We may not yet know when the register of overseas entities (the "Register") to be set up under the Economic Crime (Transparency and Enforcement) Act 2002 (the "ECA") will become effective, but we can be fairly certain that it will be in the not-too-distant future.
While the expected effects of the Register on real estate and finance transactions have been well-documented, will the new regime also be a factor to consider in corporate transactions?
The answer is yes, but possibly not to as great an extent.
The Register – the basics
Essentially, any overseas entity which owns UK property will be required to apply for registration. Various actions in relation to the property, such as its disposal or the registering of a charge against it, will be prohibited unless registration has occurred. The details of the beneficial owners of the overseas entity will need to be provided as part of the registration process and annual updates will be required to confirm if there have been any changes.
For a full overview of the Register, please see our briefing here.
The PSC Register
The PSC register has been around since 2016 and has become an accepted part of company administration. At this stage, there appears to be a fair amount of overlap between the PSC register and the Register. It is therefore arguable that the Register is simply a way of levelling the playing field between the information requirements expected of both UK and overseas entities, although admittedly with a focus on overseas entities which own UK property.
Corporate sales and purchases
In the case of a corporate sale or purchase, it is the shares in the asset-owning company which are sold and purchased, rather than the underlying asset itself. (For further information about the differences between asset and share deals in a property context, see here.) As such, the direct owner of the asset does not change. So, where the asset is a property, a share sale requires no change in the title to be registered at HM Land Registry.
However, no purchaser will want to acquire shares in a target company if it has not complied with its statutory obligations and the potential sanctions of failing to comply with the Register's requirements are severe, so we can expect to see specific reference to the Register in share purchase agreements ("SPAs") going forward. The extent of these references will depend on the timing of the transaction.
Let's consider the case of a UK property owned by an overseas entity (the "Target"). The shares (or equivalent) in the Target are to be sold by the current shareholders.
1. Exchange/completion before the Register takes effect
The Target and its beneficial owners cannot be registered in the Register before completion and so there will be no need to incorporate Register-related provisions in the SPA. Applying to register the Target and its new beneficial owners will be a post-completion matter for the purchaser and Target to deal with once the Register is open. They will need to bear in mind that there is a six-month window once the Register is up and running (the "Transitional Period") in which the application can be made.
2. Exchange/completion during the Transitional Period
If exchange/completion of the transaction is to occur during the Transitional Period, the parties will need to decide who is responsible for registration. Assuming completion will take place before the end of the Transitional Period, the seller could argue that registration is of no concern to it and that the purchaser should apply for registration post-completion, whereas the purchaser may demand that it be dealt with by the seller/Target before completion. In a straightforward structure where the beneficial owners can be easily ascertained the actual application to register should be quite straightforward (although we have not yet seen the form that Companies House will require) and so in reality, this may not be a significant issue for either party.
Where the seller agrees to apply for registration before completion, the purchaser may require comfort in the form of a warranty that registration has been achieved. Although likely to be caught by a compliance with laws warranty, expressly referring to the Register may assist with focussing the seller's/Target's minds. The purchaser will also expect to see evidence of due registration.
Where the transaction comprises a split exchange and completion, the purchaser may require the inclusion of a condition that registration will be completed, and that the Target will not remove itself from the Register, prior to completion.
3. Exchange/completion after the Transitional Period
If exchange/completion is to take place after the end of the Transitional Period, the Target should already be registered, assuming that it has held the property for some time. In this instance, we can expect to see warranties confirming that the Target is duly registered, the information on the Register is correct and any annual updates have been correctly made. Again, this will arguably be caught by a compliance with laws warranty, but purchasers may require express comfort.
If exchange and completion of the transaction is not simultaneous, the purchaser may require the Target to comply with any updating requirements that arise between exchange and completion or a repeat of the above-mentioned warranty on completion and comfort that the Target will not remove itself from the Register prior to completion.
Registration of charges at Companies House
Some of us can remember a time when charges against overseas entities were routinely sent to Companies House for the sole purpose of receiving the rejection letter as evidence that an attempt to register the charge had been made. This is no longer required, but query whether the practice will re-instated now that more overseas entities will be registered. Time will tell.
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.