M&A Update

Most UK Companies and All UK LLPs Must Now Publicly Disclose Information Regarding Persons With Significant Control Over Them

April 13, 2016

Introduction

The UK Government has introduced a new requirement for UK incorporated companies (both private and, with only limited exceptions, public), Societates Europaeae and Limited Liability Partnerships (LLPs) to maintain, at their registered offices, a register of persons with significant control over them (PSC Register). The PSC Register will be treated as a statutory register for purposes of the Companies Act 2006, akin to the registers of directors and members currently maintained by companies in the UK, and will therefore be available for public inspection.

This new obligation is aimed at increasing transparency and combating tax evasion, money laundering and terrorist financing. New UK legislation, the Small Business, Enterprise and Employment Act 2015, introduces Part 21A and its schedules to amend the Companies Act 2006 to accommodate this, including the requirement to hold a PSC Register. The Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016 amend the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, to apply Part 21A of the Companies Act 2006 to LLPs (with appropriate modifications).

Companies not required to maintain a PSC Register are those that have their voting shares admitted to trading on a regulated market in the EEA or on other specified markets in Israel, Japan, Switzerland and the United States.

What is a PSC Register?

The obligation to maintain a PSC Register commenced on April 6, 2016. A PSC Register identifies the individuals with significant control (PSCs) and/or registrable relevant legal entities (RLEs) in relation to a company or LLP.

A PSC Register will contain information including the date of birth, nationality and residential address of each registrable PSC and the name, registered address, governing law, jurisdiction of incorporation and registration number of each RLE. Members of the public are generally entitled to view, or make requests for copies of, a PSC Register, although a PSC’s residential address will remain protected and may not be disclosed.

Even if a company/LLP does not have any PSCs/RLEs, it must nonetheless maintain a PSC Register in which it states this fact. The UK Government has published guidance as to the entries to be made in a PSC Register with respect to various circumstances.

From June 30, 2016 onwards, companies and LLPs will need to deliver information contained within their PSC Registers to the central public register at Companies House by way of a confirmation statement (which is intended to replace the current annual return). The information contained in the central public register held at Companies House, other than a PSC’s day (but not the month and year) of birth and residential address, will be freely accessible.

Who needs to be included on the PSC Register?

PSCs

An individual will be a PSC in relation to a UK company if he or she directly or indirectly:

holds more than 25 percent (by nominal, or par, value) of the issued and outstanding share capital in the company;
holds more than 25 percent of the voting rights in the company; or
has the right to appoint or remove a majority of the directors of the company.

An individual will be a PSC in relation to a UK LLP if he or she directly or indirectly:

holds rights over more than 25 percent of the LLP’s surplus assets on a winding up;
holds more than 25 percent of the voting rights in the LLP; or
has the right to appoint or remove a majority of the management of the LLP.

It is to be noted that the relevant interest in the three conditions referred to in each case above can be held indirectly; for these purposes, when the relevant direct interest is identified, the PSC is the individual who controls that interest as a result of having a “majority stake” in the intermediate entities in the ownership/control chain. For these purposes, having a “majority stake” means holding or controlling the majority of votes, having the right to appoint a majority of directors or having the right to exercise (or actually exercising) dominant influence or control. In this context, limited partnerships without separate legal personality are ignored and, instead, regard is had to the general partner (and not the limited partners in and of themselves).

If none of the relevant three conditions referred to above is satisfied in relation to a potential PSC, there are two further conditions to be considered in the context of seeking to identify a PSC. First, whether an individual has the right to exercise, or actually exercises, “significant influence or control” over the company/LLP. Second, whether (i) the trustees of a trust or members of a firm (that is, an entity that, under the law by which it is governed, is not a legal person) meet any of the relevant conditions to be a PSC in relation to a company/LLP (or would do so if they were individuals) and (ii) an individual has the right to exercise, or actually exercises, “significant influence or control” over that trust or firm. In interpreting whether or not there is “significant influence or control,” regard must be had to the statutory guidance (which is currently only in draft form).

The draft statutory guidance for companies notes that, the ability of an individual to direct the activities of a company, trust or firm would be indicative of “control,” and the ability of an individual to ensure that a company, trust or firm generally adopts the activities that are desired by that individual would be indicative of “significant influence.” The “control” and “significant influence” do not have to be exercised by an individual with a view to gaining economic benefits from the policies or activities of the relevant company, trust or firm.

In the context of LLPs, the draft statutory guidance states that absolute decision or veto rights over matters related to the running of the business of the LLP, such as amending the LLP Agreement, adopting or amending the business plan, changing the nature of the business, incurring further borrowings or establishing any financial incentive scheme, are examples of what might constitute a right to exercise “significant influence or control.” On the other hand, veto rights to protect a minority interest (for example, to prevent the dilution of the member’s interest in the LLP or requiring further capital contribution) would not, on their own, evidence the required influence or control.

An individual is only entered in the PSC Register of a company/LLP if that individual is “registrable” with respect to that company/LLP. An individual is a “registrable” PSC with respect to a company/LLP only if he or she (i) holds any direct interest in the company/LLP (irrespective of whether or not that interest, on its own, is sufficient to constitute that individual as a PSC) or (ii) holds any of his or her interest in the company/LLP otherwise than (directly or indirectly) through an RLE.

Relevant Legal Entities (RLEs)

A legal entity will be an RLE, and must therefore be entered in the PSC Register of a company/LLP, if it would have been a PSC with respect to that company/LLP (if it were an individual), and it is both “relevant” and “registrable.”

A legal entity is “relevant” if it maintains its own PSC Register (so it must be a UK company or LLP) or (irrespective of its place of incorporation) it has voting shares admitted to a regulated market in the EEA or to a specified market in Israel, Japan, Switzerland or the United States. A legal entity is “registrable” if it is the first “relevant” legal entity in the ownership/control chain above (and including) the legal entity that holds the applicable interest (for example, more than 25 percent of the voting rights) in the company/LLP.

When the applicable interest in the company/LLP is held by an RLE, that RLE will be entered in the PSC Register of the company/LLP. When that interest is held by a legal entity that is not an RLE (for example, a non-UK entity that is not publicly traded on a specified market as referred to above), it cannot be entered on a PSC Register and, instead, each level of the chain of ownership and control of that legal entity must be examined to identify any individuals or RLEs that have a direct or indirect “majority stake” (as referred to above) in that legal entity. The presence in the ownership/control chain of a non-UK entity that is not publicly traded on a specified market will not “block” the route to identifying any PSC or RLE.

For the purposes of its own PSC Register, there is no need for a company/LLP to look beyond the first RLE in the relevant ownership/control chain above it, as any PSC will be recorded in the PSC Register to be maintained by the most senior RLE in that ownership/control chain (unless that RLE is publicly traded on a specified market as referred to above). A PSC who has a direct interest in a company/LLP, however, will still be “registrable” with respect to that company/LLP (and will, therefore, still need to be entered into the PSC Register maintained by that company/LLP), even if the direct interest, on its own, is insufficient to constitute the individual as a PSC and/or the individual also has an indirect interest through an RLE.

New statutory obligations

Reasonable steps must be taken by all UK companies and LLPs in order to ascertain which individuals are registrable PSCs and which legal entities are RLEs for the purposes of maintaining their PSC Register. As part of this, companies and LLPs must give a notice to anyone whom it knows, or has cause to believe, to be a registrable PSC or an RLE. A notice may also be given to any person if the company/LLP has reasonable cause to believe that the person knows the identity of a registrable PSC or RLE or knows the identity of someone likely to have that knowledge. Guidance on these steps can be found in the supporting materials to the PSC Register outlined below. Companies and LLPs will need to consider all documentation they have available to identify any and all interests held by any trusts, individuals or legal entities.

All relevant information on PSCs/RLEs needs to be complete, accurate and confirmed before it can be entered into the PSC Register. An individual or legal entity may hold its interest on behalf of someone else, and this may be relevant for determination. The individual or legal entity that may be a registrable PSC or RLE also has a positive obligation to contact (within one month of becoming a registrable PSC/RLE of a company/LLP) the relevant company/LLP.

Companies and LLPs will have ongoing obligations to monitor the accuracy of their PSC Register and make necessary amendments as circumstances change. Also, if the company/LLP finds that incorrect information has been entered on the PSC Register, it must make the necessary changes immediately. All updates and changes need to be filed at Companies House.

Failure to comply with relevant regulation, failure to keep or maintain a PSC Register, making false or reckless statements, failure to give, or respond to, a notice requesting information which is required to be given (as referred to above) and failure to respond to notices requesting information which must, or which may, be given (as referred to above) are criminal offenses. The punishment is up to two years’ imprisonment, a fine or both.

Examples

1. UK LLP subsidiary of a U.S. asset manager

In this scenario, it will need to be considered: (a) if the UK LLP has any members who are individuals, whether any of them has sufficient influence and control to require him or her to be entered as a PSC in the LLP’s PSC Register; and (b) whether there is an individual with an interest in the U.S. asset manager that requires that the individual also be entered as a PSC in the PSC Register of that LLP (or of the appropriate intermediate UK LLP or company in the corporate ownership/control chain to the U.S. asset manager). This requirement applies irrespective of whether the UK LLP subsidiary is regulated by the FCA.

2. UK portfolio company that is a direct or indirect subsidiary of an offshore fund managed by a U.S. asset manager

In this scenario, if there is an individual who controls, or exercises a dominant influence over, the U.S. asset manager (and/or the general partner of the fund) and/or has “significant influence or control” with respect to the UK portfolio company, that individual may need to be entered in the PSC Register of the UK portfolio company (or of the appropriate intermediate UK company or LLP in the corporate ownership/control chain from the UK portfolio company to the fund).

3. UK subsidiary of a U.S. company listed on the New York Stock Exchange

As the U.S. company listed on the New York Stock Exchange is considered to be subject to a recognized ownership disclosure regime already, the UK subsidiary would not need to investigate above the level of the U.S. company in relation to maintaining its PSC Register. Instead, its PSC Register would disclose the U.S.-listed company as an RLE or, if there is another UK company or LLP in the ownership/control chain between the UK subsidiary and the U.S.-listed company, that other UK company or LLP would be disclosed in the PSC Register (and that RLE would maintain its own PSC Register, which would disclose the U.S.-listed company as an RLE).

Supporting materials on PSC Registers

Additional guidance on PSC Registers can be found in the following documents. To access each of these documents, please click on the relevant links below.

Draft statutory guidance on meaning of significant influence and control for companies - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/495414/LLP
_Statutory_Guidance_for_PSC_register.pdf
Draft statutory guidance on meaning of significant influence and control for LLPs - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/498275/Statutory
_company_PSC_Guidance.pdf

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

	Leonard Ng Partner	Struan Oliver Of Counsel
	+44 20 7360 3667 lng@sidley.com	+44 20 7360 2063 soliver@sidley.com

Sidley M&A Practice

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