Who Has Significant Control of Your Company and Why it Matters

As of 6 April, barring a small number of exceptions (see below), all companies and LLP's will be obliged to keep and maintain a register (PSC Register) of people with significant influence or control (PSC) over the company.

The change is implemented by the Small Business, Enterprise and Employment Act 2015 (the Act) which was enacted with the aim of enhancing the transparency of UK companies thereby increasing trust in the UK as a place to do business. The provisions of the Act are designed to improve transparency of company ownership and to tackle directors involved in misconduct. It is hoped that by increasing transparency, tax evasion and criminal activity via corporate entities will be reduced.

Breach of the Act or failure to comply will be a criminal offence punishable by up to 2 years in prison and/or a fine.

The Act also introduces a number of filing reforms with the aim of simplifying the current requirements and improving the accuracy of information at Companies House. This article focuses on the need to keep and maintain the PSC Register and who is a PSC rather than other changes introduced by the Act which include the abolition of bearer shares and a prohibition on companies having corporate directors (i.e. companies being run by other companies with no individual being accountable).

Application

Generally all UK incorporated companies, LLP's and Societas Europaea must maintain a PSC Register. The exceptions to this are UK listed companies (on either main market or AIM) or UK companies with voting shares traded on a regulated market in the EEA or specified markets in the USA, Israel or Japan.

Who are "People with Significant Control" and "Relevant Legal Entities"?

The Government has produced both statutory and non-statutory guidance which aims to support companies and LLP's by explaining how the regime will work in practice (Guidance). One of the key elements of the Guidance is to explain who is a PSC or a relevant legal entity (RLE).

Companies are required to take 'reasonable steps' to identify PSC's and RLE's. In addition, they also have to obtain and confirm the information held, record, provide to Companies House and monitor and update (where required).

Even if a company does not identify any PSC's or RLE's it still has to keep a PSC Register noting this and the Guidance contains the form such a notice should take.

PSC's

A PSC must be an individual and meet at least one of the following 5 criteria:

Directly or indirectly own more than 25% of the shares of the company;
Directly or indirectly holds more than 25% of the voting rights of the company;
Directly or indirectly holds the right to remove the majority of the directors;
Otherwise has the right to exercise, or fully exercise, significant influence or control; and/or
Holds the right to exercise, or actually exercise, significant influence or control over the activities of a trust or firm which is not a legal entity, but which would itself satisfy any of the first four conditions if it were an individual.

RLE's

Subsidiaries are often owned or controlled by parent companies and are therefore controlled by a legal entity rather than an individual. In this case the RLE must be entered in the PSC Register if it is 'relevant' (i.e. it meets one or more of the 5 criteria set out above and is also subject to transparency obligations).

Taking 'Reasonable Steps' to Identify PSC's and RLE's

Examples of the most significant steps are set out in Appendix 1 of the Guidance. Generally companies should consider:

All documents it has which may indicate a PSC;
All interests held by individuals, trusts, legal entities and firms; and
If there are any rights held through a variety of means that might be controlled by the same person.

If a company has PSC's it must obtain relevant information and 'confirm' the information before entering it in the PSC Register. Information can be treated as being confirmed if:

The PSC provided the information;
The information was provided to the company with the knowledge of the PSC;
You asked the PSC to confirm the information was correct and they did so; or
You previously confirmed information and have no reason to believe it has changed.

For further information or guidance on the changes please do not hesitate to contact the team at McDaniel & Co. on 0191 281 4000 or legal@mcdanielslaw.com.