Since 6 April 2016, virtually all UK incorporated companies and LLPs have been required to prepare and maintain a Register of People with Significant Control (the “PSC Register”). The purpose of the register is to disclose those individuals (“PSCs”) and “registerable relevant legal entities” (“RLEs”) who have significant control over the company, with such information being made available to the public via records held at Companies House. We have considered the PSC Register in some detail in previous blogs but what are the implications for lenders who take security over shares in a Scottish company?
In order to take valid security over shares in a Scottish company, it is necessary for the shares to be formally transferred into the name of the lender. Typically the share security agreement will provide that until the occurrence of a certain trigger event (e.g. an event of default or enforcement event), the lender will vote in accordance with the instructions of the entity that has granted the security (the “Chargor”) and shall account to the Chargor for all dividend payments. While the lender holds title to the shares, the Chargor retains control.
Guidance from the Department for Business, Energy & Industrial Strategy (“BEIS”) makes it clear that the intention is that it should be the person or entity who actually exercises control over the shares or voting who should appear on the PSC Register. Indeed the legislation provides a carve out which, on the face of it, suggests that a lender (or, in the case of a syndicated loan, the security trustee) who holds shares by way of security does not require to be entered on the PSC Register, at least until it actually beings to exercise control. So, what is the problem? On closer reading, the legislation has not been properly drafted so as to effectively carve-out lenders (and security trustees) who actually take title to the shares. The guidance from BEIS is nothing more than its view. There is no certainty that a court would interpret the legislation in the same way.
So, what are the implications for lenders who have or are going to take security over Scottish shares?
- A company must take reasonable steps to identify any PSC or RLE. In order to do this, they must give notice to the PSC or RLE seeking confirmation of their details. In the case of a Scottish company whose shares have been pledged, a request for information will be made to the lender as well as the Chargor. The lender and the Chargor both have a statutory duty to respond to an information request; failure to respond could result in the company issuing a warning notice. The PSC and/or RLLE then have a month in which to respond to the notice failing which, the company may (at its discretion) issue a restrictions notice. If a restrictions notice is issued to a lender, there are significant implications: it prevents the shares from being transferred without a court order meaning that lender would be unable to enforce its share security without first applying to the court to have the restriction lifted.
- Any individual or entity that knows or ought to know that it is a PSC or RLE (as applicable) must notify the company to that effect. This means that lenders who hold Scottish shares in security now have a statutory duty to notify any Scottish company whose shares have been pledged in their favour (assuming the lender has not already responded to an information request from the company, as outlined in point 1 above).
- Failure to comply with the statutory obligations set out above is a criminal offence for both the company and any PSC or RLE.
In light of the possible implications for the enforceability of such share security, we would recommend lenders and security agents complete an audit of all Scottish share security held.