UK: Should Lenders Worry About The New PSC Registers?

Last Updated: 19 April 2016
Article by Robert Cooke

The Small Business, Enterprise and Employment Act 2015 amends the Companies Act to require UK companies and LLPs to keep registers of people with significant control over them ("PSCs") – i.e. to obtain, hold and register information about who ultimately owns and controls them – unless they are subject to the disclosure requirements of DTR 5 (e.g. UK companies with voting shares traded on the LSE Main Market or AIM, an equivalent EEA regulated market, or on specified markets in Israel, Japan, Switzerland and the US).  The purpose is to promote transparency, and to combat tax evasion and money laundering (the definition of PSC is close to that of a beneficial owner for the purpose of anti-money laundering controls).  Companies are required to keep a PSC register from 6 April 2016, to file the relevant information at Companies House from 30 June 2016, and to confirm this information annually.   

The register must show the individuals and relevant legal entities who beneficially own or control (alone or jointly with others, and directly or indirectly) the company's shares.  Companies must take reasonable steps to identify their PSCs, record the information on their PSC registers, and file it at Companies House.  If those asked and having a relevant interest do not provide the information within one month, the company must send a warning notice requiring the information to be provided within one further month, failing which the company may decide that "taking reasonable steps" requires it to impose restrictions that effectively freeze the shares.   Any transfer of the shares will then be void, and no rights relating to them may be exercised.  PSCs have a corresponding obligation to provide the relevant information.

A PSC includes an individual or relevant legal entity directly or indirectly holding more than 25% of the nominal value of a company's shares, more than 25% of the voting rights, the right to appoint or remove a majority of directors, or otherwise having the right to exercise (or actually exercising) significant influence or control over the company.  The published guidance is helpful in explaining how the rules operate where there is a corporate chain of ownership.  But overall the rules are horribly complicated.

What effect might this have on facility documentation and practice?  A copy of the borrower's PSC register may become a condition precedent and required as part of due diligence, but otherwise the effects are likely to be limited.  In theory, a lender taking share security might itself qualify as a PSC but in general this should not be the case.  Leaving aside the detailed provisions, BIS guidance is that where a person has used their shares as security, they should be treated as the holder of the shares where they retain control over the rights attached to the shares, or do so except where the lender exercises such rights for the purpose of preserving or realising the value of the security, or where the lender controls those rights but, except where exercising those rights for the purposes of preserving or realising the security, must exercise them in the interests of the owner.  In general the lender will not be a PSC on these grounds.

Might the lender nonetheless qualify as a PSC by virtue of having "significant influence or control", perhaps through the rights given by covenants restricting borrowing or the nature of the borrower's business?  Draft statutory guidance, however, provides that a person engaged in a third party financial arrangement such as a lender would not, in the normal course, be regarded as exercising significant exercise or control.  This suggests that lenders need not be unduly concerned, although very strict covenants or particular circumstances might produce a different result. 

Finally, will the position change when the security becomes enforceable, when under a typical share charge voting rights and the right to receive dividends "flips" from security provider to lender?  It appears not.  If control remains with the security provider when it actually exercises the security, it can hardly become the PSC merely because the security becomes "enforceable".    

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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