The "Transparency and Trust" discussion paper published by the Business Secretary Vince Cable earlier this week outlines various proposed measures to help improve corporate transparency. Of particular relevance will be the new rules requiring English companies (and most likely English LLPs) to obtain and hold information on their beneficial ownership, and the creation of a central registry for such information. This follows David Cameron's commitment, at the G8 summit in June, to implement agreed core principles relating to the transparency of ownership and control of companies.
Current law requires information on directors and the registered legal owners of a company's shares to be made publicly available. And there are limited circumstances where companies may be required to disclose details of beneficial ownership, for instance:
- where complying with the usual KYC processes imposed by banks or external service providers;
- where law enforcement authorities are exercising their statutory powers of investigation; and
- in relation to listed companies being required to disclose to the market shareholders with an interest of greater than 3 % in that company's share capital.
The proposed rules represent a significant and fundamental shift in the disclosure regime in that they will require a company to identify and record:
- individuals who beneficially own or control at least 25%. of that company's share capital, whether directly or indirectly and whether individually or in concert with other persons; and
- individuals who otherwise exercise control over the company, irrespective of whether or how many shares they hold, and then to disclose that information to Companies House where it would be recorded in a register that is very likely to be publicly available (although this latter point is subject to further consultation).
On a detailed reading of the consultation paper, it is clear that the principal drivers behind the proposed changes are to improve transparency, and to aid in the fight against criminal activities and tax evasion. And, although there are attempts to streamline the compliance process, by for instance extending to private companies the existing rules entitling public companies to enquire into their beneficial owners, it is clear that the new regime will impose a material additional burden on private companies to investigate continually their beneficial ownership.
The consultation makes clear that the new rules will not be capable of binding overseas companies, so in circumstances where an English company is directly beneficially owned by an overseas entity, there will be no obligation to "look up the chain". This should give comfort to fund managers operating in the private equity and real estate industries, at least in terms of keeping confidential the identity of investors in funds domiciled overseas. Ownership and control of the companies that advise or manage those funds will be a different matter however – it seems clear that the current proposals would require disclosure of how such management companies are beneficially owned. And for English limited partnerships that own private equity assets through English companies, there will be a risk under the new rules as currently drafted that investors in those funds would be publicly disclosable.
Although the paper acknowledges that there may be circumstances where it will be inappropriate to disclose publically beneficial ownership data, the paper does not add much detail as to what those circumstances should or will be (and there is no current safe harbour for "commercially sensitive" information).
In the context of financial services, the proposed rules raise a further issue. On the acquisition of a financial services entity – such as a bank or insurer – that is regulated by the PRA or the FCA, its probable the assessment of the acquiror's suitability would include any detail set out in the register of beneficial ownership. This would go beyond current disclosure requirements of "close links" and persons of "significant influence", and has the potential to prove a stumbling block for financial services M&A.
The consultation closes on 16 September.
Further detail on the proposals:
- Part 22 of the Companies Act to be extended to all companies, including private companies, thereby (i) giving all companies the ability to identify their beneficial owners and (ii) requiring individuals to respond to companies’ requests for information. As is currently the case for public companies, it would be an offence to fail to respond, or to provide false information.
- Companies to be required to identify the beneficial owners of any block of shares representing more than 25% of the voting rights, or any other block of shares which would give the beneficial owner other “equivalent control” (to include known or suspected concerted arrangements between beneficial owners).
- Beneficial owners to be required to disclose their status as beneficial owners to the company (to be modelled on disclosure regime for companies listed on the Main Market of the London Stock Exchange – ie which requires disclosure by individuals with an interest of 3% or more) and to update this information within a certain number of days if it changes.
- If further information regarding a company’s beneficial ownership is required by law enforcement and tax authorities (eg in connection with a holding of less than 25%), such authorities to be able to obtain any relevant information without a court order.
- A central registry of beneficial ownership information to be maintained by Companies House. Companies to be required to provide beneficial ownership information along with details of legal owners on incorporation and periodically (or as it changes) thereafter.
- Companies to be required to make a declaration to Companies House if they are unable to identify any of their beneficial owners.
- Information provided to Companies House may be available to the public.
- Companies may be required to keep a register of beneficial ownership at their registered office and make this information available to the public.