Hot on the heels of the recent reforms to enhance company transparency in the UK via the new "register of persons with significant control", the Government is considering whether to extend the new disclosure requirements to foreign companies. If adopted, foreign companies may be required to disclose information on their beneficial owners before buying property in England and Wales, or bidding for a public contract in England.
Owning UK property
In a recent discussion paper, the Department for Business, Innovation and Skills (BIS) sought views on proposals to set up a new foreign companies beneficial ownership register (Foreign Companies Register). It is proposed that the Foreign Companies Register would function as a central repository of information on foreign companies, and would be managed either by Companies House or another independent organisation. Foreign companies on the Foreign Companies Register would be allocated a unique identification number.
In future, foreign companies may need to provide their unique identification number to the Land Registry before applying to register titles to land or property.
The same requirement is also due to affect foreign companies owning existing titles, which would be required to supply a unique identification number to the Land Registry by a "reasonable time" (the timescale is yet to be confirmed). If implemented, this could affect around 100,000 existing titles.
BIS has proposed that failure by a company to provide the required information could result in civil and criminal sanctions being imposed. These could include a daily fine until the breach is remedied and/or restrictions on the company's ability to charge or sell existing property as well as restrictions on the ability to purchase new property. Penalties could potentially be more onerous than under the regime for UK companies.
To avoid duplication, BIS is considering introducing an exemption for companies incorporated in overseas jurisdictions that already operate an accessible central register of beneficial ownership information. In this scenario, the Land Registry would require a unique identification number from the relevant overseas register.
Bidding for public contracts
The changes could affect new public contracts granted to foreign companies in England with a minimum value of £10 million. It is proposed that existing public contracts would not be affected.
Various mechanisms have been suggested for implementing the beneficial ownership policy in respect of public contracts.
One option is to require bidding companies during the pre-qualification questionnaire stage to either provide a unique identification number or to inform contracting authorities of beneficial ownership details directly. Failure to provide such information could render the bid incomplete and at risk of rejection.
Another option is to require only the highest ranked bidder in the evaluation process to satisfy the beneficial ownership requirements. Foreign companies could therefore engage in the initial bidding process without suffering the cost or delay of the registration process. However, once the bids are ranked, the highest bidder would only proceed to the contract award stage if the required information is provided.
Of particular significance to bidding companies is the proposed inclusion of termination provisions in public contracts, which would be triggered in two situations:
- Where a bidder provides inaccurate beneficial ownership information; and
- Where a bidder fails to update beneficial ownership information throughout the term of the contract.
BIS is considering whether non-compliance should be grounds for the relevant contracting authority to exclude a foreign company from participating in public tenders for 3 years under the Public Contract Regulations 2015. Foreign companies could be prevented from participating in future public tenders if they fail to provide beneficial ownership information.
Potential implications for foreign companies
As with the new regime for UK companies, information around beneficial owners may be complex and difficult to identify, particularly in international group structures.
Foreign companies would need to take into account the added burden of providing and updating information on their beneficial owners when deciding whether to bid for an English public contract or property. There may also be sensitivities around disclosing beneficial ownership information which may mean that a foreign company decides not to bid.
The proposals relating to ownership of property by foreign companies (including off-shore property investment vehicles) are potentially far-reaching with significant penalties. However, whilst there will be an onus on foreign companies to have their ducks in a row before entering into real estate transactions this increased visibility may also have an upside in the private sector. Increasingly, we are asked by our clients and by other lawyers to provide details on the ultimate beneficial owners of both buying and selling entities. If this regime comes into force this information will be publicly available and as such should be neither controversial nor a reason for delaying a deal: the deals simply should not get to exchange if the due diligence does not check out or match the business requirements of the other transacting party. In effect this may become simply another box to tick when dealing with a foreign company akin to gaining a legal opinion from their local lawyers.
Background to the proposed reforms
As of 6 April 2016, all UK companies and UK LLPs (with the exception of companies traded on markets such as AIM and the Main Market of the London Stock Exchange) are required to maintain a new register called a Register of People with Significant Control (PSC Register). From 30 June 2016 details of the PSC Register will need to be filed with Companies House at least once every year along with the Confirmation Statement (which replaces the current Annual Return). Please click on the link to access our dedicated PSC Register page on our website for more on this development.
BIS is proposing to extend similar obligations to non-UK registered companies. The discussion paper, "Enhancing transparency of beneficial ownership information of foreign companies undertaking certain economic activities in the UK" was open for submissions until 4 April 2016.
Depending on public responses to the discussion, formal consultations will take place later this year.
If adopted, the new requirements would apply to foreign companies active in England and Wales. The Scottish Parliament is considering separate reforms which are not covered in this article. It is anticipated that the proposals will take effect from June 2017, given the deadline for EU Member States to implement the Fourth Money Laundering Directive.
Further updates on this important reform will follow.