UK: Companies Act 2006: New Rules On People With Significant Control

Last Updated: 28 January 2016
Article by Richard Barham, Candice Chapman and David Collins

From 6 April 2016, UK-incorporated companies and LLPs will have to collect and keep information about people with significant control over them. The new rules form a key part of the government's drive to tackle tax evasion, money laundering and terrorist financing and to increase trust in UK corporates. They require new levels of corporate transparency regarding ultimate beneficial ownership and control.

Background

The broad framework of the new regime is in Part 21A to the Companies Act 2006 which was inserted by the Small Business, Enterprise and Employment Act 2015. However, much of the detail will be in secondary legislation.

To whom does the new regime apply?

The new regime will apply to all UK-incorporated companies other than those that:

  • are subject to the existing disclosure requirements of DTR 5 (principally companies whose shares are traded on the Main Market of the London Stock Exchange and AIM); or
  • have voting shares admitted to trading on a regulated market in the EEA outside the UK or on specified markets in Switzerland, the US, Japan and Israel.

The regime will also apply to UK-incorporated LLPs, but with modifications to reflect their different ownership structure. This note should therefore be read as applying also to LLPs.

Overseas entities operating in the UK, whether through a branch or otherwise, are not subject to the regime.

What are the key features of the new regime?

Companies will have to:

  • keep a register of those with significant control over them (the PSC Register);
  • take reasonable steps to identify those who are registrable on the PSC register;
  • enter the required information on the PSC Register and keep that information up to date;
  • make the PSC Register available for public inspection;
  • as part of the new annual return regime, from June 2016, file information about their PSC Register at Companies House.

Who is a person with significant control?

A person with significant control (PSC) in relation to a company is any of the following:

  • an individual who holds, directly or indirectly, more than 25% of the shares in a company;
  • an individual who holds, directly or indirectly, more than 25% of the voting rights in a company;
  • an individual who holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of a company;
  • an individual who has the right to exercise, or actually exercises, significant influence or control over a company;
  • an individual who holds the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm which is not a legal entity, but would satisfy any of the first four tests if it were an individual.

The Act includes detailed interpretive and anti-avoidance provisions on the tests.

Which PSCs are registrable on the PSC Register?

The legislation draws a distinction between PSCs which a company must register in its PSC Register and those which it need not register.

A company treats an individual as a non-registrable PSC if that individual has significant control of the company only because her or she has significant control over a "relevant legal entity" (RLE). This is a UK legal entity which (i) the company would have classed as a PSC had it been an individual, and (ii) must itself keep a PSC Register (or comply with DTR 5 or equivalent). The following is an example.

John Smith owns 100% of the share capital of A Ltd which in turn owns 100% of B Ltd. A Ltd and B Ltd are both UK companies. John Smith is a PSC in relation to A Ltd (direct control). John Smith is also a PSC in relation to B Ltd (indirect control). However, John Smith is only a registrable PSC for A Ltd. He is a non-registrable PSC for B Ltd, as he only has significant control over B Ltd because of his control of A Ltd. Therefore, only A Ltd must enter him on its PSC Register.

Which RLEs are registrable on the PSC Register?

An RLE which is the first legal entity in a company's ownership chain is registrable on the company's PSC Register. So, in the above example, B Ltd must record A Ltd as an RLE in its PSC Register.

In contrast, had A Ltd been an overseas company, it could not be an RLE. B Ltd would instead have to record John Smith as a registrable PSC on its PSC Register.

How does a company go about compiling its PSC Register?

Every company must take reasonable steps to find out whether it has any registrable PSCs or registrable RLEs and, if it does, to identify them. The legislation sets out detailed procedures for this. It also imposes certain proactive notification duties on registrable PSCs and registrable RLEs. In each case, there are penalties for failure to comply. Failure by a relevant person to respond to a company's requests for information may eventually result in the company being able to disenfranchise the affected shares.

What information must go on the PSC Register?

The information which the PSC Register must include, and which must be updated as necessary, breaks down into three broad categories:

  • information about the registrable PSC or registrable RLE (name, address etc.);
  • which of the five PSC tests that person meets. This includes quantifying their shareholding or voting rights, if relevant, by reference to three broad bands (over 25% up to 50%, over 50% but less than 75% and 75% or over);
  • status of the company's investigations and whether it has served any notices.

If a company identifies that it has no registrable PSCs or registrable RLEs, it must still keep a PSC Register and include a statement to that effect.

How must a company make its PSC Register available to the public?

The PSC Register is one of the company's statutory registers. The company must keep it at its registered office (or alternative inspection location). Anyone with a proper purpose may have access to the PSC Register without charge or have a copy of it for which companies may charge a small fee.

From June 2016, as part of the new annual return regime, companies will have to provide annual information about their PSC Register to Companies House. This information will also be publicly available.
The PSC regime includes some safeguards from public disclosure. The day of date of birth and residential address information of registrable PSCs will be subject to the same protections as for company directors.

Additionally, if a registrable PSC considers that they or someone they live with would be at serious risk of violence or intimidation because of their wider PSC information being publicly available, they can apply to have it protected from disclosure.

What should companies be doing?

Companies will need to put in place the necessary internal systems to deal with the new regime from 6 April 2016.

Although all UK companies (which are not subject to DTR 5 or equivalent) will be subject to the new regime, compliance for those with complex ownership and control structures will be inevitably more complicated than for those with simple structures.

The government is producing detailed practical guidance, both long form and short form, on the new regime. There are links to the currently available consultation drafts at the bottom of this article. There will also be separate guidance, not yet available, for PSCs.

And finally?

Although the UK has led the way on transparency of ownership and control, the Fourth Money Laundering Directive introduces similar EU-wide measures which member states must adopt by 27 June 2017. This will mean some changes to the UK PSC regime before then. For companies already in scope of the PSC regime, the most significant change will probably be the need to inform Companies House of PSC Register changes as they occur, rather than yearly.

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