New obligations on UK businesses to disclose details of their controllers

New law comes into force in April 2016 aimed at making the control of UK businesses more transparent. For the vast majority of UK businesses, compliance with the new law will be straightforward.

The new law also applies to a UK limited liability partnership and a Societas Europaea registered in the UK. In this briefing, unless otherwise indicated, "company" includes such entities.

The Government has issued extensive guidance to help businesses prepare for the new law, which can be found here. The guidance includes:

• non-statutory summary and long-form guidance (PSC guidance); and
• statutory guidance on the meaning of individuals exercising or having the right to exercise significant influence or control.

Failure to comply with the new law is a criminal offence, punishable by an unlimited fine for businesses and/or up to two years' imprisonment for culpable individuals.

The remainder of this briefing explains the new law in greater detail and will be of particular relevance to UK companies not falling within the categories referred to in the box opposite (such as unlisted companies with multiple shareholders and subsidiaries of overseas companies).

1. What is the aim of the new law?

The aim of the new law¹ is to allow third parties to identify any individuals who exercise direct or indirect significant control over a UK company through inspection of publicly available records, while imposing no greater disclosure burden than is consistent with that aim.

Thus, a UK subsidiary of another UK entity which is in turn controlled by an individual does not need to disclose the identity of the individual; it only needs to disclose the details of its parent entity, on the basis that third parties will be able to inspect that entity's register to ascertain the identity of the individual. If, however, the parent were an unlisted overseas company, the UK entity would be required to disclose the identity of the individual (and not the overseas parent, as that would be superfluous information). This distinction gives rise to the inelegant concept of registrable relevant legal entity (RLE) discussed further below.

2. Who needs to keep a PSC register?

UK companies

Unlisted companies registered in the UK are required to keep and maintain a PSC register from 6 April 2016 (including companies limited by shares, limited by guarantee and unlimited companies).

Publicly traded companies whose shares are admitted to trading on the following markets are exempt and do not need to keep a PSC register:

• main market of the London Stock Exchange plc;
• AIM;
• ISDX Growth Market;
• regulated markets in other EEA states; and
• specified non-EEA regulated markets in the USA (such as the New York Stock Exchange and NASDAQ), Japan, Switzerland and Israel.

These publicly traded companies are exempt because they comply with alternative disclosure obligations, requiring them to disclose their major shareholders via stock market announcements.

UK subsidiaries of a publicly traded company (including dormant subsidiaries) must keep a PSC register.

Other UK entities

A UK limited liability partnership (LLP) and a Societas Europaea registered in the UK must also keep and maintain a PSC register from 6 April 2016, and the PSC regime will apply to them with appropriate modifications.

Partnerships and limited partnerships are not required to keep a PSC register. A UK company or UK LLP acting as a general partner in a limited partnership structure will need to keep a PSC register.

3. What must the PSC register contain?

In summary, the PSC register must contain details of:

(a) any individual who exercises direct significant control over the company;

(b) the first legal entity (if there is one) above the company in the corporate structure which is subject to an appropriate disclosure regime, that is, a UK unlisted company or a publicly traded company (which could be an overseas company) of the type described above; or

(c) where there is no entity above the company which meets the criteria in (b), the details of any individual who has an indirect majority stake in the company.

A PSC register must not be blank; if there are no persons or legal entities within the above categories, that must be stated and if the company is in the process of obtaining information, that must be stated.

The PSC regime requires companies to take reasonable steps to identify persons and legal entities required to be entered in the PSC register, and the PSC guidance suggests appropriate steps that companies should take (see section 8 below).

The rules prescribe the specific details that must be recorded for such individuals and entities, and to what extent that information must be publicly available (see section 9 below).

4. Who is a person with significant control?

A person with significant control (PSC) can only be an individual (but nationality and residence are irrelevant).

A PSC in a company is an individual who meets at least one of the five conditions summarised in the box below. The first, second and third conditions define a PSC by reference to share ownership, voting rights and the ability to appoint or remove a majority of the board of directors. The fourth and fifth conditions define a PSC by reference to an individual possessing or exercising "significant influence or control".

Where the first, second or third conditions are satisfied, the fourth and fifth conditions will be irrelevant. The fourth and fifth conditions are unlikely to be of relevance in the vast majority of cases but are discussed in greater detail in section 7 below. All of the conditions are appropriately modified for LLPs.²

For the purposes of the PSC regime, the government, government departments, local authorities and corporations sole (legal entities consisting of one person only) are treated as individuals.

"Indirect" is not defined such that an individual with a, say, 26 per cent stake in the parent company of the company will constitute a PSC in relation to the company; rather it requires the individual to have a majority stake, directly or via intermediate majority stakes, in the legal entity that has significant control of the company.

A PSC will have a majority stake in a company if it: holds or controls a majority of the voting rights; can appoint or remove the majority of the board; or has the right to exercise or actually exercises dominant influence or control over the company.

Details of a company's direct PSC must be entered in its PSC register. However, whether it must include details of any indirect PSC depends on whether that individual's interest is held through an RLE; if it is then it is the details of that RLE, and not the indirect PSC interests, that must be disclosed, as explained further below.

5. What is an RLE?

The PSC register must include the details of an entity that is a registrable relevant legal entity (RLE) in relation to the company.

In practice, this means that a company's RLE will often be another UK private company, a UK LLP or a publicly traded company with voting shares admitted to trading on one of the markets specified above.

By way of example, a UK company owned by a Japanese company listed on the Tokyo stock exchange (either direct or via non-UK intermediate companies) would disclose that it has no PSC, and that the Japanese listed company is its only RLE. An unlisted company registered in another country (an overseas company) cannot meet the test for an RLE and so cannot be entered on a company's PSC register.

If a company has disclosed details of an RLE (e.g. its parent company) and it has no direct PSC, then it is not required to make any further disclosure, in particular of any indirect PSC; the obligation to disclose the existence and details of any such individual lies with the appropriate legal entity "up the chain", access to which (albeit possibly indirectly) the company has given to third parties by virtue of identifying its RLE(s).

6. Examples

The provisions governing control set out in the preceding section of this briefing are illustrated in the example scenarios below. The examples involve establishing whether or not the parties are PSCs or RLEs by considering if they satisfy the first and second PSC conditions (holding more than 25 per cent of the shares or votes). It is assumed that none of the parties are PSCs by virtue of being able to remove the majority of the directors (the third condition) or otherwise exercising significant influence or control (the fourth condition). The percentage thresholds refer to share ownership and it is assumed that one share equates to one vote.

Example 1: UK listed company group

S is a company listed on the main market of the London Stock Exchange. It is not required to keep a PSC register as it is subject to the FCA's Disclosure and Transparency Rules (DTRs).

B, C and D are UK private companies and each company is required to keep a PSC register. An enquirer looking at D's PSC register should be able to follow the chain of control up to the ultimate PSC or RLE.

D's PSC register

C should be entered as it is an RLE holding directly more than 25 per cent of the shares in D.

Neither B nor S will be entered as, although they are entities satisfying two of the RLE requirements, they are not the first such entity in the corporate chain.

Mr. Blue should be entered as he is a PSC holding directly more than 25 per cent of the shares in D.

C's PSC register

B should be entered as it is an RLE holding directly more than 25 per cent of the shares in C. The register should also expressly state that C has no PSCs.

B's PSC register

S should be entered as it also meets the test for an RLE, holding directly more than 25 per cent of the shares in B. It is unnecessary to enter details of S's shareholders in B's PSC register. An enquirer will be able to determine details of S's major shareholders as S is a listed company, and is subject to the DTRs (notably DTR5).

Example 2: Mixed UK / overseas company group

X is an unlisted overseas company and is therefore not required to keep a PSC register. Y and Z are UK private companies and each is required to keep a PSC register. An enquirer examining should be able to follow the chain of control up to the ultimate PSC or RLE.

 

Z's PSC register

Y should be entered as it is an RLE holding directly more than 25 per cent of the shares in Z. Mrs Sky should be entered as she is a PSC holding directly more than 25 per cent of the shares in Z.

Y's PSC register

X will not be entered on Y's PSC register as it does not qualify as an RLE; as an unlisted overseas company, X is neither required to keep a PSC register, nor is it a publicly traded company subject to its own disclosure requirements.

Y must look up through X to identify and record details in its PSC register of the first PSC or RLE holding a majority stake in X, as any such PSC/RLE is treated as holding an interest or control indirectly in Y.

Mrs Side has a majority stake (more than 50 per cent of the voting rights) in X, which means that she is a PSC in relation to Y and should be entered in Y’s PSC register.

Mr Bright does not have a majority stake (more than 50 per cent of the voting rights) in X, which means that he is not a PSC in relation to Y. However, if Mr Bright held shares in Y directly, it is possible that he could be entered as a PSC in Y's PSC register if the aggregate of his direct and indirect holdings exceeded 25 per cent of Y's shares or votes.

If, in this example, X was an overseas publicly traded company listed on an EEA market (or on one of the other specified markets in the USA, Israel, Japan and Switzerland), it could be entered in Y's PSC register as it would meet the test for being an RLE. In such circumstances, Y would not need to go any further up the ownership chain.

Example 3: Typical private equity structure

 

D's PSC register

C should be entered as it is an RLE holding directly more than 25 per cent of the shares in C. The register should also expressly state that D has no PSCs.

C's PSC register

B will not be entered on C's PSC register as it does not qualify as an RLE (being an unlisted overseas company).

Even if the management holding of 26 per cent in B is held by one individual, that individual will not be a PSC in relation to B because it is not a majority stake in B.

A limited partnership is not a legal entity and limited partnership interests are generally ignored for the purposes of the PSC tests, so they will not be entered in C's PSC's register.

Whether the General Partner (GP) is entered in the PSC register will depend on whether it holds a majority stake in B and on whether it is a UK company. A GP in this scenario would normally satisfy the majority stake requirement because it will have control over how the limited partnership's votes in B are cast and control is equated to "holding" for these purposes. If the GP were a UK company then it would be an RLE in relation to C and be entered in C's PSC register. As the GP in this example is not a UK company, C will need to ascertain whether there is any UK company (or other entity subject to disclosure requirements such as a publicly traded company) above the GP (which, if there is, it will register as an RLE) or, if not, whether there are any individuals with a direct or indirect majority stake in the GP. If there are not, then C's PSC will record that it has no RLEs or PSCs.

7. Identifying PSCs with significant influence or control

Where a person does not meet the first, second or third conditions for being a PSC, it is necessary to consider whether the person could nevertheless be a PSC because he has the right to, or actually exercises, significant influence or control: (a) over the company (the fourth condition for being a PSC); or (b) over the activities of a trust or a firm which meets any of the first four conditions (the fifth condition for being a PSC).

The Government's statutory guidance on what constitutes significant influence or control in the context of companies and LLPs assists in determining whether a person falls within the scope of the fourth and fifth conditions. The statutory guidance sets out non-exhaustive examples of when a person may fall within these conditions, as well as identifying some "excepted roles" where a person will generally not do so. Key points to note from the statutory guidance are set out below.

What does significant influence or control mean?

The statutory guidance distinguishes between situations where a person has a right to exercise significant influence or control, and where a person actually exercises it. The distinction is important because a person who holds a right that constitutes significant influence or control may be a PSC even though they do not exercise that right.

The right to exercise significant influence or control over a company

A person is considered as having the right to exercise significant influence or control over a company (thereby satisfying the fourth condition for being a PSC) if he or she holds absolute decision rights or absolute veto rights in relation to the running of the business of the company. The reference to "absolute" means that the person holds the rights without reference to, or collaboration with, anyone else.

Absolute decision or absolute veto rights could arise from provisions in a company's articles of association, a shareholders' agreement, rights attached to the shares or in some other way. Non-exhaustive examples of such rights include situations where a person can:

• adopt or amend the company's business plan;
• change the nature of the company's business;
• appoint a majority of the company's board; or
• agree any additional borrowing from lenders.

However, veto rights that protect a person's minority interests in the company, such as preventing the articles from being amended or prohibiting further shares from being issued, will not, on their own, be viewed as giving the person the right to exercise significant influence or control.

Exercising significant influence or control over a company

In determining whether a person actually exercises significant influence or control over a company (thereby satisfying the fourth condition for being a PSC), all roles and relationships that the person has with the company, or with the company's directors, must be considered to establish whether the cumulative effect of such relationships means that the person is actually exercising significant influence or control.

The statutory guidance gives some non-exhaustive examples of when a person would need to be recorded as a PSC as a consequence of actually exercising significant influence or control, including situations where:

• a person who is not a director, is regularly consulted on, and consistently directs or influences board decisions;
• a person without a significant shareholding is able to make recommendations which are routinely followed by the shareholders holding the majority of a company's voting rights; or
• a director owns important company assets or has key business relationships which enable him to also exercise significant influence or control.

Excepted roles

The statutory guidance specifies certain "excepted" roles and relationships that would not, on their own, result in a person being considered as exercising significant influence or control over a company (and consequently being construed as a PSC under the fourth condition), including situations where a person:

• makes recommendations to shareholders on a one-off occasion which are voted on by shareholders;
• has a commercial or financial relationship with the company (for example, as a customer, supplier or lender);
• is a director of the company (including a director with a casting vote);
• is an employee acting in the course of employment; or
• provides professional advice.

However, these examples are non-exhaustive and such a person may be a PSC if his role or relationship differs in material respects or includes significantly different features from how the role or relationship is generally understood or exercised.

Significant influence or control over a trust or a firm

The fifth condition applies when, in relation to a company, a trust or firm satisfies any of the first four PSC conditions (that is, it holds over 25 per cent of the shares or voting rights, has the right to appoint or remove a majority of board, or exercises significant influence or control over the company).

Under those circumstances, the fifth condition enables the trust or firm to be "looked through" in order to identify any person who has the right to exercise, or actually exercises, significant influence or control over the activities of the trust (for example, a trustee or beneficiary) or firm (for example, a particular member). Details of that person must be recorded in the company's PSC register.

As with the fourth PSC condition, the statutory guidance distinguishes between situations where a person has the right to, or actually exercises, significant influence or control over the activities of a trust or firm.

A person will have the right to exercise significant influence or control over the activities of a trust or firm where he or she has the right to direct or influence the running of the activities of the trust or firm. A person will be considered as exercising significant influence or control over a trust or firm if he or she is regularly involved in the running of the trust or firm. In both cases, the person will need to be entered as a PSC in the company's PSC register.

Regardless of whether or not the fifth condition is applicable, it is important to note that a person who is a trustee or a member of a firm (such as a member of an English partnership) and satisfies any of the first four conditions for being a PSC in relation to a company can be entered on the company's PSC register.

8. Practical steps for identifying PSCs and RLEs

If a company fails to take reasonable steps to identify its PSCs and/or RLEs, both the company and its officers could commit a criminal offence, which is punishable by an unlimited fine and/or up to two years' imprisonment.

Where it is unclear who a company's PSCs and/or RLEs are, the PSC guidance suggests that companies should take the steps set out in the box below in order to comply with the law. However, the steps are not definitive or exhaustive, and further actions might be necessary, depending on the circumstances.

9. Recording information on the PSC register

A PSC register can be completed if the company has all the information it needs about its PSCs and/or RLEs. In the case of an RLE, a company must update its PSC register as soon as it becomes aware of the relevant information.

However, in the case of a PSC, the company cannot update its PSC register until the information has been confirmed by, or with the consent of, the individual PSC.

The PSC register must record the information set out opposite for each of its PSCs and/or RLEs.

PSC register cannot be blank

The PSC register cannot be blank and must either:

• show complete and up-to-date details for all registrable PSCs and/or RLEs;
• confirm that the company does not have any PSCs and/or RLEs if all reasonable steps to identify them have been taken; or
• give information about the status of the company's investigations, for example, specifying that the company has not yet completed taking reasonable steps to find out if there is anyone who is a registrable PSC or RLE in relation to the company.

Annex 2 of the PSC guidance includes certain prescribed statements with official wording that must be inserted in the company's PSC register to describe the status of the company's investigations in ascertaining its PSCs and/or RLEs.

Residential address

A PSC's residential address is not generally publicly disclosable, although it is available to public authorities and credit reference agencies. However, where there is a serious risk of violence or intimidation due to the activities of the company, it is possible to apply to Companies House to prevent any PSC information being made public (unless it is required by law enforcement agencies). The protection regime for PSCs mirrors the existing regime for the protection of directors' residential addresses.

The nature of control

The PSC register must specify which of the five conditions a PSC or RLE satisfies for being registrable. If the condition satisfied involves the holding of more than 25 per cent of the company's shares or voting rights, the PSC register must also identify one of three bands that the PSC/RLE falls within: more than 25 per cent and up to 50 per cent; more than 50 per cent and up to 75 per cent; or 75 per cent or more.

Monitoring and updating

There are obligations on both companies and PSCs/RLEs to ensure that the PSC register is kept up to date. When a company knows or suspects that information relating to the nature or extent of a PSC's or RLE's interest has changed, it must take steps to verify the change by serving an investigation notice as soon as reasonably practicable, requiring the PSC/RLE to provide information about the change. The PSC register must also be updated if an individual or legal entity stops being a PSC or RLE (for example, following a share disposal).

If the PSC or RLE does not respond to the company's notice within one month of receiving it, a note to that effect must be entered in the PSC register. The company will not need to serve notice on a PSC where the company has already been notified of a change by, or with the consent of, the PSC.

Public inspection

A company must make its PSC register available for inspection at the company’s registered office or, provided that the necessary notifications have been made to Companies House, another inspection location. Subject to certain safeguards, any person may inspect a company's PSC register and, on payment of a prescribed fee (£12), request a copy of it. However, a PSC's usual residential address must not be included in the information or copy that is made available to the public.

The person wishing to inspect or obtain copies of the PSC register must provide their name, address and the purpose for which the information is to be used. Within five days of receiving a request, the company must either comply with the request or apply to court to determine whether or not the company should comply. Failure by the company to respond to requests is an offence.

As the purpose of the PSC register is to make ownership and control of companies more transparent, the test applied by the court in determining whether the applicant has a "proper purpose" for making the application will have a wide interpretation.

Filing

From 30 June 2016, details of the company's PSC register must be published at Companies House and updated annually as part of the new Confirmation Statement (which replaces the current Annual Return). A private company will be able to elect to keep its register at Companies House but this has important ramifications, including:

• the full date of birth of an individual PSC will be accessible at Companies House;
• the information on that PSC register must be kept up to date in real time with changes being noted as they occur; and
• the company cannot wait for the annual Confirmation Statement to notify changes as companies maintaining their own PSC register at their registered office or alternative location can do (failure to note changes as they occur is a criminal offence).

Appendix 1: Example³ PSC Register

[ – ] Limited (the "Company")

Register of People with Significant Control over the Company maintained pursuant to section 790M Companies Act 2006 (as amended) (the "Act")

Words and expressions defined in Part 21A of, and Schedule 1A to, the Act have the same meanings in this register.

1. The Small Business Enterprise and Employment Act 2015 has inserted a new Part 21A and Schedules 1A and 1B to the Companies Act 2006. Accompanying secondary legislation has been published for UK companies and LLPs in the form of the Register of People with Significant Control Regulations 2016 and the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016.

2. A person with significant control in a LLP is an individual who (i) holds, directly or indirectly, the right to share in more than 25% of any surplus assets of the LLP on a winding up (ii) holds, directly or indirectly, more than 25% of the rights to vote on those matters which are to be decided upon by a vote of the members of the LLP (iii) holds, directly or indirectly, the right to appoint or remove the majority of the persons who are entitled to take part in the management of the LLP (iv) has the right to exercise, or actually exercises, significant influence or control over the LLP (v) has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm that is not a legal entity which would itself satisfy any of conditions 1 to 4 in relation to the LLP if it were an individual.

3. Please note that this is an example of a simple PSC register illustrating the entries that would be made for (i) a wholly-owned subsidiary of a UK company and (ii) a UK company with a known single beneficial individual owner. In other circumstances, for example, where the identity of a registrable person or legal entity is unknown or remains to be confirmed, the PSC register will need to include additional information.