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:
- the PSC supplied or confirmed them to the company;
- another person did so with the PSC’s knowledge; or
- 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:
- 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:
- holds a majority of the voting rights in the company;
- is a member of the company and has the right to appoint or remove a majority of the directors of the company;
- 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
- 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:
- a sole individual trustee (although the statutory guidance suggests that Condition 5 focuses on non-trustees); or
- a sole director of a corporate trustee; or
- 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.