At the G8 summit in June, the UK government committed to reforms designed to increase transparency in the ownership and control of companies. This is intended to help in the fight against tax evasion, money laundering and terrorist financing while improving the investment climate, making it easier to do business and fostering a greater level of trust in UK companies, seen as an essential element of a business environment that encourages investment and growth.
As the first stage towards achieving this aim the Department for Business Innovation and Skills (BIS) published a discussion paper on 15 July outlining a range of proposals aimed at enhancing the transparency of UK company ownership and increasing trust in UK business.
Section A: Proposals to enhance transparency
The key proposal in this area is for the introduction of a central registry of beneficial ownership of all companies incorporated in the UK. The register would be kept by Companies House but companies would be required to provide the information. A beneficial owner would be defined using the Money Laundering Regulations 2007 definition, being any individual with an interest in more than 25% of a company's shares or voting rights, or who otherwise exercises control over how the company is run. Split holdings and holdings of concert parties would be aggregated.
The regime would apply to UK companies, with the possible exception of certain companies. BIS's provisional view is that companies which are traded on the Main Market of the London Stock Exchange should be exempt because they are already subject to stringent ownership disclosure requirements. The discussion paper also asks for feedback on whether the beneficial ownership of other legal entities should also be held in the central registry, suggesting that there is a strong case for saying that limited liability partnerships should also be included in such a system.
To enable the identity of beneficial owners to be established, BIS intends to extend Part 22 of the Companies Act 2006 (information about interests in shares) so that it covers all companies, not just public companies. BIS is also considering imposing a requirement on companies to identify beneficial owners holding 25% of the company's shares (or voting rights). If a company is unable to identify beneficial owners it could apply to the courts and BIS is considering requiring a company to notify Companies House if it is unable to identify beneficial owners. It is proposed that beneficial owners would have to notify companies that they are a beneficial owner and that a company would need to disclose publicly the total number of shares and voting rights at least annually.
The discussion paper also raises the issue of whether the information on the registry should be made public. The options suggested include restricting the information to certain law enforcement and tax authorities, making the information available to regulated entities to enable them to carry out customer due diligence checks or making the information available to the public. There is an acknowledgement that, if the information were to be made available to the public, there may be concerns about the impact on companies and that certain exemptions may need to be put in place for those who would be vulnerable if their personal information is put on the public record.
BIS is also inviting discussion as to the additional measures that might be needed in order to ensure that beneficial ownership information is obtained. Other issues include the scope of information to be provided, the frequency of reporting and the measures necessary to ensure the accuracy of the information.
Other proposals in Section A include:
changing the annual return process to simplify filing requirements for all companies with the suggested option of combining the annual return with the annual accounts and other options to reduce the duplication of information required by different agencies and government departments. A full consultation on these proposals will follow later this year
the banning of the creation of new bearer shares and a requirement that existing bearer shares be converted to ordinary shares within a certain time period
the possibility of prohibiting the use of corporate directors
various options in relation to nominee directors including the introduction of an obligation to disclose arrangements of this type to Companies House with the possibility of automatic disqualification from acting as a director for breaching such an obligation or, alternatively, taking measures to increase awareness among nominees of their duties as directors. BIS acknowledge that there may be legitimate business reasons, in some circumstances, for nominee director arrangements.
Section B: Proposals to increase trust in UK business
The discussion paper also seeks feedback on proposals to increase trust in UK business in order to encourage investment and growth.
The most radical of the proposed reforms is a suggestion that directors' duties under CA2006 in key sectors, such as banking, should be amended to create a primary duty for directors of banks to promote financial stability over the interests of shareholders. New proposals would also give sector regulators broad powers to disqualify directors in the relevant sector or generally.
BIS also made the following additional proposals aimed at promoting transparency:
adding several factors to those set out in the Company Directors Disqualification Act 1986 (CDDA) which can be taken into account when determining disqualification. These new factors are: any material breaches of relevant sectoral regulation; the scale of loss suffered by creditors; the impact on wider society and any previous failures of the individual director
the introduction of a scheme to make directors financially liable for reckless behaviour and to allow creditors to receive compensation. Suggestions include giving administrators the right to bring civil claims for wrongful trading, the grant of statutory powers for liquidators to sell or assign wrongful trading actions, and the grant of new powers to the courts to make compensatory awards
the possibility of extending the time limit for disqualification proceedings in insolvent company cases from 2 to 5 years
the introduction of education or training for disqualified directors to help them to run a successful company in future - such training would be at the directors' expense but their agreeing to undertake it may, potentially, reduce the length of any ban
the extension of overseas restrictions to enable the disqualification in the UK of any director found to have been disqualified or convicted of a criminal offence in connection with managing a company overseas
a review into the use of pre-pack administrations.
The proposals in the discussion paper raise a number of concerns. In particular, on transparency, the proposals for a register of beneficial owners will arguably impose a significant additional burden on private companies at a time when the government is supposedly committed to trying to lessen the administrative burden with its 'Red Tape Challenge'. We are also sceptical as to whether it is likely, in practice, to deter or uncover unlawful behaviour. And on trust, the idea of additional 'public interest' duties for directors in key sectors seems to muddle industry regulation and company law, while the proposals to make directors financially liable run the risk of deterring directors from taking the calculated risks which are essential to grow a business (or indeed possibly from taking a directorship at all).
It seems clear that these proposals will provoke a great deal of debate and comment and what will emerge after responses to the discussion draft are received and analysed may be significantly different from what has been proposed in the discussion paper.
The deadline for responses to the discussion paper is 16 September 2013. If you would like any assistance with compiling a response please contact your usual Hogan Lovells contact or one of the listed contacts.
The discussion paper can be found here.