Trust, transparency and the new PSC regime: are you ready for April 2016?

In light of the introduction of the new PSC Regime,Bryan Rickman, Corporate and Commercial solicitor at Keystone Law, looks at the implications of this new regime for UK companies and LLPs.

This guide explains the criteria that define ‘People with Significant Control’ as well as the steps that must be taken to comply with the new legislation and avoid heavy sanctions.

From 6 April 2016, most companies and LLPs will be required to keep a “PSC Register” listing “People with Significant Control” (“PSCs”) and “Relevant Legal Entities” (“RLEs”). PSCs are individuals with significant control over the company or LLP. RLEs are legal entities that meet the conditions for being a PSC and certain other conditions.

This is a new additional duty applying to UK companies limited by shares (including dormant companies), companies limited by guarantee, community interest companies, societas europaea and LLPs. It does not apply to companies which report under Chapter 5 of the Disclosure and Transparency Rules (e.g. Official Listed and AIM traded companies) (“DTR5 Companies”).

From 30 June 2016, this information will also need to be delivered to Companies House in the annual confirmation statement (replacing the annual return). The information will therefore be publicly available.

Failure to comply with these new requirements is a criminal offence, punishable by fine and/or up to two years’ imprisonment.

This guide is an overview to help you prepare for the new regime. However, it is just a summary, so please refer to the latest government guidance and please note that the government is still updating and clarifying the guidance. This guidance includes (i) details on the requirements overall in the government guidance; and (ii) details of the meaning of “significant influence or control” in the draft statutory guidance for companies and the draft statutory guidance for LLPs.

If you have any questions on this guide or would like our assistance in setting up your PSC Register, we would be pleased to advise.

1. What do you have to do to comply with the PSC Regime?

a. Set up the PSC Register by 6 April 2016 and identify any PSCs and RLEs

• Set up the PSC Register for your company or LLP (i.e. a document headed with your company or LLP name and number and the sub-heading “Register of People with Significant Control”). This should contain the information on PSCs and RLEs noted at paragraph 6 below.
• Take “reasonable steps” to identify PSCs (who meet the conditions at paragraph 2 below) and RLEs (who meet the conditions at paragraph 3 below).
• Even if you haven’t completed the process by 6 April 2016, it is a criminal offence not to have taken “reasonable steps”.

b. The “reasonable steps” to take to identify any PSCs and RLEs

• For many companies and LLPs it will be easy to identify the PSCs and RLEs. If not, further investigation will be needed.
• Review the register of members, articles of association, shareholders’ agreements, share option agreements, LLP agreements, etc. (as applicable) to establish the rights of those participating in the company or LLP. You’ll also need to consider the actions of those participating in the company or LLP who actually exercise significant influence or control over the company or LLP (whether or not they have documented rights).
• If this hasn’t identified the PSCs and RLEs, make informal enquiries with the likely PSCs and RLEs or anyone who might know the PSCs and RLEs.
• A company or LLP need not make enquiries where it has already been told about an individual’s or legal entity’s status and it has all the relevant particulars it needs to enter on the PSC Register, provided the information and particulars were either provided by that person or obtained with their knowledge.
• If this still hasn’t established the identity of the PSCs or RLEs, statutory notices can be served in the form set out in the government guidance. These can be served on anyone it knows to be registrable or has reasonable cause to believe is registrable. If it knows or has reasonable cause to believe that another person knows the identity of the PSC or RLE, it may also give notice to that person.
• PSCs and RLEs, or anyone who might know about a PSC or RLE, must respond to such requests for information. It is a criminal offence not to. In addition, if they do not respond within one month, then an additional warning notice can be sent to them. If they do not respond within that further month, you can impose restrictions on their shares or rights provided you serve a restrictions notice on them and note the restrictions on the PSC Register. Such restrictions could include non-payment of dividends, disenfranchising voting rights or preventing the sale or transfer of those shares by rendering any such transactions void.

c. Ensure the information about PSCs is “confirmed”

• This is required for PSCs but not RLEs.
• Information about individual PSCs is treated as “confirmed” if: (i) the PSC supplied that information; (ii) the information was provided with the knowledge of the PSC; (iii) you asked the PSC to confirm the information was correct, and they replied that it was so; or (iv) you hold previously confirmed information and have no reason to believe it has changed.
• Information about a particular PSC must also be complete before that particular PSC can be entered on the register.
• You must check that the information is confirmed before entering it on the register.

d. Get in contact if you are a PSC

• Importantly, if you are a PSC and have not been contacted by the company or LLP by 6 April 2016, then the onus is on you to contact the company or LLP to ensure they are aware of your interest. Again it is a criminal offence if you do not.

e. If you haven’t completed this by 6 April 2016

• You still need to have complied with paragraph 1a above.
• If you have not yet completed the process, you can include one of the prescribed statements in the government guidance, such as: “The [company/LLP] has not yet completed taking reasonable steps to find out if there is anyone who is a registrable person or a registrable relevant legal entity in relation to the [company/LLP].”

f. Further reporting and updates

• The information will also need to be included in each annual confirmation statement (replacing the annual return) from 30 June 2016. All information on the PSCs (excluding their date of birth and usual residential address) and RLEs will therefore be publicly available.
• The PSC Register must also be kept regularly up to date.

2. What is a PSC?

• A PSC is a person that meets one or more of the following conditions in relation to a particular company or LLP:

i. Directly or indirectly owns more than 25% of the shares in the company (or for LLPs holds rights over more than 25% of the surplus assets on a winding up).ii. Directly or indirectly holds more than 25% of the voting rights in the company (or the LLP).iii. Directly or indirectly holds the right to appoint or remove the majority of the board of directors of the company (or for LLPs the majority of those in management).iv. Otherwise has the right to exercise, or actually exercises, significant influence or control.v. Holds the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm which is not a legal entity but would itself satisfy any of the first four conditions if it were an individual.

• The meaning of “significant influence or control” is noted at paragraph 4 below. The meaning of “indirectly” is noted at paragraph 5 below.

3. What is an RLE?

• If your company or LLP is owned or controlled by a legal entity, that legal entity must also go on the PSC Register if it is both relevant and registrable.
• A legal entity is relevant in relation to a company or LLP if it meets one or more of the conditions for being a PSC at paragraph 2 above and:
  • it holds its own PSC Register; or
  • it is a DTR5 Company; or
  • it has voting shares admitted to trading on a regulated market in the UK or European Economic Area (other than the UK) or on specified markets in Switzerland, the USA, Japan and Israel.
• A relevant legal entity is registrable in relation to a company or LLP if it is the first relevant legal entity in the ownership chain. Indirect interests further up an ownership chain needn’t be included on a PSC Register if there is a registrable RLE because they in turn can be discovered by looking at that RLE’s register.

4. What is the meaning of “significant influence or control”?

• This is detailed in the draft statutory guidance for companies and the draft statutory guidance for LLPs.
• This only needs to be considered if none of the PSC conditions i to iii at paragraph 2 above apply to the particular PSC or RLE.
• The guidance includes a non-exhaustive list of what amounts to “significant influence or control” and examples. Examples that might constitute a right to exercise significant influence or control over a company are where an individual holds:
  • absolute decision rights over decisions related to the running of the business (e.g. adopting or amending the company’s business plan, changing the nature of its business, making any additional borrowing from lenders, appointing or removing the CEO, establishing or amending a profit-sharing, bonus or other incentive scheme for its directors or employees, or granting options under a share option or other share-based incentive scheme);
  • absolute veto rights over decisions related to the running of the business (e.g. adopting or amending the company’s business plan or making any additional borrowing from lenders, unless that veto right is to protect a minority interest);
  • absolute veto rights over the appointment of the majority of the company’s directors, being those directors who hold a majority of the voting rights at board meetings on all or substantially all matters.
• This condition applies if the person has this right to exercise “significant influence or control” (whether or not they actually exercise that right) or where they actually exercise “significant influence or control” (e.g. where they exert influence through the ownership of important assets or relationships that are key to the company or the LLP, or directors, shareholders or members (as applicable) regularly follow that person’s recommendations). A careful review of the articles of association, shareholders’ agreements, share option agreements, LLP agreements, etc. (as applicable) and rights attaching to the shares or membership, as well as that person’s actions, will therefore be required.
• It also lists a number of excepted roles that do not ordinarily mean the person exercises “significant influence or control”. The excepted roles include:
  • where the person provides advice or direction in a professional capacity (e.g. lawyer, accountant, management consultant or financial advisor);
  • where the person deals with the company or LLP under a third-party commercial or financial agreement (e.g. supplier, customer or lender);
  • where the person exercises a function under an enactment (e.g. regulator, liquidator or receiver);
  • where the person is an employee acting in the course of their employment for their employer, including an employee or director of a third party, which has significant control over the company or LLP;
  • where the person is a director of a company, managing director, sole director or non-executive or executive director who holds a casting vote (or for LLPs, designated members);
  • a person who makes recommendations to shareholders on an issue (or set of issues) on a one-off occasion, which is subject to a shareholder vote (or for LLPs, members);
  • rights held by all or a group of employees for the purpose of representing the employees’ interests in an employee-owned company.

5. What is the meaning of “indirectly”?

• Essentially, shares or other rights are held “indirectly” when a legal entity holds them and an individual has a majority stake in that legal entity. However, that person need not be entered on the PSC Register of the company or LLP concerned unless the legal entity in which they hold their majority stake is not itself an RLE.
• An individual will have a majority stake in a legal entity if that individual:
  • holds a majority of the voting rights in that legal entity;
  • is a member of that legal entity and has the right to appoint or remove a majority of the board of directors of the company (or for LLPs, a majority of those in management);
  • is a member of that legal entity and controls alone (pursuant to an agreement with other members) a majority of the voting rights in that legal entity; or
  • has the right to exercise or actually exercises dominant influence or control over that legal entity.

6. What information must be included on the PSC Register?

• The PSC Register (i.e. a document headed with your company or LLP name and number and the sub-heading “Register of People with Significant Control”) must be created for all companies limited by shares (including dormant companies), companies limited by guarantee, societas europaea and LLPs – other than DTR5 Companies.
• The details that must then be entered on the PSC Register are:
  • If there are no applicable PSCs or RLEs, then the following prescribed statement must be entered: “The [company/LLP] knows or has reasonable cause to believe that there is no registrable person or registrable relevant legal entity in relation to the [company/LLP].”
  • If you are in the process of taking reasonable steps, then the following prescribed statement must be entered on the PSC Register: “The [company/LLP] has not yet completed taking reasonable steps to find out if there is anyone who is a registrable person or a registrable relevant legal entity in relation to the [company/LLP].”
  • The government guidance sets out other prescribed statements depending on the progress made in establishing the PSC Register at that point. When any of these statements are no longer applicable, you must enter that on the PSC Register along with the date on which the statement ceased to be true.
  • If there are applicable PSCs, the details that will need to be obtained, confirmed and entered are: (i) name; (ii) date of birth; (iii) nationality; (iv) country, state or part of the UK where the PSC usually lives; (v) service address; (vi) usual residential address (if different to the service address); (vii) date the individual became a PSC in relation to your company or LLP (for existing companies or LLPs this will be 6 April 2016); (viii) which of the five conditions for being a PSC the individual meets, with quantification of the interest where relevant (you must use the official wording in the government guidance); and (ix) any restrictions on disclosing the PSC’s information that are in place.
  • If there are applicable RLEs, the details that will need to be obtained (but not confirmed) and entered are: (i) name of the legal entity; (ii) address of its registered or principal office; (iii) legal form of the entity and the law by which it is governed; (iv) if applicable, a register in which it appears (including details of the state) and its registration number; (v) date it became a registrable RLE in relation to your company or LLP (for existing companies or LLPs this will be 6 April 2016); and (vi) which of the five conditions for being a PSC it meets, with quantification of its interest where relevant (you must use the official wording in the government guidance).
  • If the person stops being a PSC or RLE, you must also record the date they ceased to be a PSC or RLE.

7. Further points of note

• Nominees: Shares or rights held by a nominee are treated as held by the beneficial holder.
• Joint interests: If shares or rights are held by joint holders and jointly they qualify as a PSC, then each of them must separately be entered on the PSC Register in respect of the joint interest.
• Joint arrangements: If two or more people arrange to exercise all or substantially all of their rights arising from their shares or membership jointly in a way which is pre-determined and jointly they qualify as a PSC, then each of them must separately be entered on the PSC Register in respect of the joint interest.
• Limited partnerships: Where shares or rights are held as assets of a limited partnership without legal personality, then ordinarily you should only enter the details of the general partner(s) on the PSC Register (if they are individuals or RLEs).
• Rights controlled by another: If voting rights or the right to appoint or remove directors with the majority of board-level voting rights are held by one person but controlled by another person, then you should treat those rights as held by the person who controls them. A person controls a right if there is an arrangement which means that right is only exercisable by that person, on their instruction or with their consent or concurrence.
• Rights exercisable only in certain circumstances (e.g. options): Some rights might only be exercise in certain circumstances (e.g. an option to acquire shares, voting rights or rights to appoint directors). If the circumstances under which the rights are exercisable are within the control of the person who holds them, then they are relevant for identifying your PSCs and RLEs. Otherwise, you should only consider these rights if those circumstances have arisen and for as long as they continue.