UK: Small Business, Enterprise And Employment Bill – Corporate Governance: Proposals That All UK Companies Should Be Aware Of

Last Updated: 24 July 2014
Article by Rebecca Gardner

The Small Business, Enterprise and Employment Bill was introduced to Parliament by the government in June 2014. Drafted in response to the 2013 BIS discussion paper 'Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business', the Bill sets out a number of proposals which, once implemented, will have a significant impact on a large number of companies in the UK.

We set out below the key proposals that directors and shareholders of UK companies should be aware of....

Information on beneficial ownership

The Small Business, Enterprise and Employment Bill ("Bill") is seeking to impose an obligation on all UK companies to create and maintain a register of beneficial ownership and the intention is that the information contained in these registers will be publicly available. It will no longer be possible for companies or shareholders to disguise the ultimate beneficial ownership of their shares through the use of nominee companies and trust structures.

The draft legislation creates the concept of 'persons with significant control' ("PSC") and specifies in detail the type of information that must be gathered and made available in respect of all such persons.

Under the Bill as drafted at present, a PSC will include:

  1. any person who holds (directly or indirectly and whether alone or jointly with another person or entity) 25% or more of the issued share capital of a company. For companies without share capital the same 25% threshold will be applied to the members' right to participate in the capital or profits of a company;
  2. any person who exercises (directly or indirectly and whether alone or jointly with another person or entity) 25% or more of the voting rights in the company;
  3. any person who is entitled (directly or indirectly and whether alone or jointly with another person or entity) to appoint or remove a majority of the board of directors of a company; or
  4. any other person who has the right to, or actually, exercises 'significant influence or control' over a company. It will be for the Secretary of State to publish guidance as to the interpretation of this particular limb of the definition of a PSC.

There are also specific provisions in the Bill which deal with shares held by trustees and shares held by nominees. These provisions are intended to ensure that the ultimate beneficial owner of shares or the person or persons with ultimate control over the company will also constitute a PSC for the purposes of the act, even where they are not directly involved.

The information that will be contained on the public register for individuals who are PSCs will be the same as that currently held in respect of registered directors, i.e. full name, service address, country or state of residence, nationality and date of birth. Residential addresses will also be collected, but as with directors, this information will not be generally available to the public.

Where a legal entity is considered to be a PSC the information shown on the public register will vary depending on the type of legal entity and its connection to the shares held, but is likely to include as a minimum; its full name, registered office address, legal form and the law by which it is governed. The register will also include details of the date upon which a person became a PSC and details of the nature of his or her control.

Not only does the new legislation impose obligations on all companies to take proactive steps to gather the above information in relation to its shareholders, it also imposes obligations on individuals and entities that are PSCs to proactively supply information where they are aware (or should be aware) that they are a PSC.

It will be an offence for companies to fail to comply with these new requirements and any person or entity failing to supply the relevant information in relation to their shareholding may find that their rights in respect of those shares are suspended or in extreme circumstances, they may be forced to transfer their shares.

Companies should be starting to review their register of members and should be considering which (if any) of their shareholders or members may fall within the definition of a PSC.

For trustees, nominees and shareholders, they should also be starting to think about whether they will fall within the definition of a PSC and, if so, whether they are happy for their identity to be made public.

Corporate Directors

Following the implementation of the Bill, it will no longer be possible for UK companies to have corporate directors – all directors of UK companies will need to be natural persons. The Bill envisages that there may be some limited exceptions to this general rule, but the details of what those exceptions will be have not yet been clarified.

The draft legislation contains transitional provisions which will allow for the phasing out of corporate directors over a period of 12 months following the coming into force of the act. However, when that 12-month period expires, the appointment of any remaining corporate directors will automatically terminate.

In addition, any attempt to appoint a corporate director after the implementation of the Bill will be void and the officers of a company seeking to make such an appointment will have committed an offence under the Companies Act 2006.

Companies (and shareholders) should start to think now about whether they will need to terminate the appointment of any corporate directors and, if necessary, start to consider who will be appointed in their place. It will be important to ensure that no companies are unintentionally left without any validly appointed directors as this could ultimately lead to an action for striking off.

Option to use Central Register

Following the implementation of the Bill, companies will be able to elect for certain statutory registers (including the register of members, register of directors and register of secretaries) to be held centrally by the Registrar of Companies rather than being held and maintained by the company itself. Any such election will need to be approved by all of the members of the company and the company will be required to file the necessary paperwork with the Registrar to ensure that the registers are kept up to date, but the intention is to reduce the administrative burden on company secretaries (or directors in the absence of a company secretary).

Other significant proposals

Some of the other significant changes proposed by the Bill include:

Removal of the requirement for companies to file an annual return (Form AR01) each year

Whilst this change may seem significant, the requirement to file an annual return will be replaced by an obligation for companies to confirm at least once in any 12-month period, that it has filed all of the information that it is required to file with the Registrar of Companies, which is likely to mean that, in practice, very little will change.

Removal of the requirement for consent when appointing a new director

Under the new legislation, it will no longer be necessary for a newly appointed director to provide evidence of his consent to act in order for an appointment to be registered at Companies House. The appointment form will contain a statement by the company that the director has consented to act and the Registrar will send a confirmation of the appointment to the new director as soon as possible following receipt of the appointment form. The new director will then be entitled to apply to the Registrar to have his name removed if he did not consent to the appointment.

Abolition of bearer shares

Bearer shares have become increasingly uncommon in the UK over the last 10 years, to the point that a relatively small number of UK companies still have bearer shares in issue. It is proposed under the Bill that the issue of further bearer shares be prohibited and that any existing bearer shares be called in for cancellation in exchange for registered shares. There are transitional provisions set out in the draft legislation but, ultimately, a failure to surrender bearer shares within the set periods may lead to the cancellation of those shares without the consent of the current holder.

Shadow Directors

It is proposed that the general duties of directors set out in the Companies Act 2006 be extended to apply to 'shadow directors' in so far as they are able to. A shadow director is someone who effectively fulfils the role of a director of a company (be it by virtue of his duties or by the level of control he exerts over the day-to-day running of a company), but who is not actually registered as a director of the company. Any person who exerts control over the board of directors of a company will, following the implementation of the Bill, need to be aware of and comply with the statutory duties imposed on directors by the Companies Act 2006.

Strike-off procedure to be streamlined

Under the Bill, the procedure for striking off a company will be streamlined with various time limits being reduced. The impact will be to reduce the overall timeframe for striking off a company from 6 months to 4 months.

Comment

The above legislation is still at an early stage of the parliamentary process and there is, as yet, no set timetable for the implementation of the changes. However, it is unlikely that these proposals will be dropped entirely at this advanced stage which means that it is only a matter of time before they (or proposals of a largely similar nature) become law.

Companies, directors and shareholders alike would be advised to consider the above and start thinking about what (if any) action they will be looking to take in advance of or as a result of the implementation of the Small Business, Enterprise and Employment Bill.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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