Category Archives: Corporate/Commercial Law

Tips for Effective Drafting and Enforcement of Restrictive Covenants

The speed of business in the 21st Century has undoubtedly placed tremendous burdens upon employers seeking to enforce restrictive covenants in the modern business world.   In today’s fast-paced and high-tech society, trade secrets can be lost with the click of an iPhone camera and customer information can be mined from protected databases and stolen through the use of an inexpensive flash drive.  Often, the only protection available to prevent further harm is the legal construct known as the restrictive covenant.  Yet, the restrictive covenant’s status as the great elixir is directly linked to its ability to be enforced.  The past decade has ushered in an era of tremendous conflict in connection with the relationship between employers who seek to hold employees accountable for agreements that control the end of the parties’ economic relationship, and the ability of employees to escape the enforcement of such agreements.   This article will explore the methods used in drafting and enforcing restrictive covenants.    

The Basics:

Restrictive covenants in the employment context seek to protect business interests of a corporation by limiting post-employment engagements of an individual or individuals who has moved on from the company.  As a general rule in all jurisdictions, our country’s courts will not allow a company to enforce restrictions if such enforcement will not benefit the legitimate business interests of the ex-employer. See, Guardian Fiberglass Inc. v. Whit Davis Lumber Co. 509 F.3d 512 (8th Cir. 2007).  This notion stems from the fact that our judicial system considers restrictive covenants to be a restraint upon trade by their nature.  This is of course balanced against the parties’ inherent freedom to enter into a contract, which has led courts to a common ground in most jurisdictions.   In large part, most jurisdictions will not issue a blanket prohibition against restrictive covenants and will uphold restrictive covenants to the extent that: 1) the restriction is fair and reasonable and; 2) protects a legitimate business interest.   In determining what constitutes a legitimate business interest, courts usually identify trade secrets, confidential proprietary information, goodwill and special training as protectable property of the business.  With these protectable interests in mind, it becomes essential for the employer to identify how to protect each interest and specifically tailor the agreement to meet its specific needs.   Stated another way, there is no “one size fits all” restrictive covenant.   Business owners and employees must narrow their proposed agreements to match their specific needs.  Doing so requires an understanding of the various types of agreements that are classified as follows:

Non-Competition Agreements:  A Non-Competition Agreement prohibits a former employee from engaging in an employment or ownership affiliation with a competing separate entity or group.

Non-Solicitation Agreements:  These agreements protect against employees who solicit current and or former customers. 

Non-Disclosure Agreements:  These agreements prohibit the employee from utilising and or disclosing trade secrets and confidential information belonging to the employer.

Non-Poaching Agreements:   Non-Poaching Agreements are also commonly referred to as “anti-raiding” covenants and bar employees from hiring away employees to join a new entity.

Given the various types of restrictions available to business owners, it is critical at the outset for the drafter to identify, with particularity, what specific business interests the company seeks to protect.  After identifying the company’s needs, the framework of the agreement may be constructed in a manner that avoids the common pitfalls that have a detrimental effect upon the enforcement of restrictive covenants.  Aside from these agreements, one should be mindful of the separate common-law duty of loyalty in many jurisdictions which prohibits employees from acting in a manner that is contrary to the best interests of the employer during the employment relationship.

Effective Enforcement of Restrictive Covenants Begins with The Drafting of An Effective Agreement – What Every Business Owner Should Know:

When drafting a restrictive covenant, the practitioner must always be mindful of the notion that courts in all jurisdictions historically characterise restrictive covenants as a restraint upon trade.  Because of the judiciary’s conceptual concerns over the restraints presented in this setting, the drafter must be especially mindful of the fact that the agreement must be precise in its scope and more importantly, should only go as far as necessary to protect specific business interests.  Drafters of restrictive covenants should take great care in avoiding the common mistake of creating a covenant that will not stand judicial scrutiny on account of the overbroad nature of the restrictions placed upon the departing owner or employee.  A hallmark of an effective agreement achieves a delicate balance between the protection of the business’ legitimate interests and fairness to the departing individual(s).  

Avoid Broad Geographic Restrictions At All Costs

One of the most critical errors in the process of drafting a restrictive covenant occurs when a party attempts to inject an overly protective limitation on the area in which the departing party may operate a business.  A restrictive covenant must be reasonable in its geographic area.  Generally, this limitation is defined as the area where the existing company does business.  Depending upon the nature of the specific business at issue, the geographic areas often vary and are best described as economies of scale.  While there is no bright-line rule per se, it is generally accepted that geographic restrictions contained in restrictive covenants can restrict an area as small as a few miles as in the case of a “mom and pop” business, or can span the continent as in the case of a large corporation.  Because of the uncertainty attached to geographic limitations, recent strategies in drafting restrictive covenants often de-emphasise a detailed geographic restriction in favour of protecting confidential information and or trade secrets.  By focusing on the information, not the location of the business, the covenant is more likely to be found to be a reasonable protection of a legitimate business interest as opposed to an unreasonable restraint on trade.   Through careful craftsmanship of a targeted and precise geographic restriction, or alternatively focusing on confidential information, (not location), the restrictive covenant is more likely to withstand any challenge, and will likely be enforceable.

Avoid Lengthy Periods of Restriction

Because excessive restrictive periods will not be enforceable, the drafting of an enforceable restrictive covenant requires the infusion of a reasonable time period controlling the former employee or co- adventurer’ conduct toward existing or former customers and the handling of confidential information.  Typically, these the types of restrictions: 1) aim to control the length of time that an individual must refrain from soliciting the employer’s clients or customers and; 2) prohibit the use of  business’ confidential information.   With regard to the former, the duration and the nature of the customer relationship are critical factors in determining whether the prohibition from soliciting customers is reasonable.  In these instances, the duration of the restriction is generally reasonable only if it is no longer that necessary for the former employer to put a new employee to work as a means to demonstrate his or her skill-set in satisfying the former employer’s clients and customers.

In the case of confidential information, the focus shifts to the type of information being protected, not geography. A key consideration in this regard is the length of time the information remains confidential before it becomes part of the public domain or stale and unusable.  The longer the time the information retains its confidentiality, the longer the restrictive period will be found to be reasonable.   By examining the nature of the relationship between the customer or client and the identification of the of information being protected, the period of the restriction set forth in the agreement can be gauged appropriately which will protect the terms of the agreement from collateral attack.

 Identify Whether the Agreement Contains Proper Consideration

Because it is a contract, a restrictive covenant must have adequate consideration (a bargained for exchange) for the covenants to be enforceable.   The most common form of consideration is contained in a services agreement, such as an employment agreement where the owner receives services from the employee in exchange for salary.   In a variety of states, the act of requiring a new employee to sign a restrictive covenant at the commencement of employment as well as conditioning an employee’s continued employment upon execution of the agreement are considered valid consideration.   However, the concept of employment as consideration is not universally accepted in each state and it is imperative for the practitioner to be aware of the jurisdiction’s treatment of employment as adequate consideration.  For example, New Jersey courts hold that employment is valid consideration in a restrictive covenant, whereas Pennsylvania courts hold that mere continued employment is not sufficient consideration and will not enforce a restrictive covenant absent some additional consideration.  See, A.T. Hudson, 216 N.J. Super. at 431-32 (non-compete signed at hire supported by adequate consideration) But See, Socko v. MidAtlantic Systems  of CPA,  105 A.3d 659 (2014) (holding that continued employment is not sufficient consideration to support a restrictive covenant under Pennsylvania law.)   Because of these conflicts of law, drafters must be keenly aware of their state’s handling of employment as consideration to avoid challenge to the sufficiency of the entire agreement.

Be Cautious With Choice of Law and Forum Selection Provisions

Choice of law and forum selection clauses can present significant risks in the context of restrictive covenants because not every jurisdiction treats restrictive covenants in the same manner.  There exists a strong possibility that selection of a choice of law clause could have unintended consequences which prove fatal to the enforceability of the agreement.  For these reasons, parties drafting these types of agreements must exercise due diligence and familiarize themselves with the procedural and substantive law of the foreign jurisdiction.  For example, restrictive covenants are void as a matter of law in California except for a small number of limited circumstances expressly authorized by statute, e.g., where owner is selling goodwill of business. California Business and Professions Code § 16600.  Similarly, not all states honor forum selection clauses, effectively rendering the parties’ intent moot.  To avoid the latent dangers associated with these provisions, it is extremely important for the parties to familiarize themselves with relevant state law in both choice of law and forum selection settings.  Otherwise, these seemingly innocuous provisions could have potentially devastating ramifications upon the enforceability of the agreement.

 The Importance of Confidentiality Agreements

 As mentioned above, a confidentiality agreement protecting the company’s confidential information is independent of  the tighter restrictions of non-competes.  For this reason, it is worthwhile to explore the utility in drafting a confidentiality agreement in tandem with a restrictive covenant insofar as the confidentiality provisions may withstand scrutiny when a restrictive covenant fails.

Strategies For Enforcing Your Agreement

Armed with an agreement that adheres to the foregoing characteristics and honed to the particular laws of the relevant jurisdiction; a party seeking to enforce the agreement by obtaining a remedy for a breach of the agreement can confidently pursue an action at law and equity in several ways:

The Injunction

In a majority of jurisdictions, injunctive relief fashioned to prevent further violations of a restrictive covenant is available under specific circumstances where the relief is necessary to prevent irreparable harm, meaning that the damage cannot be remedied by monetary damages.  For example, acts such as disclosing confidential trade secrets and interfering with customer relationships have been recognised as conduct that sufficiently rises to the level of irreparable harm in various state and federal courts.

Money Damages

Monetary damages may be recovered against a former employee who violates a valid and enforceable restrictive covenant as a means to place the injured party in the position it would have been in but for the action of the party who breached the agreement.  In determining the amount of damages that may be recovered, courts will typically review what the expectations of the parties were at the time of the agreement and will analyse the foreseeability of the harm caused by the breaching party in setting the amount of monetary damages.

Having an agreement that comports with the above principals will

The Blue Pencil Doctrine:

In many jurisdictions, even where = certain portions of the parties’ agreement may be found to be unreasonable, all may not be lost.  Restrictive covenants containing certain unenforceable provisions may still be enforced to the extent reasonable under the circumstances.  In various jurisdictions known as “Blue Pencil States”, the courts have broad equitable power to grant partial enforcement of a restrictive covenant both by removing offensive terms and by adding limiting language in order to grant an employer only that protection which the court deems necessary; to protect what the court’s deem to be legitimate business interestsThis principle allows courts to redraft an unreasonable restrictive covenant to make it reasonable and, therefore, make it enforceable based on the equities in the case.  The doctrine, known as the “Blue Pencil Doctrine” is not universal and must be analysed on a state by state basis.

While the restrictive covenant is not the perfect elixir on all occasions and in all locations, if properly utilised, it can be the best line of defence against threats to the very existence of a business.  However, because of the various state by state idiosyncrasies associated with laws governing the enforceability of restrictive covenants, it is fundamentally important to familiarise one’s self with the particular state law in the jurisdiction at issue and not simply assume that the “cookie cutter” restrictive covenant will suffice.

Law Society practice note gives law firms more impetus to use electronic signature platforms

In the haze of the Brexit referendum, you can be forgiven if the new EU Regulation on Electronic Identification and Trust Services in the Internal Market (EU No 910/2014) (eIDAS Regulation) passed you by. This important new law came into force on 1 July and establishes a new regulatory framework for “trust services” including electronic signatures throughout the EU.

On 13 July, a joint working party of the Law Society and the City of London Law Society (JWP) published a practice note endorsing the use of electronic signatures in commercial transactions under English law.  This is a welcome development. The practice note (and the eIDAS Regulation) will spur law firms to use electronic signature platforms and boost the digital transformation of business.

The aim of the practice note

The practice note aims to help lawyers and clients gain a better understanding of the applicable law, and foster confidence in electronic signatures for commercial transactions; its terms of reference did not include consumer contracts, but the rules on authentication are broadly the same as for commercial transactions.

What is an electronic signature?

Article 3 of the eIDAS Regulation defines an electronic signature as: “data in electronic form which is attached to or logically associated with other data in electronic form and which is used by the signatory to sign”. It has many guises:

  • Typing a name into a contract or into an email containing the contract’s terms;
  • Clicking an “I accept” button on a website;
  • Pasting a signature into an electronic contract;
  • Using a web-based electronic signature platform to generate:
    – an electronic representation of a handwritten signature; or
    – a digital signature using public key cryptography.

Validity of electronic signatures under English law

The practice note confirms that an electronic signature may be used to execute simple contracts as well as those documents (such as a guarantee) which are required by English law to be “in writing” or “signed”. The practice note also clarifies that a deed may be validly executed using an electronic signature. If the deed needs to be witnessed, the JWP recommends that the witness “physically” observes the signature of the deed; however, there does not appear to be any legal impediment to the witness attesting the signature using video technology.

Section 7 of the Electronic Communications Act 2000 states that electronic signatures are admissible in legal proceedings to establish the authenticity or integrity of an electronic document. But the evidential weight of the electronic signature will depend on the circumstances in which it is created and on what steps are taken to verify the identity of a signatory. And this is why the leading law firms such as Linklaters and A&O are turning to electronic signature platforms. The best platforms generate a signature that offers a higher level of authenticity and security, and a better alternative to a “virtual signing” where signature pages are exchanged by email.

The benefits of using an electronic signature platform

Agility. A platform speeds up workflow and execution of documents, especially where clients are in different hemispheres and time zones.  An authorised signatory just needs an email address and an internet connection to sign from any location.

Efficiency and cost savings. Printing, faxing, scanning, and sending documents by post or courier is inefficient and expensive. Law firms routinely pass on these costs with a margin to their clients. But it is worth sacrificing this margin for the higher goal of improving client service.

Digital audit trail. In a dispute over the authenticity or integrity of an electronic document, a platform provider can verify the identity of the signatory (often using two-factor authentication). The audit trail  will record who signed the document, including their email and IP address, when the document was signed and sometimes where. This can help law firms and their clients strengthen their regulatory compliance, particularly in the realm of data protection, security and retention.

Superior client experience. Advances in cloud and mobile technology mean clients can sign and retrieve their documents anytime, anywhere and from any device (desktop, tablet or smartphone) using an email address and an internet connection.

Law firms must use technology to innovate and improve their standard of service; no firm can afford to look like a digital laggard in the fierce battle to win and retain clients.

Secure cloud storage. Documents will be encrypted and stored securely at the provider’s data centre(s). Providers are acutely aware that their credibility depends on keeping data secure and confidential, both in transit and at rest. Law firms should conduct due diligence focussed on the provider’s information security and risk management practices. In particular, they should verify whether the provider is certified to the ISO 27001 standard for “information security management systems”.

Employee productivity increases. This message will resonate strongly with Managing Partners who preach the mantra of “smart working”. A platform ensures lawyers spend less time chasing signatures and drafting powers of attorney to close out transactions, and shift their focus to other clients’ business.

Legal effect of electronic signatures. An electronic signature will facilitate valid execution of most commercial, consumer, corporate, financial and HR contracts under UK law.

Some providers also offer digital signatures, which – boffins take note – are defined in the eIDAS Regulation as “advanced electronic signatures” and “qualified electronic signatures”. A digital signature is a subcategory of electronic signature. It is produced using public key cryptography and inserted into the code of the electronic document. The signature is supported by a digital certificate from a “trust service provider” that verifies the identity of the signatory.  The JWP practice note affirms that the law and market practice in England and Wales overwhelmingly favours electronic signatures.

Nevertheless, lawyers should be aware that there is demand in some UK industry sectors, such as banking and pharmaceuticals, for the extra security and more advanced identity-proofing afforded by a digital signature/certificate. Moreover, there are some transactions under foreign laws (including Scottish law) that must be authenticated with a digital signature.

The Right to Information Act No. 12 of 2016 of Sri Lanka

The fight for responsible accountability, good governance which is against corruption can only be strengthened if the information held by responsible authorities is more readily available. The result of relaxing the obstructing tight mechanisms that prevent the access of information would create a more transparent system of administration.

It is remarkable and broadly accepted by legal academics that the true essence of democracy can be achieved by the declaration of “Right to Information” to the public. The scrutiny of such is notably to maintain a more democratic system in the country whilst entertaining the true spirit of transparency.

Sri-Lanka, having face a 30 year conflict of war and a rather traumatic era left the purported ‘right to information’ under the Constitution of Sri Lanka (Article 14A of the Constitution of Sri Lanka 1978), restricted to an article engraved in the Constitution until 2016. One may argue that the Constitution prevails over any other legal document. In a practical approach, however, the right will remain to be a grey area as the abovementioned article would entail an exhaustive list of laws relating to same. The absence of a legally binding document guaranteeing the right to information would leave a lacuna in the context of justice. Therefore, the enforceability of the right guaranteed by the Constitution will only be effective in reference to an act pertaining to “Right to Information”. This principle was established in the case of Giustiniani v. Y.P.F. S.A., a case decided in the territory of Argentina, in which the court ruled in favor of the plaintiff and further urged the public company Yacimientos Petroliferos Fiscales to produce a copy of the investment agreement related to the exploitation of hydrocarbon /oil resources.

The country although having other commitments to look into due to the war, yet functioned in ways and means to give effect to the United Nations proposed Resolution 59 (1) in the year 1946. This resolution was further taken up for discussion in the year 1995 by the UN Commission. Therein, it was stated that “Freedom will be bereft of all effectiveness if the people have no access to information. Access to information is basic to the democratic way of life. The tendency to withhold information from the people at large is therefore to be strongly checked.”[1] To give effect to the abovementioned resolution, Sri Lanka attempted to formulate a concrete ground for RTI in mid 1990’s (Legislative Draftsman’s Department, LDO Number 23/2003) which however, failed to conclude positively.

Furthermore, this principle was also encrypted under Article 19 of the International Covenant on Civil and Political Rights and Article 19 of the Universal Declaration of Human Rights which recognizes the right and access to information where Sri Lanka is a party to, with the placement of signature on the treaty.

On realizing the importance of such a right in existence, Sri Lanka, a country that looks over the democratic system, began the process of documenting the fundamental right. After several attempts of passing draft Right to Information Bills over the years, in August 2016, the Bill of Right to Information (“RTI Bill”) was passed with the view to provide a more centralized transparent system of governance. The RTI Bill was brought to the attention of the Parliament in the midst of March 2016. The sole purpose of promoting the Bill, as stated in the preamble of the RTI Bill, was to structure “a society in which the people of Sri Lanka would be able to more fully participate in public life through combating corruption and promoting accountability and good governance”[2]. The recognition of the absence of the right was further highlighted with the inception process for the 19th Amendment to the Constitution as a fundamental right. Supporting the views enacting the RTI, the Center of Law and Democracy assessed the RTI to be the 7th strongest in the world.

The prime need for the establishment of this fundamental piece of legislation was opined by Chief Justice Sarath N Silva whilst deciding the case of Environmental Foundation Limited v Urban Development Authority of Sri Lanka and others (Galle Face Green Case)[3]. He stated that “a bare denial of access to official information as contained in P10, sent by the UDA, in my view amounts to the infringement of the Petitioner’s fundamental rights as guaranteed by Article 14 (1) (a) of the constitution…the implicit right of a person to secure relevant information from a public authority in respect of a matter that should be in the public domain”.

However, the urge for the Right Information dates back to 1984 which was derived from the case of Visuvalingam v. Liyanage where it was held that the need for easy access to information was needed to be reckoned as the right to information from many sources was possible[4]. Therefore, it was prominently noted that the documentation of the right through an Act was essential to make the system of justice more approachable.

The RTI Act provides an absolute right and gives effect to the constitutional right of every citizen to access information under Section 3 of the RTI Act. Nevertheless, the granting of the right was on the other hand, followed with limitations. These limitations are in the form of a comprehensive list as stated under Section 5 of the RTI Act.

The limitations stipulated in the RTI Act include that the denial to access information may arise the personal information in concern has no public activity or interest. Disclosure of information is a threat to national security. Disclosure of such information could harm the economy of the country. Denial of information related to trade secrets or intellectual property. Providing medical records unless consented and permitted to by the person in question. Communication trails between a professional and public authority unless consented to i.e. communication between the attorney general and public authority. Existence of a fiduciary relationship. Information which may obstruct the detection of a crime. Exposure of identity of a confidential source may be revealed. Third party does not consent to the disclosure of the information. Contempt of court. Infringement of parliament privilege. Harm integrity of an examination being conducted by the Department of Examination.

Furthermore, in the process of debating the RTI Bill in Parliament, concerns and proposed changes in order to protect the confidentiality of sensitive information relating to Section 5 of the Act on ‘Denial of Information’ were raised. Accordingly, when the Parliament certified the RTI Bill, Section 5 of the Act was further expanded giving effect to Section 5 (m) whereby ‘if information is a cabinet memorandum in relation to which a decision has not been taken’ the request may be refused. Further, Section 5 (n) where ‘the information requested to be disclosed is with regard to an election conducted by the Commissioner of Elections’, which is required by the relevant election laws to be kept confidential. This was formally engraved in the Act as a stance for the public authorities to deny disclosure of information.

Moreover, many concerned parties raised their nonconforming views indicating that some of these exceptions stated under Section 5 were conflicting with the articles in the Constitution of Sri Lanka. One example of a recent dissimilarity raised to concern was the exemption stated under Section 5 in relation to denial of disclosure of information as it would harm the economy. The denial of information related to trade agreements as stated under Section 5 (v) was noted to be a clause conflicting with Article 14, 14A and 15 of the Constitution.

Dr. A.G. Damayanthi Perera, a Specialist in Food, Nutrition, an Independent Researcher, along with two other Software Engineers, raised the issue relating to the conflict of Section 5(v) by filing a petition in the Supreme Court of Sri Lanka. The Petition stated that, a developing country like Sri Lanka will find it difficult to tackle the challenging concepts in the corporate arena when dealing with overseas companies.

The exceptions to the fundamental rule of the right to information was also opined by Lord Toulson’s in the case of Kennedy v Charity Commission, in which he stated that “Judicial processes should be open to public scrutiny, unless and to the extent, that there are good reasons for secrecy”.[5] Thus, despite the right of information being a fundamental right, the times at which the denial to access of information is validly construed yet exist in the legal sense.

It is nonetheless important to note that the above limitations could be avoided where the request of information is very much urgent and as per severe circumstances surrounding the necessity of such information. This is engraved under Section 6 of the RTI Act. Additionally, if the disclosure of information is denied by the public authorities, the aggrieved party is within the capacity of making an appeal to the “Right to Information Commission”- a body corporate with perpetual succession which will be established in the conformity of Part IV of the RTI Act.

Above all, these flaws are contained within the proposed validity of the right to information. It is important to note the very exceptional advantages. The recently passed RTI Act will be a monitor for showcasing the reality, whilst making the latent motives of a government accessible to the public to some extent.

Many professionals in the arena of law supported the RTI Bill coming into force, claiming that the ideology of the Bill would restructure the transparency of the government and public authority dealings. Thus, the instances in which the public being blindfolded in times of corruption will be limited, and the Act will further provide the public with an avenue to raise their dissenting views and concerns of the same.

Looking over to our neighboring country, India, who enacted the fundamental right by way of the Right to Information Act 2005, would clear the murky waters of how successful the enactment would be in Sri Lanka. Dr. Rajesh Tandon made positive comments stating that Since the RTI law was introduced, India has seen an improvement in governance, dissemination of information and involvement of civil society in the governance process”[6]. However, the challenge in India is that acts such as the Official Secrecy Act and the Right to Information Act co-exist side by side with the right to information laws. Accordingly, the enactment of the Right to Information Act in India has exposed both how it can thrive a country to success and the possible existence of challenging conflicts to be tackled with.

Similarly, despite the anticipated positivity of the Act, a number of challenges remain when the implementation of the RTI in Sri Lanka is taken into consideration. For instance, archaic acts, such as the Establishments Code of Sri Lanka 1971 and the Sri Lanka Press Council Law No. 5 of 1973, continue to be in force. The existence of such Acts restricts the scope of the new Act in place and limits the public access to the benefits afforded in terms of Section 2 and 3 of the RTI Act. One such important Act that needs to be brought to attention is the Official Secrets Act No. 32 of 1955. The existence of this Act restricts access to documents that are confidential and documents that contain very sensitive information. Although, this act is buried and ignored and the terminology is stated to be outdated, the Act continues to be in force in Sri Lanka and consequently needs to be rectified by ways and means which will diminish the conflict with the new Act in place.

Nevertheless, the Parliament of Sri Lanka, which has the intention of achieving the promising outcomes of the act, certified the RTI Bill with a few proposed amendments on 04th August 2016. Although, the Act will take 6 months to be in force, the effectiveness and the essence of implementing the laws will continue to thrive for the aims of providing an approachable, transparent governance system. All in all, the implementation of a Right to Information Act in Sri Lanka is imperative to foster a nation of transparency, accountability and good governance and to ensure the rights of the public citizens of the country are safeguarded which Sri Lanka believes as a country driven by democratic principles.

[1] 2 UN Doc. E/CN.4/1995/32, para. 35.

[2] Right to Information, Gazette, Preamble December 2015.

[3] (S.C.F.R 47/2014)

[4] 1984

[5] Kennedy v. the Charity Commission [2014] UKSC 20


Significant Changes to Canadian Takeover Bid Regime Implemented


On May 9, 2016, the Canadian Securities Administrators (the “CSA”) implemented new harmonized takeover bid rules. These new rules represent the most significant changes to the securities regulatory regime for takeovers of public companies in Canada since the original adoption of the takeover bid regime in 1966.

Background to the New Rules

The takeover bid landscape in Canada is shaped by the principle that shareholders should be the ultimate decision makers in determining whether to accept a takeover bid or not.  That principle underpins the key regulatory guidance on defensive tactics by target companies, National Policy 62-202 Take-Over Bids – Defensive Tactics (“NP 62-202”). This policy reflects the principle that shareholder rights plans (poison pills) and other defensive tactics cannot be used to prevent shareholders from ultimately having the opportunity to tender to a takeover bid, and is primarily focused on protecting the bona fide interests of target shareholders.

This shareholder-centric approach has informed numerous decisions of Canadian securities commissions over the past decades that have, with few exceptions, cease traded (i.e. rendered ineffective) shareholder rights plans after a certain time period (generally 45 to 70 days) to allow a hostile bid to proceed. Prior to the new rules, the regulatory regime clearly favoured bidders and significantly limited a target’s ability to defend against hostile bids. In most cases, once a hostile bid was launched, some form of change of control transaction would become almost inevitable.

Following a number of court decisions confirming that the fiduciary duty of directors of Canadian companies is to act in the best interest of the company (and not any one stakeholder group, including shareholders), capital markets participants began to question whether the shareholder-centric approach to takeover bids unduly restricted the ability of boards to defend against hostile bids. In addition, there ongoing concerns have been expressed in recent years that the bidder-friendly nature of Canadian securities and corporate laws may be contributing to the “hollowing out” out of corporate Canada.

In response, the CSA embarked upon a detailed review of the takeover bid regime, which formed the foundation for the new rules.

Overview of the New Rules

The new rules are intended to enhance the quality and integrity of the takeover bid regime and rebalance the dynamic among bidders, target boards and target shareholders by (i) facilitating target shareholders’ ability to make voluntary, informed and coordinated tender decisions, and (ii) providing target boards with additional time and discretion when responding to a takeover bid.

To achieve these objectives the new rules require all takeover bids to:

  • receive tenders of more than 50% of the outstanding securities of the class that are subject to the bid, excluding securities beneficially owned, or over which control or direction is exercised, by the bidder or by any person acting jointly or in concert with the bidder (the “Minimum Tender Condition”);
  • be extended by the bidder for an additional 10 days after the Minimum Tender Condition has been achieved and all other terms and conditions of the bid have been complied with or waived (the “10 Day Extension Requirement”); and
  • remain open for a minimum deposit period of 105 days unless the target board (a) states in a news release a shorter deposit period for any proposed or outstanding bid of not less than 35 days that is acceptable, in which case all contemporaneous takeover bids must remain open for at least the stated shorter deposit period, or (b) issues a news release that it has agreed to enter into, or determined to effect, an “alternative transaction” (being a transaction that is not a takeover bid, such as an arrangement), in which case all contemporaneous takeover bids must remain open for a deposit period of at least 35 days (the “105 Day Requirement”).

The following table compares the key features of the new rules with the previous regime:

Provision Previous Rules New Rules
Minimum tender requirement No minimum tender requirement. Any minimum tender condition stated in the bid could be waived by the bidder prior to the expiration of the bid.

“Any and all” bids permitted.

Bidders are prohibited from taking up securities under a bid unless the bid receives tenders of more than 50% of the securities of the class subject to the bid, excluding those beneficially owned by the bidder.

“Any and all” bids prohibited.

Extension of successful bid following the expiration of the bid No requirement to extend a successful bid, except to satisfy customary “permitted bid” requirements under a shareholder rights plan Following the initial deposit period, all successful bids must be extended for an additional 10 days to enable any shareholder that had previously not tendered to tender its securities
Minimum deposit period Minimum deposit period of 35 days, with extensions given where variations are made to the bid Minimum deposit period of 105 days, which may be reduced at the option of the target, upon the acceptance by the target of a shorter deposit period for any other takeover bid or upon acceptance by the target of an “alternative transaction”

Implications and Issues

Through the new rules, the CSA has accomplished its goal of rebalancing the dynamics among bidders, target boards and target shareholders, and the new rules have a number of important implications.

Hostile Bids Are Now More Challenging

The new rules significantly shift leverage from hostile bidders toward target directors and shareholders. This will make hostile bids more difficult to complete and could, as a result, reduce hostile bid activity in Canada.

Time is generally the enemy of a hostile bidder. The longer a hostile bid remains outstanding, the greater the chance that a competing buyer will emerge, the target company’s circumstances will improve, market conditions will change or some other unexpected development will derail the transaction. The 105 Day Requirement should generally give target boards ample time to respond to an unsolicited offer and, if appropriate, run a thorough sales process to locate potential “white knight” bidders or make a more compelling case that target shareholders reject the hostile bid.

In addition, a longer bid period may mean that third party financing could become harder for bidders to obtain, or at least may be more expensive, as the lender’s commitment will need to be in place for a longer period. Bidders may also find it more challenging to convince key target shareholders to “lock up” to their offer for a minimum of 105 days.

The Minimum Tender Condition and 10 Day Extension Requirement remove what has been one of the most effective tactics available to a hostile bidder – the ability to waive its minimum tender condition and acquire “any and all” tendered shares. That ability permitted a hostile bidder to acquire an effective control position in the target, allowing it to block a competing transaction even if it was unable to gain majority control of the target. This, together with the fact that target shareholders may not know before the tender deadline what the outcome of the bid would be, led to persistent concerns under the previous rules that shareholders could be coerced into tendering to a hostile bid due to the possibility that they may be “left behind” in a potentially illiquid investment with no prospect of another liquidity transaction. Under the new rules, more shareholders may wait to see how the bid plays out before tendering, which could make it even harder for hostile bids to succeed.

Partial bids – offers to acquire less than all of the target company’s outstanding shares – are expected to be much more difficult to execute. Because the Minimum Tender Condition applies to all bids, a bidder that launches a bid for even a relatively small percentage of the target’s shares must still convince the holders of more than 50% of the outstanding shares not owned by it to endorse the offer by tendering to it. However, since partial bids have been quite rare in Canada, the impact of the new rules on partial bids may be of limited practical consequence.

Hostile Bid Tactics Will Evolve

The new rules are expected to cause both bidders and target companies to adjust their hostile bid tactics and commit significant resources to waging hostile bid campaigns. Since a bid’s success or failure will turn on collective, and not individual, decision making by the target shareholders, we expect that bidders will devote more resources to aggressive public relations and solicitation campaigns (e.g., social media, white papers, websites, etc.) to convince shareholders to tender. Proxy solicitors, public relations consultants and social media experts will play an important role on both sides of a hostile bid transaction.

Rights Plans Will Have Limited Utility

Although the need for targets to adopt “tactical” rights plans in the face of a hostile bid is expected to decrease significantly, many issuers may maintain rights plans to prevent “creeping” takeover bids.  The latter are still possible through takeover bid exemptions which permit, for example, the acquisition of shares under a private agreement or through limited market purchases, and which are not affected by the new rules.


The new rules are expected to have a significant effect on the manner in which takeover bids are conducted in Canada and the securities regulators’ role in takeover bid transactions.  In particular, these rules will eliminate some of the most coercive elements of hostile bids available under the previous rules and significantly increase the time available to target boards to explore  potential alternatives to a hostile bid. Yet although the new rules change the playing field, they do not abandon the Canadian principle that a target board cannot indefinitely “just say no.” If there is an offer on the table, shareholders will generally continue to have the final say.


The Automatic Exchange of Financial Information in Bulgarian Context – the Reach

I. Introduction

In 2015 Bulgaria introduced in its Tax and Social Security Procedure Code (“TSSPC”) a system implementing the regionally and globally harmonized rules on automatic exchange of financial information in the field of taxation. The participating jurisdictions are the European Union member states under Directive 2014/107/EC amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (“Directive 2014/107/ЕС”), the United States of America under the intergovernmental Agreement to Improve International Tax Compliance and to Implement FATCA (Foreign Account Tax Compliance Act) and any other jurisdiction, with which Bulgaria or the EU has concluded a treaty for exchange of information. As a result, a whole new section became effective in 2016, regulating the obligations of the financial institutions to collect and submit information and to conduct complex audits. Thus the Bulgarian legislator complied with its EU law and international obligations for fighting against tax evasion. The TSSPC also takes into account the Common Reporting Standard for automatic exchange of financial information (CRS) of the Organization for Economic Co-operation and Development (OECD).

Against this backdrop, the TSSPC aligns with the expectations for compliance with all of the above stated pieces of legislation and should not be regarded as the elephant in the room from comparative point of view especially when put next to other national legislations in the EU.

Further below, one could find an essential overview of the newly established countering tax evasion reporting system.

II. Who is affected?

The persons affected from the new rules on Automatic Exchange of Financial Information are to be differentiated in persons whose accounts are subject to processing and provision of information (i.e. “Reportable Persons”) and the institutions that are under the obligation to collect, process and submit the relevant information for the respective Reportable persons (“i.e. “Reporting Financial Institutions”).

  1. Reportable Persons

For the purposes of the TSSPC and the Automatic Exchange of Financial Information system a Reportable Person is (i) an individual or entity that is resident for tax purposes in one or more participating jurisdictions under the tax laws of such jurisdiction, or a hotchpot of a late that was resident for tax purposes of a participating jurisdiction. Where the tax residency of an entity such as a partnership, limited liability partnership or similar legal arrangement (except for trusts that are passive non-financial entities) cannot be determined, such entities shall be treated as resident in the jurisdiction in which their place of effective management is situated. The TSSPC provides explicitly that corporations, whose stocks are regularly traded on one or more established securities markets and its affiliated corporations, governmental entities, international organizations, central banks and financial institutions, are to be excluded from the list of persons for which reporting is made. Specific definition exists for Reportable Persons under the FATCA Agreement. A Reportable Person is any US person specified under Article 1, Paragraph (1), letter (aa) of the FATCA Agreement.

  1. Reporting Financial Institutions

The TSSPC categorizes the persons, who are under the obligation to collect, process and submit the information. The main group of persons refers to the so called “Reporting Bulgarian Financial Institutions”. In general terms these include custodial institutions, depository institutions (i.e. banks), investment entities, and some insurance companies.

Geographic-wise the coverage of the TSSPC spreads to encompass any financial institution that is resident for tax purposes in Bulgaria (excluding branches of such financial institutions located outside Bulgaria) and any branch of a financial institution that is not resident for tax purposes in Bulgaria, if that branch is located in Bulgaria.

III. What type of information would be collected and shared?

The Reporting Financial Institutions are under the obligation to provide to the Executive Director of the National Revenue Agency certain information on individuals or legal entities and their accounts, meeting the conditions for being qualified as reportable[1]. Such information would comprise the following:

  1. name / company name, address, the participating jurisdiction of which the respective person is a tax resident, the taxpayer identification number, date and place of birth (if an individual) for each account holder, who qualifies as a Reportable Person;
  2. where the account holder is an entity which, after implementation of due diligence procedures, has been identified as a passive non-financial entity with one or more controlling persons, who are Reportable Persons then the following information is to be provided: name, address, taxpayer identification number and participating jurisdiction or other jurisdiction of which the entity is a tax resident, as well as for each controlling Reportable Person the name, address, participating jurisdiction of which that person is a tax resident, the taxpayer identification number, date and place of birth;
  3. account number or, where there is no number, the functional equivalent;
  4. name and identification number of the reporting financial institution;
  5. account balance or value, including, in the case of a cash value insurance contract or an annuity contract – the cash value or surrender value, as of the end of the calendar year or the date on which the account is closed;
  6. in the event of a custodial account:
    1. the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year, and
    2. the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year, with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;
  7. in the event of a deposit account: the total gross amount of interest paid or accrued (credited) into the account during the calendar year;
  8. in the event of an account not specified in item 6 or item 7 above then the following information is to be provided: the total gross amount paid or accrued into the account to the benefit of the account holder during the year, with regard to which amount the Reporting Financial Institution has a reporting obligation, including the aggregate amount of any redemption payments to the account holder during the calendar year.

IV. How is it collected?

The Reporting Financial Institutions are obliged to follow specific due diligence procedures in order to acquire and process the necessary information for the Reportable Persons. The procedures for collection of complex and diverse data differ depending on whether the Reportable Person is a legal entity or a natural person and whether the accounts under examination are existing or newly created.

  1. Individuals

For natural persons it should be noted that there is also a difference in the methods of scrutiny of low value and high value accounts. The relevant threshold for differentiating between low value and high value accounts is USD 1,000,000. Against this background, the TSSPC chose to combine both the permanent residence address test and the indicia search test. The permanent residence address test uses information on the addresses of the Reported Person stored by the Reporting Financial Institution. The indicia search test on the other hand is based on the electronic data held by the Reporting Financial Institution for low value existing accounts. The indicia search test is to be used by the Reporting Financial Institution only where the Reporting Financial Institution does not apply the permanent residence address test. On the basis of such tests the Reporting Financial Institution may qualify a Reported Person as a tax resident of any of the participating jurisdictions. The test applicable for the FATCA Agreement obligations is in fact an adjusted version of the indicia search test, which includes also a check on whether the person is an US citizen and whether the person is born in the United States.

More stringent procedures apply for high value accounts of natural persons. In these cases the Reporting Financial Institution is to use the indicia search test without application of the permanent residence address test. The more stringent review requires the Reporting Financial Institution to scrutinize the electronic dossier of the respective person and the paper dossier for the last five years where necessary (as the case may be).

For the purposes of the FATCA Agreement, the Reporting Financial Institutions have the discretion not to implement the due diligence procedures and not report on the following already existing individual accounts:

  • a pre-existing individual account with a balance or value not exceeding the BGN equivalent of USD 50,000 as of 30 June 2014;
  • a cash value insurance contract or an annuity contract with a balance or value equal to or lower than the BGN equivalent of USD 250,000 as of 30 June 2014;
  • a deposit account with a balance equal to or lower than the BGN equivalent of USD 50,000 as of 30 June 2014.

Finally, with regard to individuals and for their newly created accounts, as a general rule, a self-certification procedure applies, which aims at collecting the necessary information for determination of the tax residency of the respective person on the basis of a sample declaration.

  1. Entities

Regarding existing accounts of legal entities the TSSPC introduces a threshold below which the Reporting Financial Institutions are not obliged to perform the due diligence check. Nevertheless, they retain their full right to do so. The threshold is the BGN equivalent of USD 250,000 (for the purposes of the FATCA Agreement the relevant sum is the BGN equivalent of USD 1,000,000) as of 31 December 2015 (for the purposes of the FATCA Agreement the relevant date is 30 June 2014). However, if the value of the accounts is over the threshold or exceeds at certain point in time the threshold the account would be subject to review.

With respect to accounts for which a due diligence check is performed, the Reporting Financial Institution should carry out an examination on whether the entity(ies) holding the account is a Reportable Person or a passive non-financial entity.

The Reporting Financial Institutions analyze available documentation and information in order to determine whether the entity is a Reportable Person. The TSSPC provides that the Reporting Financial Institutions could use the information kept for regulatory or customer relation purposes, including information submitted for compliance with the anti-money laundering legislation and the self-certification method.

The Reporting Financial Institution must determine whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons. This check is made on the basis of the information that the Reporting Financial Institution already has on the entity, including information provided for anti-money laundering purposes and also on publicly available information. If any of the controlling persons of the passive non-financial entity is a Reportable Person, then the reporting financial institution must treat the account as a reportable account. Specific rules for determining passive non-financial entities exist for the purposes of the FATCA Agreement.

For newly created entity accounts, a check needs to be performed by the Reporting Financial Institution whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons, similarly to the checks of existing accounts. Two of the main differences between the due diligence procedures for existing accounts and for newly created accounts are: first for the latter no thresholds apply and secondly the collection of the necessary information is made through the self-certification method (i.e. through submission of a sample-form declaration). For the purposes of the FATCA Agreement specific due diligence procedure applies.

V. Temporal Reach

From temporal standpoint 2016 is the first year for which automatic exchange of information would be effected between the National Revenue Authorities and the competent authorities of the participating jurisdictions. This, however, is subject to exceptions agreed under an international agreements for automatic exchange of financial information (i.e. in situation where such international agreements provide for other relevant dates). For instance, regarding the exchange of financial information with the competent authorities of the United States, the earliest starting year, as of which an exchange of information is to be performed, is 2014. Thus, depending on the data to be exchanged and the regime under which it is exchanged, it is possible that an exchange is performed retrospectively.

Last but not least, it should be recognized that the financial institutions providing information should complete the review of existing accounts of individuals of high value until 31st of December 2016 and existing accounts of individuals of low value until 31st of December 2017. A high value existing account under the TSSPC is an account with total amount or value that exceed the BGN equivalent of USD 1,000,000 as of the 31st of December 2015 or 31st of December of each subsequent year. For the purposes of FATCA Agreement the relevant dates for estimation of whether the threshold is met or exceeded are 30th of June 2014, 31st of December 2015 or 31st of December of each subsequent year. An existing low value account of an individual is one with total amount or value below the BGN equivalent of USD 1,000,000 as of 31st December 2015. For FATCA purposes the date is 30 June 2014.

The review of existing accounts of entities (legal entity or legal arrangement, including company, partnership, trust or foundation) with total amount or value exceeding the BGN equivalent of USD 250,000 should be completed until 31st of December 2017, and for FATCA purposes until 30th of June 2016.

The Reporting Financial Institutions should supply the collected information to the National Revenue Authorities on an annual basis in electronic manner by 30th of June of the year following the year of collection of the financial information.

VI. Conclusion

The TSSPC implements the idea of introducing a somehow uniform standard in the automatic exchange of financial information. The TSSPC relies on three main methods in the process of collection and processing of the relevant data. These are the permanent residence address test, the indicia search test and the self-certification method. The first two tests count mainly on the anti-money laundering and know your client data bases kept by the Reporting Institutions. Nevertheless, all these methods of collection and processing of information and the possibility of having the obligation to make a retrospective examination of accounts and persons in fact affect both the economic operators acting as Reporting Financial Institutions and their clients, namely the Reportable Persons. They create burdensome administrative obligations for both service providers and clients, the effectiveness of which is yet to be seen. Thus, the assessment on whether this new system is proportionate to the aim of countering tax evasion and whether the same results can be achieved through less restrictive and less burdensome measures is also yet to be made.

[1]           Reportable account means a financial account that is maintained by a reporting financial institution and is held by one or more reportable persons or by a passive non-financial entity with one or more controlling persons that are reportable persons, provided it has been identified as such pursuant to the relevant due diligence procedures.

Structuring European M&A activity: why Gibraltar?

The European M&A market saw record trends in 2015, with Q4 2015 being the highest ever quarter for deal value in Europe, exceeding €420billion[1]. A weakening euro resulted in strong US investment playing an important role, and amounting to over US$ 208 billion. This seems to have particularly fuelled European M&A, which saw deal values increase 40% in the first quarter of 2016, compared to the same period in 2015, despite uncertainty in Europe in the lead-up to the UK referendum on retention of its EU membership.[2]

The increasingly international nature of transactions is evidenced by the fact that cross-border M&A represents significant proportions of overall activity. The key challenge in structuring deals of this nature is to minimise costs for the purchaser, both in terms of professional fees and importantly, tax liabilities. Gibraltar provides unique attributes which make it an ideal international financial centre for structuring M&A transactions.

The recent decision of the UK to leave the EU will affect Gibraltar, which depends on the UK’s EU status for its own membership. While this has inevitably created a period of uncertainty, the EU methodologies discussed in this article will certainly remain available until such time as Article 50 of The Lisbon Treaty is triggered by the UK government and EU law ceases to be applicable to the UK.

 1. Membership of the EU

Companies looking to enter into the European single-market can use Gibraltar as a gateway to Europe. In contrast with the other international financial centres, it is often compared to, such as Jersey or Guernsey, Gibraltar’s membership of the EU enables a Gibraltar company to passport services throughout Europe at low cost, with the support of a cooperative, easily accessible, responsive and business-focused regulator. These factors make Gibraltar an attractive location for inbound European M&A activity from the US and Asia.

A Gibraltar vehicle could also be used for the structuring of deals involving other EU member state companies, which is facilitated by the fact that Gibraltar has transposed the Cross Border Merger Directive (“the CBMD”).

The CBMD facilitates cross-border M&A activity for limited companies by providing a simple framework drawing largely on national laws applicable to domestic mergers. This avoids the sometimes prohibitively high costs of cross-border M&A deals, as well as avoiding the winding up of the target company. A Gibraltar company can merge with a company registered in any other EU member state. Interestingly, the CBMD does not operate between Gibraltar and the UK, which are not deemed to be the separate EU Member States for this purpose. The same result can be obtained, however, by undertaking two cross-border mergers, one between the Gibraltar company and a company registered anywhere in the EU, and another between that company and the UK company.

Gibraltar’s EU membership and first class regulatory regime means that holding structures or special purpose vehicles in Gibraltar will be fully compliant with the standards expected by the European Commission and applicable tax laws. This, coupled with Gibraltar’s adoption of EU standards of administrative co-operation in the field of taxation and other tax information exchange regimes, resulted in Gibraltar scoring “largely compliant” in its review by the OECD. This reputation facilitates dealings with third parties, ensuring lack of transparency does not hinder the business.

2. Flexible company law regime for modern-day transactions and business-focused tax laws

  • Corporate law and tax regime 

    Gibraltar overhauled its Companies Act in 2014, to include some features which make Gibraltar companies attractive for structuring acquisition vehicles and facilitating M&A activity. Gibraltar corporate vehicles enjoy the flexibility of the English common law; a legal regime which is widely used and preferred by businesses around the world. A Gibraltar company only requires one director and one secretary (which can be corporate entities), with no requirements for agents or resident directors (although the location of management and control can determine the company’s tax residence). There is no limit on the number of shareholders a company can have, which enables a Gibraltar company to be funded easily with a large share capital, which would be subjected to a fixed capital duty of only £10. It is also possible to have different share classes, such as redeemable shares, or shares with preferential rights to dividend and/or a return of capital on a winding up. There are no minimum capital requirements and share capital can be denominated in any lawful currency. Shares can be issued  per any value and at a premium. Nominee shareholdings are also permitted.The taxation of companies are relatively simple, and also facilitate business needs. All companies are chargeable on taxable profits accrued and derived in Gibraltar, at a fixed rate of 10%. Capital gains are not taxed, and no withholding tax is imposed on the payment of interest or dividends. Interest income is generally not taxable, unless it is inter-company loan interest that is received by or accrues to a company and is in excess of £100,000 p.a. Furthermore, the transfer of shares in a Gibraltar company is not subject to any tax or duty, unless the company whose shares are transferred holds Gibraltar real estate.

  • Gibco as an investment vehicle 

    Gibraltar Private Limited companies are able to convert to public companies, as well as a number of different forms. The shares of Gibraltar companies have been listed on international recognised stock exchanges, such as the London Stock Exchange. The fact that capital gains are not taxed makes an IPO for institutional investors and private equity houses to be attractive. It is also possible for Gibraltar companies to return capital to shareholders (e.g., by delivering redemption proceeds on a redemption of the shares) as opposed to distributing profits by way of dividend.The fund industry in Gibraltar has been growing at a rapid pace and continues to expand. There are many types of fund in Gibraltar, including private funds, Experienced Investor Funds (EIFs), Non-UCITS Retail funds and protected cell companies. This makes Gibraltar a serious option for basing investment funds.

3. Mergers and schemes of arrangement

Mergers are possible for public companies, and the Companies Act 2014 provides a framework for reconstructions and schemes of arrangement. The recent prohibition on cancellation schemes of arrangement in the UK (by virtue of the Companies Act (Amendment of Part 17) Regulations 2015) has resulted in stamp duty payments on the transfer of shares being an additional cost to a purchaser. Given that cancellation schemes were the overwhelmingly preferred structure for conducting high value acquisitions, the closure of this loophole has resulted in a significant increase in costs involved in an acquisition. While the rate of stamp duty in the UK is currently only set at 0.5%, this can amount to a significant quantity in a high-value M&A deal. Purchasers of UK businesses may therefore consider whether the stamp duty saving could be retained by using Gibraltar to structure the deal.

The UK prohibition on cancellation schemes does not prevent a cancellation scheme of arrangement from being used to insert a holding company over the target company. It is possible therefore, to insert a Gibraltar holding company over the UK target, by cancelling the shares in the UK company in consideration for issuing to the shareholders, new shares in a Gibraltar company which will hold shares in the target. A purchaser could then acquire the shares in the Gibraltar company by way of a share transfer.

The shares of a Gibraltar company with a share register maintained outside the UK are not subject to stamp duty in the UK. In Gibraltar, no stamp duty is payable on shares (unless the transaction involves real estate located in Gibraltar). In an increasingly cost-conscious market, this can amount to a significant saving for the purchaser.

The proposal is illustrated below:

  1. Shares in UKCo cancelled, in consideration for the issuing of shares in Gibraltar HoldCofig1
  1. BuyerCo purchases shares of Gibraltar HoldCo. No stamp duty is payable in the UK on shares in Gibraltar companies and no stamp duty on shares in Gibraltar.fig2

In addition, there would be no tax on the dividends received from the UK target to the Gibraltar HoldCo, and no withholding tax on dividends paid from Gibraltar HoldCo to the BuyerCo. Corporation tax would only be on profits accrued and derived in Gibraltar, at a flat rate of 10%.Furthermore, the lack of VAT provides significant savings on professional fees.

4. Redomiciliation

Gibraltar law permits redomiciliation of companies registered in a number of other countries to Gibraltar, as well as the redomiciliation of Gibraltar companies elsewhere. This can be vastly helpful in the context of M&A transactions. In the above example, for instance, companies incorporated and registered in jurisdictions which do not recognise the scheme of arrangement, who wish to take advantage of the benefits structuring the acquisition in this way can provide redomicile under the Companies Act 2014. Once redomiciled to Gibraltar, the scheme of arrangement provisions under Gibraltar corporate law can be utilised. Similarly, after completing an M&A transaction, the new business may consider redomiciling to Gibraltar to take advantage of the competitive and flexible taxation and legal regime.

Companies registered in any of the following jurisdictions may redomicile into Gibraltar:

Any of the EEA States, Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, Cayman Islands, Falkland Islands, Guernsey, Isle of Man, Jersey, Montserrat, Pitcaim, St. Helena, Turks and Caicos Islands, British Virgin Islands, States which are members of the British Commonwealth, Liberia, Panama, Singapore, Switzerland, Hong Kong and the USA.

The arrangements are reciprocal, so a Gibraltar company is also able (subject to local laws) to redomicile into any of the above-listed jurisdictions.

Upon a redomiciliation, a company continues in uninterrupted existence, so the assets and liabilities, rights and obligations of the company remain as they are in the original state, which further facilitates post-acquisition synergies.

5. SocietasEuropaeas

The Companies Registrar in Gibraltar recognises and registers SocietasEuropaeas, which also facilitates cross-border M&A activity.. Such entities are able to transfer their registered office from one EU member state to another, without having to comply with the more onerous procedure to migrate a company, which involves the transfer of assets and liabilities, dissolutions and re-incorporations. A SocietasEuropaeas can be formed by a merger between two public companies in different EU Member States. This may be of particular benefit to companies in the gaming sector, as many of the largest providers in the gambling market operate out of Gibraltar.

6. Conclusion

At a time where clients are more cost-conscious than ever, structuring a merger or acquisition effectively, while keeping costs and tax-liabilities at a minimum is key. Gibraltar offers a variety of mechanisms for M&A deal structures, as well as post-transaction corporate group structuring. Gibraltar boasts a diversified economy which is rapidly growing in sectors such as financial services, gaming, shipping and tourism. Despite the uncertainty and instability resulting from the UK’s decision to exit the EU, the legal matrix in which the market operates remains unchanged. Following 2015 as a record year in the European M&A market, 2016 may see Gibraltar featuring increasingly on the radars of M&A professionals, indicating that notwithstanding its small size, Gibraltar has a lot to offer.

[1]Deloitte“Impact of the EU referendum on M&A activity in the UK” accessed on 5th August 2016 on


Environmental Legal Risk in Mergers and/or Acquisitions

 I. Background

As a consequence of the promulgation of Environmental Laws in México over the past five years, the topic of risk and environmental liability has become a major issue of merger and acquisition operations.

Moreover, in this type of operation, it is crucial to take into account the very nature of the transaction in question so as to fully understand the risk and liability corresponding to each project.

II. Modalities

Basically, we have two main types of modalities: A) the purchase-sale of stocks and B) the purchase-sale of assets.

  • Purchase-Sale of Stocks

In this case, past, present and future environmental liability is acquired fully by the purchaser, independently of the fact that liability for the seller may be agreed to for past irregularities, such as the case of soil contamination.

Inasmuch as the legal personality of the corporation remains intact and, therefore, the new owner shall be liable for the facts and/or omissions implied by violations.

  • Purchase-Sale of Assets

In this case, personal liability ends since it is not acquired by the corporation and, consequently, legal personality is extinguished.  Subsisting are solely real liabilities, procte rem, as, for example, soil contamination.

Therefore, environmental liability pursue the item, that is, the property.

It is of major importance to review the possibility of assigning the rights of the corresponding permits, licenses or concessions so as to validate their transfer before the legal personality of the corporate entity in charge thereof is terminated.

Once having distinguished between the modalities of transaction in question, I list below the legal actions to be reviewed so as to carry out precise and proper environmental due diligence.

III. Analysis of the Legal Actions to be Follower

  • Ad Hoc Check List

It is quite common to see that the majority of our colleagues use standard forms applying to all merger and acquisition operations, thereby committing a big mistake, given the fact liability for the hotel industry is not the same as for the chemical industry.

It is our opinion that a specific checklist must be worked out for the industry in question.

  • Study Phase 1 vs. Legal Review

In particular, it is often used for the parties involved in this type of transaction to measure environmental risk by solely carrying out a Phase 1 study.  The problem lies in the fact that, though it is true the aforementioned reports deals with the risk level of the company´s operation vis-à-vis soil contamination, it does not deal with the scope and validity of the environmental permits required to operate nor with the risk of revocation and/or closure thereof.

  • Measurement of Risk and Liability

To resolve the environmental legal-risk factor of operations, it is essential to do an exhaustive legal review of the permits the company and/or industry needs to operate.

This will allow us to prepare an integral strategy, which, on the one hand, allows us to reliably measure environmental legal risk, and, on the other hand, with this hard data, leads to an integral strategy of regularization, should such be necessary.

  • Measurable Costs

After all is said and done, an integral legal report must provide us with the: i) legal risk of the operation; ii) legal liability of the parties; iii) parameters of the fines and/or administrative sanctions that might be levied for existing environmental irregularities; iv) approximate costs of the regularization of the company.

IV. Conclusions

  • The growing legal regime of environmental liability in Mexico makes it essential to do an exhaustive review of compliance in the area applicable to all mergers and acquisitions.
  • It is crucial to fully understand the type of modality of the transaction in question.
  • An exhaustive legal review is fundamental to measuring legal risk, as well as the scope of the civil, environmental, administrative and/or criminal liability of the parties involved in the transaction.
  • The elaboration of a report at the level of compliance and limit of environmental liability is essential, as are parameters of the cost of regularization.
  • In the case, contamination is found in the site, there must be ex profeso clauses within the contract.
  • Finally, in the interest of avoiding lawsuits brought for unreviewed defects and unnecessary risk in mergers and acquisitions, the involvement of an environmental expert with more than 20 years knowledge and proven

The Referendum – One Month On


It is now one month since the 23 June EU Referendum, and few could have anticipated the positive tone to markets and surprisingly buoyant reaction to the Brexit result. Since 23 June, equity markets have rallied strongly while bond yields have fallen further, and the Sterling is still trading at an all-time low versus major currencies.

Returns since before the UK referendum:

The positive tone can be explained by a number of factors:

  • Investor relief at seeing definitive leadership in the UK. Prime Minister May is seen to be pursuing a judicious review plan for Brexit as opposed to helter-skelter invocation of Treaty 50.
  • Central Banks have signalled their willingness to remain accommodative in the face of any significant slowdown or systemic event, with both the Bank of England and ECB promising further support if needed.
  • Elsewhere in the world, US & China have announced economic numbers which signal a stronger tone to the second quarter. Investors for the moment believe these economies to be largely insulated from events in Europe.
  • The US market has hit an all-time high, buoying sentiment elsewhere in the world.

When counterbalancing these positive ‘relief’ factors, there are still some worrisome signs.

  • Geopolitical events remain at the fore with weekly terrorist incidents providing an unnerving backdrop to global stability.
  • Bank stocks remain under pressure across Europe, with large bank bail-outs in Italy and weakness in European bank shares a concern.
  • Economic growth numbers in Europe and Japan remain weak, despite substantial liquidity injections through bond buying and negative interest rate policies in force.
  • UK PMI numbers (an indicator of the health of the manufacturing sector) have shown a decisive downturn in the UK, with the headline service sector PMI falling to 47.4 (below 50 indicates slowing activity), the lowest level since 2009.
  • Second-quarter earnings have kicked off with mixed results from across the globe.

Against this backcloth, investors remain watchful, feeling that there are still ample risks in the world that could derail the current rally. This has been a characteristic pattern of financial markets in 2016 – surprising market rallies following significant market declines, while bond yields continue their relentless move lower.

High volatility has boosted “safe” and income assets

Heightened volatility and the decline in bond yields have led to an enormous appetite for income and safety.

Two interesting statistics are worth noting:

  • So far this year, the percentage of days when the US intra-day volatility has been greater than 2% has been close to 15% versus an average of 4% for the last 3 years. In the UK, that number is even higher.
  • The yield on ten-year gilts is below the previous low recorded in 1897 and the lowest level since Bank of England records started in 1703. Today, over a third of the $25 trillion in global government bonds is yielding a negative rate of return.

As a result, stocks that look like bonds have led the rally across equity markets year to date. In the US, the telecommunications index is up 22%, utilities are up 21% and energy (because of it’s higher than market yield and the bounce in oil prices) is up 14%. Yields are close to 4% across these sectors. This pattern has been mirrored in other global markets, with utilities, staples and telecommunications up close to 10% in other developed markets excluding the US.

Is “safety” expensive?

  • We believe that “safe” and high yielding stocks are now expensive, trading at an average premium of 30% to the market (see footnote). Normally, these stocks trade at anywhere between a 10-20% discount. “Safe” companies are those that offer dividend income but little earnings growth, or income stocks with high yields (such as in the energy sector) but with inherent cyclicality and risk in the underlying business.
  • We believe that “safe” stocks, in particular utilities and telecommunications shares may be at significant risk as investors rotate from income sectors on rich valuations to embrace quality growth. (They also tend to be hurt when interest rates rise.)

From monetary to fiscal stimulus

What could be the catalyst for this rotation? If policy makers significantly embrace stimulative fiscal policy measures, as is expected by some, this would have a meaningfully positive impact on the outlook for growth.

Investors perceive that the monetary policy toolkit is nearing exhaustion, and negative interest rates in Europe and Japan have yet to have the desired impact on growth.  As a result, the policy narrative seems to be changing. Fiscal policy is now becoming more widely discussed as a stimulus tool, and the change in policy is coinciding with political “regime shifts’:

  • The EU referendum and new Prime Minister has brought an end to Osborne’s austerity, and the objective of a balanced budget for 2020.
  • Japan looks close to announcing a substantial fiscal stimulus package.
  • In the US, both Trump and Clinton stand for increases in infrastructure spend, potential tax amnesty for US companies to repatriate cash and reform of the tax code; with Trump calling for a lowering of the corporate tax rate from 35% to 15%.
  • Xi Jinxing has implemented significant fiscal stimulus in China; many speculate that that is all part and parcel of stabilising growth at the 6% mark while cementing his leadership position for the upcoming 19th Communist Party Congress (end 2017).


If any of these early indications of more expansionary fiscal policy come to pass, this will support portfolios with a “quality growth” bias. Interestingly, since the 24 June rally , there has been a discernible rotation in sector leadership with the perceived ‘safer’ telecom, utility and income and energy sectors underperforming other sectors (such as technology, healthcare and industrials).

It is too early to say whether this shift signals a more substantial trend reversal, but we believe it still makes sense to favour compares with quality growth, strong balance sheets, good cash flows and sustainable business franchises, which – in addition – continue to deliver earnings growth.

Given that valuation, expansion has been a significant contribution to total return, and valuations are rich as a result, there is lower scope for this to continue. Companies must now deliver earnings growth to justify further increases in valuation. In a low growth environment in which equity valuations are far from cheap, we believe investors will continue to pay for persistent and sustainable earnings.

Footnote: Source: “Keep Calm and Carry On” 2016 First Half Client Review. 30th June 2016, Bloomberg, CRSP, FactSet, MSCI, and AB. Past performance is not a reliable indicator of future returns. Safe stocks defined as the lowest quintile of monthly beta within the AB US Large Cap universe of stocks. Premium/discount is versus the universe average


50 Jurisdictions, 300 Million Potential Customers: Unlocking One of the World’s Biggest Markets, The United States of America

For the uninitiated, doing business in the United States can seem especially daunting. Each state has different laws and compliance requirements, meaning the United States is comprised of 50 different jurisdictions, plus the District of Columbia! Not only that, US territories such as Puerto Rico, the US Virgin Islands, Guam and the Northern Mariana Islands have their intricate regimes and require a specialist to navigate the waters.

Especially now in times of economic and political uncertainty, the US remains the ideal business partner for UK enterprise. Besides the common language and similar entrepreneurial culture, the United States is consistently ranked among the top countries in the world for its ease of doing business. US businesses, regardless of domestic or foreign ownership, can market freely to 300 million Americans as well as another 425 million consumers via free trade agreements. Furthermore, the US boasts a well-educated and productive workforce, an excellent university system with innovative research and development programs and a transparent legal system emphasizing intellectual property rights (not to forget its GDP of $16 trillion). In general, there are no citizenship or residency requirements for forming a company in the US. International often form LLCs to benefit from pass-through taxation, that is, the requirement to file and pay taxes only if they have US-source of income (other global income of the principals remains unaffected).

There can be advantages and disadvantages to corporations, limited liability companies, and limited partnerships, so it is important to keep the following considerations in mind when in the early stages of planning an expansion to the US. The company’s business objectives are paramount: are you testing the waters, or thinking long-term? Sometimes establishing a branch is a good solution as it involves far less on-going compliance, but a branch has no separate legal identity from the parent company and thus has much more liability. Seeking the advice of a tax professional is imperative at this stage.

The next consideration is the choice of the state. Many foreign businesses head straight to Delaware as it is internationally known for its business-friendly ethos and favorable tax rates. Still, many US jurisdictions outside of Delaware offer distinct advantages, and if a company plans to establish its headquarters or open an office in a particular state, it is often most cost-effective, to begin with that state. Many companies, especially those headquartered on the West Coast, appreciate doing business in Nevada (businesses should be aware, however, of the business license requirement that raises annual fees for Nevada registrations–all entities are required to maintain a business license, regardless of whether a company is doing business in Nevada). Other popular choices are New York and Florida because of their business-friendly environments and easy compliance requirements. Virtual offices are freely available in almost every major city, supplying services from mail and telephone forwarding to rented or shared ownership offices and conference facilities. If the company will be operating in 4 or 5 states, it makes sense to pick the most “business friendly” environment as the primary state, and then register in the other states. Income can be allocated proportionally to each of the states in which the company does business.

An international company must remember that it is imperative to maintain good standing, as well as a registered agent, in each state in which it is doing business. This will become more important as a company grows. If a company is doing business in multiple states, they must register or “qualify” in each of these states. So what is doing business? In general, if a business has an office or employees in a jurisdiction, it is considered to be doing business there. (There are also more specific circumstances that constitute doing business—for example, if a company advertises on a local billboard in addition to national media campaigns, it could be considered to be doing business in the state in which the billboard is located. Again, it is recommended to seek professional advice in each particular case). Unlike in the UK, financial statements or accounts are not required to be submitted yearly to the registrar, but each state requires companies to file annual or biannual reports. If these reports are not filed, companies lose good standing, which can make previously entered into contracts void or voidable and precludes doing business. Because penalties and interest can accrue exponentially due to late filings, we recommend that companies entrust their compliance needs to specialists; for instance, we offer an annual report monitoring service which manages registered agents and annual reports in one place. For entities already doing business, our Corporate Health Check identifies gaps in compliance and is recommended in advance of a company’s expansion to new states.

In addition to state requirements, in many states, businesses require licenses to operate. For instance, in the case of Nevada, as was previously mentioned. However, certain industries also require federal, county and municipal licenses, with provisions varying greatly from state to state. Services such as comprehensive license research and filings, as well as assessment and verification of current licenses (this includes identification of defaults and renewal dates), are helpful for international businesses in light of the complexities of licensing from state to state.

With our home office in New York, International Business Company Formation has been helping international companies expand to the USA since 1998. Our expertise and unparalleled experience ensure that you have everything you need to operate confidently in the USA, especially in today’s business climate with its growing emphasis on transparency and compliance. We are proud to announce the opening of our London office – IBCF UK Ltd.  IBCF provides corporate services to legal and tax professionals throughout the world and is confident that the London office will facilitate an easy flow of corporate work between companies in the US and the UK, and beyond.

Contact us at either our New York or London offices, depending on your time zone. We are here to make doing business simple, across the globe.


IBCF’s Services

  • Formation of all entities including Corporations and LLCs, for all 50 states and US territories
  • Registered Agent Services
  • Annual Report Maintenance and Compliance Checks
  • Authentication of Documents including Legalisations and Apostilles
  • Business License Research and Filing
  • Document Searches (such as UCC and lien)
  • Registered Officers and Directors
  • Nominee Shareholders (where available)
  • Representation by Private/Special Agreement
  • Patent and Trademark Searches

Top 10 Reasons to do Business in the USA

  1. Ease of incorporating in the United States: many states can get you set up within a day!
  2. States like Delaware and Nevada pride themselves on their business-friendly ethos
  3. One of the biggest and most exciting markets in the world with over 300 million potential clients
  4. A common language and similar culture allows you to take your business global with ease
  5. A skilled and well-educated workforce
  6. Dependable infrastructure including communications and transport
  7. Free trade agreements with 20 countries
  8. Outstanding university system
  9. Gateway to emerging markets in Latin America
  10. Ability to outsource almost any component, commodity or service your business requires

13 Bayley Street
London WC1B 3HD
t: +44 (0)20 3002 0580
e: [email protected]

IBCF Headquarters
101 Main Street, Suite 1
Tappan, NY 10983
t: +1 845 398 0900
e: [email protected]


People with Significant Control Register for UK companies

The United Kingdom has introduced, with effect from 6 April 2016, a new statutory register for UK companies called a PSC register.  This is an acronym for “People with Significant Control”. Any individual who exercises or who has the right to exercise significant influence or control over a UK company must have his or her particulars entered on the PSC register.

The new transparency rules are contained in s81 of and Schedule 3 to the Small Business Enterprise and Employment Act (SBEEA).  Schedule 3 provides a core statutory framework for the transparency rules.  However, this framework is in many respects an outline and requires the detailed embellishment and clarification of secondary legislation (or regulations).  These regulations are now in final form and there is also statutory guidance on the meaning of “significant influence or control”, as well as general guidance to companies, Sociatates Europeae, Limited Liability Partnerships and PSCs themselves. There is no doubt about the purpose and intention of SBEEA’s transparency provisions.  This is that the names and other particulars of beneficial owners with significant control of a UK company should be entered on the company’s PSC register, which will be available for more or less indiscriminate public inspection.  PSCs will have very limited statutory protection from public disclosure, unless they can show to the satisfaction of the Registrar (or the High Court on appeal) that their disclosure on the PSC register puts them at serious risk of physical harm.

Which UK Companies are Affected?

SBEEA’s transparency rules apply to all UK companies that are not DTR 5 issuers.  DTR 5 issuers are essentially UK companies that are listed on a regulated market in the UK, including AIM.  UK companies whose voting shares are listed on a regulated stock market in any EEA State and certain other specific countries are also excluded in the regulations.  LLPs are also subject to the new transparency rules under the LLP regulations (the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016).  This article considers the application of the primary and secondary legislation as it affects UK limited companies.

Conditions of PSC Status

Condition 1: X holds directly or indirectly more than 25% of the shares in the UK company;

Condition 2: X holds directly or indirectly more than 25% of the voting rights in the UK company;

Condition 3: X holds the right directly or indirectly to appoint or remove a majority of the board of directors;

Condition 4: X has the right to exercise or actually exercises significant influence or control over the company;

Condition 5: the trustees of a trust or the members of a firm not being a legal person meet any of Conditions 1 to 4 in their capacity as trustees or partners of a firm, in relation to a UK company (or would do so if they were individuals) and X has the right to exercise or actually exercises significant influence or control over the day to day activities of the trust or firm.

Conditions 1-3 are essentially objective. Indirect ownership means ownership by companies that are not subject to the SBEEA or comparable transparency rules overseas.  Such companies (e.g. offshore companies) are “looked through” by the new transparency rules, but this look-through has its limits, as will be illustrated towards the end of this article.

Condition 4 is the flexible, subjective Condition. X is a PSC if he has the right to exercise, or actually exercises, significant influence or control over the UK company. The Secretary of State has issued statutory guidance on the meaning of “significant influence and control” in the context of this fourth Condition and also the fifth Condition.  Regard must be had to this guidance in interpreting references to “significant influence or control” in Sch 1A to the Companies Act 2006.

Condition 5 of PSC status is presumably not a “look-through” provision against trusts or firms, provided that the trustees or general partners are the only persons who exercise significant influence and control of the trust or partnership.  But as will be shown in the examples at the end of this article, some uncertainty remains around Condition 5

The PSC Register

All UK companies have been required to keep a PSC register since 6 April 2016.  The PSC register must contain all the particulars of the PSC required by SBEEA.  There are eight particulars per PSC including name, service address, country of residence, nationality, date of birth, usual residential address, the date on which the individual became registrable and the nature of his or her control.  Until a PSC’s particulars are “confirmed”, they cannot be entered in the PSC register.

A PSC’s particulars are confirmed if:

  1. the PSC supplied or confirmed them to the company;
  2. another person did so with the PSC’s knowledge; or
  3. they were included in a statement of initial significant control delivered to the Registrar by the company’s subscribers on incorporation.

Until all the individuals’ particulars have been supplied or confirmed, none of the PSC’s particulars must be entered on the PSC register.  But the PSC register must never be empty of content.  It must contain narrative (which is provided by the regulations and non-statutory guidance), describing the company’s progress with its investigatory and information gathering obligations.  So, for example, if no one is a PSC or otherwise registrable on the PSC register – which is possible – this fact must be stated in the PSC register.  The prescribed narrative for this state of affairs is:

“The company knows or has reasonable cause to believe that there is no registrable person or registrable relevant legal entity in relation to the company.”

Circumstances in which a corporate can be entered on a PSC register

The general rule is that corporate bodies are kept off the PSC register. But as with all rules, there are exceptions.  An important exception is that a “Relevant Legal Entity” (RLE) is registrable on the PSC register, if it is a person with significant control – i.e. would be a PSC if it were an individual.  The hallmark of an RLE is that it is subject to SBEEA or transparency requirements equivalent to SBEEA.  Therefore all UK private companies are RLEs.

UK Companies Duty to Investigate

It is not enough for SBEEA to require companies to maintain and populate a PSC register. SBEEA must give the company investigatory duties and powers. A UK company must take ‘reasonable steps’ to find out if anyone is registrable on the PSC register. A UK company does this by giving notices to anyone it has reasonable cause to believe is a registrable person or registrable RLE (s 790D). And a UK company may also give notice to anyone it thinks knows the identity of a PSC, RLE or any legal entity who knows the identity of someone likely to have that knowledge. Recipients of such notices must reply to the company within a month. A UK company also has a duty to keep PSC particulars up to date, and must give notices to PSCs if it has reasonable cause to believe that their particulars have become out of date (s 790E). Again recipients must reply within a month.

If s 790D or E notices are not replied to within the specified period of a month, the company must record this in the PSC register. For example, if after one month of the date of a s790D notice it has not been replied to by the addressee, the following must be recorded in the PSC register:

“The company has given notice under s790D of the Act which has not been complied with.”

Where a s 790E notice has not been complied with, the prescribed wording is:

“The addressee has failed to comply with a notice given under s790E of the Act.”

Where a notice given under s790D or s790E is complied with after the time specified in the notice, the company should record in its PSC register, along with the date on which the notice complied with the following:

“The notice has been complied with after the time specified on the notice.”

PSC’s Duties to Provide Information to the Company

PSCs have reciprocal duties to notify UK companies of their status, and supply their particulars. They must also reply reasonably promptly to notices issued by a UK company requesting their information or particulars. SBEEA contains enforcement provisions to support these disclosure requirements, enabling a UK company to apply restrictions on share rights of PSCs, or any other person with an interest in the company, who does not respond to notices issued by the company.  Possible sanctions include restrictions on the transfer of shares, or the exercise of share rights.

It is important to note that the residential address of all people with significant control will be kept by the company, but will never appear on the PSC register (or the Central Register maintained at Companies House) unless this is provided as the service address. Furthermore, the day of the date of birth will be suppressed on the Central Register as an anti-fraud measure provided the company maintains its own PSC register (and does not elect for the Registrar to maintain the register).

Copying or Inspecting the PSC Register

The PSC register is a register maintained by the company itself. The PSC register must be available for inspection or copying by any person at the registered office of the company, or at some other specified place in England and Wales. A person wishing to inspect or copy the PSC register must make a request to the UK company. This request must contain the name and address of the requesting party, and the purpose of the request.

The UK company then has five working days to comply with the request to inspect or copy the PSC register, or apply to the UK courts for an order to deny the request. A UK court will only order a UK company not to comply with the request if the court is satisfied that the inspection or copy is not sought for a proper purpose. A court order requiring non-disclosure will be a rare occurrence, given that the grain of the legislation is towards transparency of ownership. If the UK company fails to secure such a UK court order, it must permit the inspection or copying immediately or it commits a criminal office. Inspection of the PSC register is free of charge. A company may charge £12 for a copy of its PSC register.

The Central Register

The Central Register is in effect a PSC register maintained by the Registrar of Companies and can be unconditionally searched by anyone. UK companies can choose between keeping their PSC’s particulars on their own PSC register, or on the Central Register. The Central Register will not be ready until 30 June 2016, which means that on 6 April 2016 when the PSC register was launched, all UK companies in existence and all new UK companies formed between 6 April 2016 and 29 June 2016 will have to create a PSC register. Once the PSC register and the Central Register exist in tandem, i.e. from 30 June 2016, then UK companies can choose between maintaining their own PSC register or delegating this to the Registrar. UK companies can ‘chop and change’ between the maintenance of a PSC register and a central register, although there is little advantage in doing so.

Where a UK company that already has a PSC register makes an election to maintain PSC particulars on the Central Register, any pre-existing PSC register becomes ‘historic’. Third party rights to inspect or copy the historic PSC register will continue, and the historic PSC register must notify inspectors or copiers that PSC particulars are maintained on the Central Register. Once the Central Register is launched, every new incorporation must provide an initial statement of significant control to the Central Register and provide an annual statement under the ‘check and confirm procedure’.  If the government keeps to its timeline, then after 30 June 2017 the details of the PSCs of all UK companies should be recorded in the Central Register at Companies House. Anyone can inspect the Central Register, without identifying themselves or declaring their purpose.

Protecting Residential Addresses

There are statutory protections for PSCs at serious risk of violence or intimidation, but these are limited in scope. First, as already mentioned, residential address details of PSCs will always be protected by the PSC and Central Registers. These are therefore suppressed from public view, unless the PSC has nominated his residential address as his service address. But residential address information can still be made available to Credit Reference Agencies (CRAs) by the Registrar. However, regulations will allow vulnerable PSCs to apply to Companies House to prevent their residential addresses being disclosed to CRAs. UK company directors are already able to obtain this level of protection, and if the PSC is or was a company director, or a member of an LLP already receiving this protection it will be possible to make an application on that individual’s behalf in his ‘PSC’ capacity without having to evidence serious risk of violence or intimidation. To obtain this limited confidentiality protection, a PSC must normally show that he or she or somebody they live with would be at serious risk of violence or intimidation due to the activities of the company they are involved with, were this information to be disclosed to CRAs.

Statutory Protection for Vulnerable PSCs

There is a much more fundamental protection regime for all PSC particulars that would otherwise normally be published on the PSC register and Central Register. To achieve this complete confidentiality the PSC must be able to show that if his or her PSC particulars were placed on the public register either the PSC or someone they live with would be at serious risk of violence or intimidation. In this case, the serious risk of violence or intimidation need not have to arise solely from the activities of the company, but may arise from a particular characteristic or attribute specific to the PSC, taken together with the activities of the company he or she exercises significant control over. This may assist PSCs from countries outside the UK who are resident in countries with poor human rights records, or high corruption indices. Applications will be to the Registrar with a possible appeal to the High Court in the case of unsuccessful applications.

Unsuccessful appeals will lead to the PSC’s particulars of already incorporated UK companies being published, but there will be a ‘grandfathering’ period for people who are PSCs on 6 April 2016, when the PSC register is launched. They will have a limited period of time – ending on 30 June 2016 to make an application for protection.  If the application fails it will not lead to the automatic disclosure of the PSC on the Central Register and PSC register, if the person in relation to whom the application was made notifies the Registrar in writing that he or she is no longer a PSC of the company concerned, together with the date he ceased to be a PSC.  The PSC will have 12 weeks from notice that his appeal for protection has been unsuccessful to divest himself of significant influence or control of the shares or rights that give rise to his PSC status.

Criminal Penalties for Non‐compliance with SBEEA

Failure by UK companies and their officers to comply with SBEEA will result in the commission of criminal offences. Conviction on indictment can result in a prison term of two years, or a fine, or both. Summary conviction can result in a prison term of one year, or a fine, or both. Some infractions of SBEEA involve only fines and daily default fines. Criminal penalties also apply to PSCs who fail to reply to investigatory notices from the UK company without reasonable cause, or who fail to notify the company of changes to particulars without reasonable cause. In addition, UK companies can encourage disclosure by restricting a persons’ share rights.

Some examples of PSC identification:

Example 1



  • No-one is a PSC under PSC Conditions 1-3 referred to above
  • What about the flexible and subjective Condition 4? The statutory guidance suggests at 3.2:“All relationships that a person has with the company or other individuals who have responsibility for managing the company, should be taken into account, to identify whether the cumulative effect of those relationships places the individual in a position where they actually exercise significant influence or control. For example: A director who also owns important assets or has key relationships that are important to the running of the business (e.g. intellectual property rights), and uses this additional power to influence the outcome of decisions related to the running of the business of the company.”But in many cases such judgements may require subjective assessments that cannot be made with reasonable certainty.  The psychological nuances may be unknowable and unquantifiable.  This sort of uncertainty is removed if the board of directors function individually and collectively in accordance with their statutory and fiduciary obligations.
  • What about 3.3 of the statutory guidance?“A person would exercise “significant influence or control” if:a) They are significantly involved in the management and direction of the company, for example: a person, who is not a member of the board of directors, but regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board.This would include a person who falls within the definition of “shadow director” set out in section 251 of the Act, but the situation is not confined to shadow directors.b) Their recommendations are always or almost always followed by shareholders who hold the majority of the voting rights in the company, when they are deciding how to vote. For example: A company founder who no longer has a significant shareholding in the company they started, but makes recommendations to the other shareholders on how to vote and those recommendations are always or almost always followed.”

This provides firmer ground for assessment and brings into play consideration of de facto directors and shadow directors.  Presumably business consultants are not PSCs where they are engaged to advise a board that is functioning properly.

Directors and other officers of UK companies are required to take reasonable measures to identify people with significant control of their UK companies. The difficult subjective judgements and perceptions that may be required to be taken account of under Condition 4 may well in real life fall to be resolved by more practical assessments of the objective Conditions 1-3.

Special challenges exist in assessing UK companies owned by offshore companies, or offshore trusts. These are briefly considered here:

Interests held through other legal entities

Suppose Mr A holds an interest in “UK Co.” via “BVI Co.”.  Assume Mr A owns 51% of the shares of BVI Co., which owns all the shares in UK Co. For clarity, this is shown in the diagram below:


Mr A is a PSC of UK Co.

This is because he owns a “majority stake” in BVI Co., and BVI Co. owns a “majority stake” in UK Co.  The concept of the majority stake is contained in para 18 of Schedule 1A of CA 2006.

BVI Co. is not a “relevant legal entity”, so it cannot be entered in UK Co’s PSC register.

Mr A is regarded as having a majority stake in another company – (e.g.  UK Co. In the example), if Mr A:

  1. holds a majority of the voting rights in the company;
  2. is a member of the company and has the right to appoint or remove a majority of the directors of the company;
  3. is a member of the company and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it, or
  4. has the right to exercise or actually exercises dominant influence or control over the company.

The implication of this is that if Mr A in the example owns only 50% of the shares – perhaps with a co-venturer (Mr B) – and assuming BVI Co. is genuinely “deadlocked”, then neither Mr A nor his co-venturer, Mr B are PSCs of UK Co. in the example above.

Many offshore trusts directly or indirectly own shares in UK companies. Consider the example below:

Condition 5 says that “X” is a PSC of “Y” (a UK Co.) if the trustees of the trust meet any of the other specified Conditions of PSC status i.e. Conditions 1-4 (in their capacity as trustees) in relation to UK company “Y”, or would do so if they were individuals and “X” has the right to exercise, or actually exercises, significant influence or control over the activities of that trust.

This seems to be the only test of PSC status where a trust owns directly or indirectly the shares of a UK company.

Who is X?  Presumably “X” could be:

  1. a sole individual trustee (although the statutory guidance suggests that Condition 5 focuses on non-trustees); or
  2. a sole director of a corporate trustee; or
  3. any other individual non-trustee. However, it is difficult to square “X’s” significant influence or control as a non-trustee with (for example) professional trustees who exercise sufficient control themselves to be would-be PSCs if they were individuals.What if the trustee is a corporate RLE of the trust and there is no such person as “X”?  The RLE cannot be registered on the UK companies PSC register under Condition 5, because Condition 5 admits of only an individual (“X”).  Paragraph 5.2 of the Statutory Guidance (published 14 April 2016) supports this view. However such an analysis, if right, conflicts with the Guidance for Companies, SEs and LLPs on page 15 which says:“You should consider whether there is a trust or firm (without legal personality) which would have met any of the conditions (i) to (iv) if it were an individual. Where this is the case (sic), the trustees would be entered on the PSC register and shown as meeting whichever of Conditions (i) to (iv) apply.”

Given that it is the trustees who own the share assets directly or indirectly (and not the trust) one wonders if the general guidance is correct in saying that such trustees are registrable.  RLEs are registrable on the PSC register, but not Jersey or other offshore corporate trustees, which are not RLEs.

In the example it is therefore not apparently clear how to proceed. Assuming the Jersey corporate trustee is a licensed professional trustee it is likely to be diversely held with a board of at least three directors.  In this scenario it would be unlikely that there is a person X to fit into Condition 5 of PSC status (this might even conflict with the trustee’s regulatory or fiduciary obligations, were it to permit a non-trustee to exercise such control).  The primary legislation says that a Jersey corporate is not an RLE and so cannot be registered as a PSC under conditions (i) to (iv) under the “if it were an individual” test.  That being so, the final result might be to record in the PSC register that no-one is a PSC.


The new transparency legislation still has legal and administrative grey areas. Professional advice will be an important protection for UK company directors in light of the possible criminal penalties for non-compliance with the new legislation.