEs would need to provide the same information on their beneficial owners as UK entities currently provide on their PSCs. BEIS is also proposing to give OLEs powers to obtain that information similar to those available under the PSC regime. If an OLE has no beneficial owners, or it cannot get their details, it will instead have to provide details of its "managing officers" (e.g. its directors).
The OEBO register would be kept by Companies House and would be publicly available at no charge. On providing information to Companies House, an OLE would receive a registration number.
OLEs would be required to update their beneficial ownership information at least every two years.
Will there be any exceptions?
Under the proposals, an OLE would not need to register with Companies House if it is already required to make equivalent details of its beneficial owners available free of charge in its home country. This is a sensible proposal which should ensure that OLEs are not required to go to the administrative expense of filing in multiple jurisdictions.
When will the regime apply?
In addition, it would usually not be necessary to register details
Unlike the UK regime (which applies in all circumstances
of an indirect beneficial owner if it is possible to register an
to each entity that is subject to it), OLEs would only need to
intermediate legal entity instead (i.e. one which is subject to its
provide details of their beneficial owners in three scenarios:
own disclosure requirements). Again, this mirrors the current
Buying property. This would apply if an OLE wishes to
acquire freehold property in the UK or a UK leasehold
Finally, the proposals contemplate that it would be possible to
property with an initial term of 21 years or more. The OLE
keep the identity of individual beneficial owners will away from
would need to provide its registration number when it
the public eye if to disclose their identity would put them at
applies to register the property in its name. Without this, the risk. The proposed test (an "elevated public safety risk") seems
application would fail and the transfer itself might be void.
somewhat easier to meet than the test under the current PSC
regime (a "serious risk" of "intimidation or violence"). This may
Holding and selling property. An OLE that already holds
well make it easier for people concerned about their own
freehold or longer-leasehold property in the UK would
personal safety to keep the link with their property confidential.
have 12 months to obtain a registration number and supply
it to the relevant land registry. At the end of this period, the Practical implications
registry would place a note on the property title stating that The proposals are still at an early stage and there is much detail
the property cannot be sold, leased or mortgaged if the
to be worked out.
OLE does not comply with the regime.
However, if enacted as contemplated, they will have a clear
This effectively means that, where an OLE which holds
impact on overseas organisations, particularly those holding
property and does not provide its beneficial ownership
real estate in the UK. These businesses would need to
details within the 12-month period, it would be unable to
decide whether to disclose under the regime or dispose of
sell its UK property.
their property within the 12-month window. BEIS recognises
the potential for this to result in a flight from the UK and has
This applies only to registered land. OLEs would not
committed itself to reviewing the likely "economic impacts" of
need to provide beneficial ownership details to sell, lease the regime before enshrining it in law.
or mortgage unregistered land. However, if the proposed
buyer or tenant of unregistered land itself is an OLE, the
The OEBO regime is likely to have less impact on entities
transfer or lease would not be possible unless the buyer
incorporated in EEA states, as these entities will already have
provides its own beneficial ownership details, which could disclosed (or will soon be disclosing) details of their beneficial
itself hamper the sale or letting.
owners under the European Union Fourth Money Laundering
Directive. However, for the numerous offshore companies that
Public tenders. Broadly, an OLE would not be able to win a hold real estate in the UK, the proposals represent a potentially
public contract tender unless it has supplied its beneficial significant compliance burden.
ownership details to Companies House and obtained a
registered number. The restriction would apply only to
At this stage, it looks like the proposals will have only a limited
contracts worth more than 10m. BEIS is exploring three impact on high-net-worth individuals who already hold property
different models designed to achieve this, which are
through offshore vehicles. Although these vehicles would not
outlined in the paper. Depending on the option chosen,
be able to transfer property without providing their ownership
either all bidders or only the highest bidder would need to details, neither would they be forced to surrender their property,
provide their details.
and transfers of interests in the vehicles themselves should
BEIS recognises that its proposals may give rise to other issues. For example, what happens if parties exchange contracts on a property, but the buyer cannot identify its beneficial owners, or the seller has not complied with the regime? It would not be possible to register the sale; potentially placing the parties in breach of contract and rendering the seller a trustee for the buyer. BEIS is exploring how to resolve these issues.
As with all consultations, there are still some key issues to be worked through. We will be examining the final proposals and draft legislation in due course when published by BEIS.
CHANGES TO MODERN SLAVERY STATEMENTS RECEIVE COMMITTEE BACKING
The Houses of Parliament Joint Committee on Human Rights has produced a report, part of which covers shortcomings in the regime under section 54 of the Modern Slavery Act 2015. It has also formally backed the Modern Slavery (Transparency in Supply Chains) Bill, a private member's bill designed to amend the regime.
Section 54 requires an organisation carrying on business in the UK to produce a slavery and human trafficking statement for each financial year in which its turnover is 36m or more. The statement must state the steps taken during that year to eliminate slavery and human trafficking in the organisation's supply chains and business. If no steps were taken, the statement must say this.
However, as currently drafted, there is no deadline for publishing the statement. Home Office guidance recommends publication within six months of financial year-end; preferably alongside annual accounts, but this is purely guidance. The Secretary of State can seek an injunction to enforce publication, but because there is no statutory time limit, this power may be useless in practice.
The Committee is therefore urging the government to facilitate the Bill's passage through parliament. If passed, the Bill would require organisations to publish their statement in their annual report and file it at the appropriate public registry. This would effectively impose an enforceable deadline on publication.
The Bill would also require the Government to compile a list of organisations that are required to publish slavery and human trafficking statements, and prohibit public bodies from procuring services from organisations that have not conducted supplychain due diligence.
A copy of the report can be found here.
NEW GUIDANCE ON DISTRIBUTABLE PROFITS
The Institute of Chartered Accountants of England and Wales (ICAEW) and the Institute of Chartered Accountants of Scotland (ICAS) have produced a joint new note on distributable profits.
Tech 02/17BL provides guidance on realised and distributable profits under the Companies Act. Its purpose is to identify, interpret and apply the principles relating to determining realised profits and losses for the purposes of making company distributions.
Tech 02/17BL builds on and replaces its predecessor note, Tech 02/10. Like all ICAEW/ICAS technical releases, Tech 02/17BL has no basis in law, but it provides useful and considered guidance on this point for companies and their advisers to consider.
Tech 02/17BL can be found here. A mark-up showing the changes from Tech 02/10 can be found here.
NEW PIRC UK SHAREOWNER VOTING GUIDELINES
PIRC has published the 24th edition of its UK Shareowner Voting Guidelines, which replace the previous March 2016 version. A few changes have been made, including:
PIRC will oppose the re-election of an executive chairman (except in exceptional circumstances).
PIRC will not support the re-election of a company's FTSE 350 nomination committee if current female representation on its board falls below the 33% mark.
Companies are encouraged to disclose the consultants they use, and their fees, annually.
The new guidelines are available here from PIRC for a fee of 300.
FCA FINES TWO INDIVIDUALS FOR MARKET ABUSE
The Financial Conduct Authority has banned and imposed financial penalties on the former Chief Financial Officer and former Financial Controller of Worldspreads Limited ("WSL") for market abuse.
The two individuals knowingly falsified critical financial information concerning WSL's client liabilities and cash position in its 2010 and 2011 accounts. This resulted in material shortfalls in WSL's client money position in the amount of 15.9m being concealed from investors.
The penalty was imposed for breaches of s. 118(7) of the Financial Services Markets Act 2000 under the old UK market abuse regime. This has now been superseded by the Market Abuse Regulation. A copy of the FCA's press release can be found here
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This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
Macfarlanes LLP is a limited liability partnership registered in England with number OC334406. Its registered office and principal place of business are at 20 Cursitor Street, London EC4A 1LT. The firm is not authorised under the Financial Services and Markets Act 2000, but is able in certain circumstances to offer a limited range of investment services to clients because it is authorised and regulated by the Solicitors Regulation Authority.
It can provide these investment services if they are an incidental part of the professional services it has been engaged to provide. Macfarlanes April 2017