As a result of the heightened focus on sanctions in the light of the Russian invasion of Ukraine, and the relevant provisions of the Economic Crime (Transparency and Enforcement) Act 2022 relating to sanctions coming into force in the UK, companies should be alert in relation to the payment of dividends (or indeed any other corporate actions that would result in funds being paid or an economic benefit passing to shareholders) where the beneficial owner or other person ultimately receiving the funds or economic benefit is a sanctioned person. The ability of a company to pay money to shareholders that are the subject of sanctions (or for such shareholders to receive consideration) may be prevented by various international sanction regimes. Companies may also be prohibited from paying money to accounts at financial institutions that have themselves been sanctioned.
What should companies be aware of?
For listed and AIM companies in particular, the share register itself is unlikely to reveal the beneficial owner of the shares who is ultimately entitled to a dividend payment or other economic benefit, as the shares are held through nominees and the information that the company has on the beneficial owners may be incomplete. This may also be the case for some private companies.
For UK companies on AIM and private companies, they should have the information on beneficial share ownership recorded in the register of persons with significant control (PSC register) which can be checked prior to making a dividend payment. As a reminder, UK companies are under a duty to investigate, obtain and update information on registrable persons and registrable entities under the PSC regime.
For UK listed companies (ie those on the main market in the UK), they are not subject to the PSC regime, so have to rely on (i) notifications made under DTR 5 of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules and (ii) information received pursuant to requests made under section 793 Companies Act 2006 (CA 2006). Under Part 22 CA 2006, a public company (but not a private company) can investigate the identity of any person it knows, or suspects, is (or was at any time in the preceding three years) interested in its shares by sending them a notice in accordance with section 793 CA 2006. There is a difference between the tests for determining whether a person has to make a disclosure in respect of a holding in a company under DTR 5 and whether they have an interest for the purposes of a section 793 notice, as the former (derived from the EU Transparency Directive) is concerned with the holding of voting rights.
What further steps can companies take?
Traded companies will no doubt be speaking to their registrars and reviewing their shareholder register against the available databases of sanctioned persons, and also ensuring that their registrars and brokers have robust processes in place to check shareholder identity.
The Chartered Governance Institute (formerly ICSA) recently published a blog post, suggesting that companies make use of section 793 CA 2006 as noted above to identify whether they have shareholders who are proscribed individuals. In practice, this is likely to be a judgement that companies have to make, driven by an assessment of the risks and what is proportionate and practical in the circumstances.
In the circumstances, companies may be considering whether they should engage third party investigation firms who carry out further analysis of the shareholder register to identify the underlying beneficial owners. This will assist companies to demonstrate that a responsible process and analysis has been carried out where they are undertaking a relevant corporate action. There will obviously be a cost incurred in such analysis, and it will have limitations, such as the size of the shareholdings that will be investigated and it will only be valid at the time that it is carried out. Whether companies wish to engage with such further analysis is likely to depend on factors such as the nature and geography of their shareholder base, their underlying business, and the size of the benefit to be paid out to shareholders. In particular, companies may be interested in further investigation into nominee accounts or shareholders where it is unknown who is behind significant blocks of shares, or where the nominee is not regulated (eg by the Financial Conduct Authority).
In circumstances where a company knows that it has (or is able to identify) sanctioned shareholders, specific advice should be taken as regards withholding payments to such shareholders.