New Statutory Register introduced under Small Business Enterprise and Employment Act 2015 (SBEE) – Part One
Whether you are a company, an LLP or an individual shareholder this new legislation will affect you.
The Small Business Enterprise and Employment Act 2015 makes many changes to the statutory administration of companies. One of the more controversial is the introduction of a new public statutory register which will set out details of those persons with significant control (PSCs) over the company: the Register of People with Significant Control (PSC Register).
The PSC Register and the requirements it places on companies and shareholders alike will be explained in this and subsequent articles.
Question - What is the PSC Register?
The PSC Register will record all individuals or corporate bodies (referred to as relevant legal entities) with significant control over a company or LLP and the nature of this control. Whilst every company and LLP is already required to keep a Register of Members, the PSC Register goes a step further as the meaning of significant control extends beyond the legal ownership of shares.
SBEE broadly defines a person with significant control over a company as being an individual (either alone or as one of a number of joint holders of the share or right in question) or a relevant legal entity meeting one or more of the following conditions:
- holding directly or indirectly more than 25% of the shares in the company (for a company limited by guarantee this would mean an individual holding a right to a share in more than 25% of the company's capital or profits);
- holding directly or indirectly more than 25% of the voting rights in the company;
- having the right to appoint or remove the majority of the Board of Directors of the company;
- having the right to exercise significant influence or control over the company. "Control" is defined as having the power to direct a company's policies and activities either by themselves or via a trust. "Significant Influence" is defined as ensuring that a company adopts those policies or activities which are desired by the holder of the significant control either as an individual or via a trust; or
- having the right to exercise or actually exercising significant influence or control over a trust or firm that is not a legal entity, which in turn satisfies any of the first four conditions over the company.
A relevant legal entity is defined as a legal entity that is a body corporate or firm that is a legal person under its governing law. Some other legal entities (including corporations sole, governments, government departments and local authorities) will be treated as if they were individuals for the purposes of SBEE.
Question – Who needs to keep a PSC Register?
Every limited company, Societates Europaeae (SEs) and Limited Liability Partnership (LLP) must have a PSC Register, Entities such as limited partnerships (LPs) and Charitable Incorporated Organisations (CIOs) are exempt from the requirement as are those companies who are subject to Chapter 5 of the FCA's Disclosure and Transparency Rules (which is where they are listed on the main London Stock Exchange or other prescribed markets such as AIM or ISDX Growth Market).
Question - What does this mean in practice? And who needs to be shown on the PSC Register?
Most UK companies will be required to comply with the provisions of SBEE. Failure to do so may result in criminal prosecution.
The Government has released draft guidance which will help both companies and shareholders to understand their obligations under SBEE and the meaning of significant control. This is available on the Companies House website and is worth reading.
The PSC Register of a given company must show those persons who (a) meet the conditions referred to above; and (b) are 'registrable'. For the reasons explained below, certain people are considered 'non-registrable'.
Most of the conditions are relatively self-explanatory, but to flag some obvious points:
- As mentioned above, the legal title to shares is irrelevant for the purposes of the PSC Register: you must look behind the legal title to see who is beneficially entitled to the shares (or the voting rights attached to them).
- It is worth remembering that not all shares attract voting rights. Someone may only hold a small percentage of the total shares of a company, but if those shares represent more than 25% of the voting rights, the holder would (subject to their being 'registrable') need to be stated on the PSC Register.
- Shares or voting rights are considered to be held indirectly if they are held via a chain of legal entities over which someone has control or influence.
- Instances where persons have the right to appoint or remove the majority of the board of directors or hold significant influence or control of a company are not so widespread, but can arise for example in groups of companies where a parent company, whilst not a direct shareholder, may have significant control and the ability to dictate the board of the subsidiary. In the most obvious instances such controls would be set out in a company's articles of association, shareholders' agreement or other documentation, but in keeping with the spirit and intention of the legislation, any such form or control (whether documented or not) will need to be disclosed.
Question - What is registrable or non-registrable?
SBEE makes a distinction between registrable and non-registrable persons. Any person meeting one or more of the criteria for significant control will be registerable and will be required to be entered into the PSC Register, unless the definition of non-registerable applies. A person is non-registrable if it does not hold any interest in the company in question, except via one or more other legal entities over each of which they have significant control and each of which is a relevant legal entity for the purposes of SBEE.
An example would be: Mr A wonders if he should appear on the PSC Register for C Limited on the basis that he owns a majority of the voting rights and shares in B Limited, which in turn owns C Limited outright.
Mr A is a person of significant control for C Limited but because this only occurs through his shareholdings in B Limited, he will be non-registerable with regard to C Limited's PSC Register. Mr A will appear on B Limited's PSC Register as he is a PSC owning a majority of the shares and the voting rights in B Limited. However, C Limited's PSC Register need only show B Limited (assuming no one else meets the criteria). (The logic being that someone inspecting the register can follow the up the chain of relevant legal entities to the ultimate PSC).
Note however that this is only the case if both B Limited and C Limited are UK companies and required to maintain a PSC Register. Where the PSC is a foreign entity, you "look through" the entity to the person behind that. For instance, taking the above example again, if B Limited were in fact a foreign entity, you would ignore it and look to identify the PSC behind B Limited; Mr A. So if B Limited were foreign, Mr A would appear on C Limited's PSC Register.
Our next article will examine the duty to investigate, obtain, provide and maintain the information required for the PSC Register and the expected time frame for implementation.