From 6 April 2016, UK companies and LLPs will be required to keep a register of people that have significant control over them (PSCs). From 30 June 2016, the information on this register will need to be provided to Companies House when making the annual confirmation statement which will replace the annual return. This bulletin discusses the requirements relating to companies, which in the main also apply to LLPs.

1.    Who is required to keep a PSC register?

All UK incorporated companies (including dormant companies) whether limited by shares, limited by guarantee or unlimited will be required to keep a PSC register.  Any such entities incorporated on or after 30 June 2016 will need to file an initial statement of PSCs along with the other documents required on incorporation by Companies House.

Due to being subject to other disclosure and transparency rules, the following companies are exempt from this requirement:

  1. companies which are subject to Chapter 5 of the Financial Conduct Authority’s Disclosure and Transparency Rules, i.e. UK companies admitted to trading on AIM and the main market of the LSE; and
  2. companies with voting shares admitted to trading on a regulated market in the UK or EEA, or specified markets in Switzerland, the USA, Japan and Israel.

2.    Identifying PSCs

A person exercises “significant control” over a company and is a PSC if he meets one or more of the following conditions:

  1. Directly or indirectly owns more than 25% of the shares in the company.
  2. Directly or indirectly holds more than 25% of the voting rights in the company.
  3. Directly or indirectly holds the right to appoint or remove a majority of the board of directors of the company.  
  4. Has the right to exercise, or actually exercises, significant influence or control over the company.  (This condition only needs to be considered if none of conditions (a) to (c) above apply).
  5. Has the right to exercise, or actually exercises, significant influence or control over a trust or firm that is not a legal entity, but which would satisfy any of the first four conditions listed above ((a) to (d)) if it were an individual.

Please note that the specifics of each condition should be examined in detail to determine whether a company has any PSCs, as should all documents relating to a company’s constitution (such as its articles of association and any shareholders’ or joint venture agreements).  There are particular requirements relating to joint holders of shares, joint arrangements, shares provided as security, nominee shareholders and rights exercisable only in certain circumstances.  An individual’s cumulative holding or rights whether direct or indirect in relation to a group of companies will also need to be calculated and reflected in the PSC register if such holding or rights meet any of the conditions.

PSCs by their nature are individuals, however it is of course possible for a company to be owned by another legal entity.  If this is the case and such entity is both relevant and registrable, its details will need to be included in the PSC register as a Relevant Legal Entity (RLE).  

An entity is relevant if it:

  1. is required to keep its own PSC register;
  2. is subject to Chapter 5 of the Disclosure and Transparency Rules; or
  3. has voting shares admitted to trading on a regulated market in the UK, the EEA or specified markets in Switzerland, the USA, Japan and Israel.

Such an entity is then registrable if it is the immediate holding company of the company in question.  

3.    Exercising significant influence or control and excepted roles

Statutory guidance has been issued which explains and gives examples of what may constitute significant influence or control, although it is not exhaustive and careful consideration should be given to the facts of any particular case when ascertaining who may fall within this category.  If a person can ensure that a company, trust or firm generally acts as they want, this is indicative of “significant influence”.  If a person can direct the activities of a company, trust or firm, this would be indicative of “control”.  It should be noted that a person does not need to be working toward economic gain for there to be either significant influence or control.

Right to exercise significant influence or control:

This is a right which if exercised would lead to the actual exercise of significant influence or control.  If someone has such a right, then they will need to be entered in the PSC register, even if they have not exercised the right as yet.  Examples are where a person has:

  1. absolute decision rights over decisions relating to the running of the business of the company, e.g. adopting or amending a business plan, changing the nature of its business, or making additional borrowings; or
  2. absolute veto rights over decisions relating to the running of the business, e.g. adopting or amending a business plan, or making additional borrowings,

and “absolute” means that a person has such rights without reference to or collaboration with anyone else.

However, if a person holds absolute veto rights in relation to fundamental matters for the purpose of minority shareholder protection, e.g. in relation to changing the articles of association or issuing shares etc., this is unlikely on its own to be either significant influence or control.  

Actually exercises significant influence or control:

When deciding whether a person actually exercises significant influence or control over a company, all relationships that such person has with the company or those who manage it must be taken into account to see whether the cumulative effect of such relationships means they exercise significant influence or control.

Examples are:

  1. where a person is significantly involved in the management and direction of the company, e.g. where they regularly advise the board and such advice influences decisions which are made.  This will include shadow directors and could also include consultants; or
  2. where a person’s recommendations are always or almost always followed by the shareholders holding the majority of voting rights in the company when they decide how to vote, e.g. where a founder no longer holds a majority stake but his advice is always or almost always followed as to how to vote.

“Excepted roles”:

The statutory guidance provides details of those roles or relationships which would not in themselves automatically mean a person has a right to exercise or actually exercises significant influence or control over a company.  Examples include a person who:

  1. provides advice or direction in a personal capacity, e.g. lawyers or accountants;
  2. deals with the company under a third party commercial or financial agreement, e.g. a supplier, customer or lender; or
  3. is a director of the company, in particular the managing director, a sole director or a non-executive director/chairman who holds a casting vote.

Even if a person falls within a category of excepted roles, it is key to note that they may still have a right to exercise or actually exercise significant influence or control, e.g. where the role they undertake includes elements which exceed the role as it is usually understood or exercised, or it forms one of several opportunities which a person has to exercise significant influence or control.

Trusts and firms:

Much of the guidance above in relation to significant influence or control over a company also applies to trusts and firms.  However, it should be noted that a person has the right to direct or influence the running of the activities of a trust or firm if, e.g., they have the right to appoint or remove any of the trustees or partners, to direct the distribution of assets or funds, direct investment decisions, amend the trust or partnership deed, or revoke the trust or terminate the partnership. A person is likely to actually exercise significant influence or control over a trust or firm if they are regularly involved in the running of the trust or firm, e.g. they give instructions which are generally followed.  An active settlor or beneficiary of a trust may therefore exercise significant influence or control.

4.    Information to be inserted into the PSC register

A company’s PSC register must be kept up to date at all times, whether kept by the company or on the central register at Companies House (further details of which are below).  The register must never be empty and the non-statutory guidance produced by the BIS contains the wording to be used in the register in various circumstances.  

The information to be kept on the register for a PSC is as follows:

  1. Name.
  2. Service address.
  3. The country or state (or part of the UK) in which the individual is usually resident.
  4. Nationality.
  5. Date of birth.
  6. Usual residential address.
  7. The date on which the individual became registrable (which for existing companies will be 6 April 2016).
  8. The nature of the individual’s control (and the level of control within certain bands when the control relates to a percentage holding of shares or voting rights).
  9. Whether any restrictions on using or disclosing any of the individual’s particulars are in force.

The information required to be kept for RLEs is as follows:

  1. Corporate or firm name.
  2. Registered or principal office.
  3. The legal form of the entity and the law by which it is governed.
  4. If applicable, the register of companies in which it is entered (including details of the state) and its registration number.
  5. The date on which it became registrable.
  6. The nature of its control.
  7. Responsibilities relating to PSC registers

A company is required to take all reasonable steps to identify its PSCs and confirm their details, as well as to keep such details and register up to date (noting if and when a person also stops to be a PSC).  Failure to do so is a criminal offence, which is deemed committed by the company and each officer and carries the possibility of imprisonment for up to two years or a fine. 

Details of the steps taken to identify PSCs should be recorded in the PSC register and essentially a company is required to do what a reasonable person would do if they knew what the company knows. None of a PSC’s details may be entered in the register until all details have been confirmed.  Details of a RLE may be entered without the need to confirm the information.

5.    Process available to companies for acquiring information about PSCs

As part of its duty to identify its PSCs, a company must give notice to all those persons that it reasonably believes are PSCs or RLEs.  This notice must include a request for confirmation of whether such person is a PSC or RLE and their details as set out therein.  A notice should also be sent as soon as practicable to confirm details upon the company knowing or having reasonable cause to believe that there has been a change in a PSC’s details or circumstances which may mean that they are no longer a PSC (this will not be required if the company has been informed of such change directly or by someone on behalf of a PSC).

A company may also give notice to anyone whom it reasonably believes holds information about a PSC (which can include lawyers and accountants).  A recipient of a notice has one month to respond from the date of such notice and must have a valid reason for not responding if this is the case.   There is no definition of what constitutes a “valid reason” and it seems to be up to the company in question to decide what will qualify.  It can request information in support of any reasons given in order to make this assessment.  

If an individual or legal entity does not comply with the disclosure obligations following notice by the time specified, or give a valid reason sufficient to justify their non-compliance, a company may issue a warning notice and then, if there is still no response, may issue a restrictions notice.  A company must have regard to the effect of such a notice on the rights of third parties in respect of the restricted interest (namely holding shares, voting rights or the right to appoint or remove a majority of the directors), but issuing a restrictions notice allows a company to prevent the exercise of rights or their transfer, the issue of shares pursuant to an existing offer or agreement, or payment in relation to a liquidation.  It also permits the company to apply to the court to be able to sell a restricted interest.

If the restrictions are breached, the person in question (or if it is a legal entity, the entity and all of its officers) commits an offence, as does the company and all of its officers if shares are issued whilst restrictions are in place.  A company may withdraw a restrictions notice if certain requirements have been met.

6.    Keeping the register at Companies House and updating PSC information

Companies may choose to keep their PSC register themselves or to keep this register centrally with Companies House. If a company chooses to keep its own register, the register must be kept up to date at all times.  From 30 June 2016, such company will be required to update its PSC register on the central register at Companies House each year in its confirmation statement.

A company may alternatively elect to keep its PSC register on the central register at Companies House.  In order to do this, a company will need to make such election on incorporation or after incorporation by making an election to Companies House following giving written notice of the company’s intention to do so to its PSCs.  Such an election comes into force when registered by the registrar and the company must include a note stating that its PSC register is now kept at Companies House in its now historic PSC register (which it must retain).  PSC registers kept solely at Companies House must be kept up to date at all times.

2017 is likely to see the requirement for companies to update the public register at Companies House at the time of any change to their PSC register (regardless of how they keep their register) to ensure that the register is current and complies with anticipated European law in respect of money laundering.

7.    Protected information

The PSC register may be reviewed or copies provided on request in the same way as a company’s other registers.  A PSC’s usual residential must be kept on the PSC register, but remain confidential and should not be disclosed.   It is possible for an application to be made to protect a PSC’s information from being disclosed on the public register at Companies House.  Such applications may be made by the individual in question or the company on such person’s behalf with their consent.

An application may be made from 6 April 2016 (in advance of the requirement to make PSC registers public), will be considered on a case by case basis and can be made to protect either a PSC’s usual residential address only or all of their information.  Such protection will apply in relation to the public record at Companies House and also the company’s own PSC register if it keeps this itself.

Protection will only be granted if the application contains evidence proving a serious risk of violence or intimidation to the PSC or people who live with them.  If the application is to restrict the disclosure of the PSC’s residential address, then the risk must come from either the activities of the company itself or another company in relation to which the PSC already has protection.  If the application is in relation to all of a PSC’s information, the risk must come from the activities of the company or from the association of the PSC with the company (in the latter case the application must show that if publically identified, the PSC’s characteristics or attributes when associated with the company put them or someone they live with at risk).  

The information in question will be protected as soon as an application is received by the registrar at Companies House and will also need to be protected in the company’s own register from this time.  Applications may be made before a person becomes a PSC or a company is incorporated.  If an application is refused, the applicant has 42 days to appeal during which time the protection will continue.  Once an application is granted, a PSC’s information will be protected indefinitely.