The New 'Persons With Significant Control' Rules - An Update For Charities And Their Trustees - Charities & Non-Profits

1. Background

The Small Business, Enterprise and Employment Act 2015 (the 'SBEEA') introduced the persons with significant control, or 'PSC', rules by inserting new provisions into the Companies Act 2006 (the 'Companies Act'). These new rules are one of a number of initiatives aimed at increasing transparency in the ownership and control of UK companies.

2. Which entities are affected?

The majority of UK registered companies[1] including charitable companies, irrespective of their size or turnover, will be required to maintain a PSC register. Certain companies will be exempted from the regime but no exemption has been given in relation to charitable companies and social enterprises, and none is currently expected.

Key dates:

Wednesday 6th April 2016

This is when most of the new provisions and their related regulations and guidance come into force. From this date, companies and LLPs will be required to keep a PSC register.

Thursday 30th June 2016

Companies House Confirmation Statements (which are to replace the Annual Return) due for filing after this date will have to include PSC information.

Even if an existing charity or social enterprise falls outside the scope of current PSC rules and is not required to keep its own PSC register, it may still be required to disclose its ownership or control of any companies which have to identify and register their PSCs.

3. Who is a 'person with significant control'?

The Companies Act provides that an individual will be a PSC if he or she meets at least one of the following specified conditions:

direct or indirect holding of more than 25% of a company's shares – this will not be relevant to most charitable companies as they are usually established as companies limited by guarantee which do not have any share capital;
direct or indirect holding of more than 25% of a company's voting rights – this means the rights attaching to membership in a charitable company limited by guarantee;
direct or indirect holding of the right to appoint or remove a majority of a company's directors (who will also be charity trustees);
otherwise having the right to exercise, or actually exercising, significant influence or control over a company; or
where the trustees or members of a trust or partnership (which does not have separate legal personality) meet any of the other conditions set out above, having the right to exercise, or actually exercising, significant influence or control over the trust or partnership.

Even if a person holds a fraction of a percent of a company's share capital or voting rights, he or she may be a PSC if he has a joint arrangement with another shareholder who, say, holds more than 25% of the company's shares or voting rights. Additionally, individuals may hold shares or voting rights in a company on a joint interest basis – an example would be where the trustees of a charitable trust hold the shares and voting rights in a wholly owned trading subsidiary company – irrespective of the number of trustees of the charitable trust, each trustee would be deemed to hold all of the shares and voting rights in the trading subsidiary.

4. What amounts to having the right to exercise, or actually exercising, significant influence or control (i.e. the fourth condition)?

A person may have the right to exercise significant influence or control as a result of a number of circumstances, including the provisions of a charity or social enterprise's constitution, some other agreement between the members or otherwise.

Some examples of person having the right to exercise significant influence or control are:

where a person has absolute decision rights, or absolute veto rights, in relation to the running of the charity or social enterprise (for instance in relation to the adoption or amendment of a business plan or appointing or removing the chief executive); and
where a person has absolute decision rights, or absolute veto rights, in relation to the appointment or removal of a majority of the directors of the charity or social enterprise.

A person may actually exercise significant influence or control in many circumstances and this condition should be widely interpreted; some examples of individuals who actually exercise significant influence or control are:

a person, who is not a member of the board of directors, who regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and his views influence decisions made by the board;
where a charitable company founder no longer has significant voting rights in the charitable company he or she started, but makes recommendations to the other members on how to vote and his or her recommendations are always or almost always followed; and
a director who also owns important assets or has key relationships that are important to the running of the business (eg intellectual property rights) and uses this additional power to influence the outcome of decisions related to the running of the charitable company [2].

This is not an exhaustive list and charities and social enterprises should seek specialist advice on the subject if they have any concerns or are unclear about the precise scope of the new rules.

Excepted Roles

The Statutory Guidance sets out that there are certain 'excepted roles' which, if applicable, would prevent a person from being a PSC, if he might otherwise be caught by the fourth condition. These are mostly professional relationships which will not, in the ordinary course of events, require the company to register the people acting in those roles as PSCs. These include:

the provision of professional services such as legal, accountancy, consultancy and financial advisory services;
involvement on a commercial basis such as suppliers, customers or lenders;
persons operating under an enactment such as a regulator or liquidator/receiver;
persons who are employees acting in the course of the employment and persons who are directors acting as such; and
professional organisations or networks.

It is important to note that this list should not be considered definitive in all circumstances. If a person acting in any of the roles above is doing so in a manner that is not 'ordinary' and in such a way that they have significant control or influence over the company, then they will need to be entered onto the PSC Register.

Application to charitable companies and social enterprises

It is likely that where a charity or social enterprise is reliant for the delivery of its services on one major donor, that donor would likely be a person with significant influence or control. Given the nature of a charitable donation, the charity could not argue that the donor is an 'excepted role' as the donation is not made on a commercial basis.

We also see arrangements where funding is provided to a charity or social enterprise by a government department or local authority, and that as part of the funding the government department or local authority retains some element of control over the charity or social enterprise. A common example is that of Academy Schools where the Department of Education provides funding for the running of the school but may also retain some element of control over the charity or social enterprise – in those circumstances the Department of Education may be a PSC.

5. What is a 'registrable relevant legal entity'?

In most cases a PSC will be a natural person, though there are exceptions. A legal entity will have to be put on the PSC register if it is both relevant and registrable in relation to the company in question. It will be a relevant legal entity ('RLE') if it meets any of the specified conditions and it holds its own PSC register.

An RLE will be registrable and will therefore have to be entered on the PSC register if it is the first RLE in the company's ownership chain.

6. How are charities affected?

Charities and social enterprises established as companies (usually companies limited by guarantee and community interest companies) must maintain their own PSC registers. Some common examples of who may be a PSC in relation to a charity or social enterprise include:

where the charitable company or social enterprise has fewer than four members, those members will be PSCs on the basis that they each have more than 25% of the voting rights in relation to the company;
where the charitable company or social enterprise has a sole member which also maintains a PSC register, for example corporate foundations where the sole member is a UK company, that sole member will be a RLE; and

Note: a charitable company or social enterprise which has as its sole member a non-UK legal entity will not include the sole member on its PSC register but will be required to look through that sole member to look at ownership and control of the sole member.

where some other person or legal entity has the right to appoint or remove the majority of the company's directors, that person or legal entity (or in the case of a legal entity which is not required to maintain its own PSC register, any individual with a majority stake in that entity) will be a PSC or RLE respectively.

In many cases, a charitable company or social enterprise may not have a PSC or a RLE – it must still maintain a PSC register but would simply include the approved wording to the effect that it has no PSC.

Any charity trading subsidiary, incorporated as a company or an LLP, will be required to maintain its own register and it is likely that the charity will be a RLE in such an arrangement. Where the trustees of a charity which is not required to maintain its own PSC register (for example a charitable trust or a CIO) establishes a trading company subsidiary, those trustees may be PSCs of the trading subsidiary.

7. Investigating PSCs and RLEs and maintaining the register

The PSC register must be available for inspection free of charge[3] at the company's registered office, or at another location, provided it has notified Companies House. Private companies may elect to keep information about their PSCs at Companies House rather than maintain the separate PSC register themselves.

However, the PSC information will be publicly available in either case and it will have to be submitted and updated as part of a company's filing of a Confirmation Statement (which is to replace the Annual Return).

The entities which fall within the PSC regime will have a duty to investigate, obtain and update information on PSCs and will be given the means to procure such information by serving notices on someone the entity in question knows or has reasonable cause to believe (a) is a PSC; (b) knows the identity of a PSC; or (c) has ceased to be a PSC.

An entity which is obliged to keep a PSC register must take reasonable steps to identify if any individual or legal entity meets one or more of the specified conditions and, if so, who that person or a registrable RLE is, even if the final determination is that the entity has no PSCs. What amounts to reasonable steps will depend on the particular circumstances of the case. It is highly advisable that a company keeps an accurate and up-to-date record of the steps it has taken.

Criminal sanctions may apply to companies that fail to take reasonable steps to identify PSCs and registrable RLEs.
A person who receives a notice has a duty to respond to it; a person may be guilty of an offence if he or she fails to comply with the notice within one month of its service without providing a valid reason or if he or she knowingly or recklessly makes a false statement when responding. Where a person fails to respond to a notice, the company would have the option of issuing a 'warning notice' and, one month later, a 'restrictions notice' to that individual.

8. Is it possible to prevent the disclosure of information?

Any person or entity may access PSC information whether it is held by the company or at Companies House. Although a request must include the purpose for seeking the information and this purpose must be 'proper', the guidance provides that the term 'proper purpose' is intended to have a wide interpretation and application. With the government stating that investigative journalism would be considered a proper purpose and the general purpose of the publicly available PSC register being transparency of company ownership and control, it appears that only in very limited circumstances would a request about a PSC be considered improper.

In exceptional circumstances PSCs, or the company on the PSC's behalf, will be able to make an application to: (i) suppress all PSC's information from public disclosure; or (ii) to prevent the PSC's residential address being accessible by credit reference agencies. The company would still need to comply with its PSC requirements and it will remain accessible by law enforcement agencies.

An individual PSC's application for protection must contain evidence of a serious risk of violence or intimidation to the PSC or someone living with him. If the application is to prevent all of the PSC's information from being publicly available, the risk must come from either: (i) activities of the company; or (ii) the PSC's association with the company.

9. Summary – what do charities and social enterprises need to do in practice

Where a charity or social enterprise, or its trading subsidiary, falls within the scope of the PSC rules, it should now:

inform its trustees of the PSC rules and the requirement to maintain a register;
take reasonable steps to identify who may be a PSC or RLE and, from 1 April 2016, prepare and maintain a PSC register;
review its trustee induction process and consider revising the process to inform new trustees of the PSC regime (in particular the information that will be publically available on the PSC register) and to obtain the information required in relation to any trustee who is a PSC;
consider revising its conflict of interest policy to address the requirements of the PSC register; and
consider whether information to be held on the PSC register in respect of a trustee or other party ought not to be publically available. In such circumstances, we would recommend you seek specialist advice in relation to the application to prevent the disclosure of information.

10. Further information

For further information relating to the PSC regime, or for advice in relation to your particular circumstances, please contact the Charities & Philanthropy team at Withers.

Footnotes:

[1] This includes charitable companies limited by guarantee and community interest companies but does not extend currently to co-operative societies, community benefit societies and charitable incorporated organisations.

[2] In such circumstances the director would not be able to rely on the 'excepted role' exemption to avoid being considered to exercise significant influence or control.

[3] A fee of £12 for each copy of the PSC register or part of it can be charged by a company.

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.

UK: The New 'Persons With Significant Control' Rules - An Update For Charities And Their Trustees