Banking & Finance 1 Who holds the reins? A brief introduction to the new People with Significant Control regime Anthony Warner Senior Associate +44 20 7919 1376 Anthony.Warner@bakermckenzie.com Introduction Since 6 April 2016, most companies (as well as limited liability partnerships and the lesser-spotted Societates Europaeae) are required to maintain a statutory register of people who have significant control over them. From 30 June 2016, when next completing their Annual Return (now helpfully re-branded as a "Confirmation Statement"), the contents of this register will be reflected in their publicly-searchable Companies House filings. The People with Significant Control (PSC) regime is part of the UK's commitment to implementing a publicly accessible central register of individuals (and in some cases legal entities) who ultimately own and control UK companies - so that we can know who holds the reins. It has been implemented by a range of legislative tools, including amendments to the Companies Act 2006. The regime establishes a number of requirements as to what information must be registered and in which circumstances, and also creates a sanctions regime (including criminal sanctions). The rules are complex and nuanced, so care is required to ensure compliance. For lenders, the PSC regime raises specific additional considerations when taking security over a company's shares. The key considerations (each of which we have discussed in brief below) include: 1. Becoming a person with significant control when taking security; 2. Becoming a person with significant control when enforcing security; and 3. Ensuring that the security grantor complies with the PSC regime, given that non-compliance can result in restrictions being applied to the transfer of the shares or the exercise of any rights attached to the shares, thereby jeopardising the lender's security. Becoming a person with significant control when taking security The test for whether or not a person is a PSC of a company can be met by (a) holding more than 25% of its shares (b) holding more than 25% of its voting rights, or (c) having the right to appoint or remove a majority of its directors. If none of those tests is satisfied, a further way to become a PSC is where a person has the right to exercise or actually exercises "significant influence or control" over a company. Banking & Finance 2 Lenders will already be aware (in particular in light of the Enviroco case) of the pitfalls of taking an English legal mortgage over shares and becoming the legal owner of the shares on day one. Because of the pitfalls, lenders will ordinarily opt for equitable mortgages (or fixed charges) over shares, with the control and ownership rights only kicking in after an enforcement event. Therefore, provided security documents are drafted carefully, it is unlikely that a lender taking an equitable mortgage or a fixed charge over the shares of an English company will trigger the test for being a PSC on day one. So far, so good. Further, the guidance that the government has helpfully produced on the PSC regime provides that a lender dealing with a company under a third party financial agreement (e.g. a loan agreement), would not, on its own, result in the lender being considered to be exercising significant influence or control. Becoming a person with significant control when enforcing security In a distress scenario that leads to enforcement, everything changes. At that point, the lender may seek to enforce its security by for instance: Directing the chargor to exercise its voting rights in a particular way; Transferring the shares to a nominee; or Exercising such influence on the borrower's affairs (even if it is not exercising the security in respect of the voting rights) which could lead to the lender being taken to have significant influence or control over the borrower. Undertaking the above actions could mean that the lender does become a PSC, in which case the PSC register would need to be updated to record the "required particulars" of the lender. In reality, if an enforcement event occurs, the PSC regime is not likely to be the first item on either the lender's or the borrower's mind. It will therefore be for their advisors (whether internal or external) to ensure that the PSC regime is complied with. Ensuring the security grantor's compliance with the PSC regime If a company fails to maintain its PSC register in accordance with the PSC regime, criminal sanctions can be imposed on the company, its directors, those who have failed to respond to a request for information from the company and even those that know they should be on the PSC register but who fail to provide the company with the requisite details for the register. In addition the company (not the chargor, but the subsidiary over whose shares security is being granted) may freeze the PSC's interest in the company by restricting the: Banking & Finance 3 Transfer of shares; Exercise of any rights in respect of the shares; or Payments in respect of the shares. It is worth noting that a company is obliged to consider the interests of third parties before imposing restrictions on the shares and that any restrictions may be lifted by the company if it discovers that the rights of a third party are being unfairly affected. However, because of the criminal sanctions that are attached to failing to comply with the provisions of the PSC regime, many companies and their directors will be keen to follow the spirit, as well as the letter of the law. Well advised lenders will be uncomfortable relying on the company's obligation to consider the interests of third parties before imposing restrictions or lifting them once imposed. It is likely that lenders will want to impose a range of additional contractual obligations on the security grantor and/or the company (whether in the form of additional conditions precedent to funding, undertakings, representations, events of default, or indeed all of the above) to ensure compliance with the PSC regime. Conclusion The PSC regime seeks to achieve a greater degree of transparency and clarity over the ownership and control of English companies and LLPs. However, the legislation implementing it is (somewhat ironically) rather complex and nuanced in its details. Clearly lenders (and indeed borrowers) will want to ensure that their security assets are in compliance with the PSC regime, and so appropriate training and procedures will need to be put in place. Please do not hesitate to contact us if you would like further advice on this matter (or indeed any other).