Transparency of Company Ownership
Since 6th April 2016, UK companies and LLPs have been required to keep a register of persons with significant control over the entity, who may be the same as existing shareholders, or may be different. Companies were exempt from the requirement if they were subject to Chapter 5 of the FCA’s Disclosure Guidance and Transparency Rules (DTR 5). DTR 5 applies to UK companies with shares traded on a regulated market (such as the main market of the London Stock Exchange), as well as to companies with shares traded on a prescribed market like AIM. However, from 26th June 2017, the scope of the regime has been changed, so that it now applies to some additional companies, including companies listed on prescribed markets such as AIM and NEX.
What does this mean for AIM companies
Every UK AIM company will need to set up a PSC Register, even if there is nobody who needs to be registered. The Register must contain details of (i) individuals who are people with significant control over the company (PSCs) and (ii) relevant legal entities (RLEs) which terms are explained below. The company will need to take reasonable steps to find out if it has any PSCs and to identify then, including issuing statutory notices on anyone it knows or has reasonable cause to believe to be a PSC, and on anyone who may have relevant information. If a statutory notice is not complied with, the company will have to consider whether to use the power conferred on it to impose transfer, voting and dividend restrictions on the relevant shares.
The PSC Register must contain the following particulars:
- in respect of an individual PSC: name, service address, country or state of usual residence, nationality, date of birth and usual residential address.
- in respect of an RLE: the entity’s corporate name, registered office, legal form and law by which it is governed, register of companies in which it is entered and registration number (if applicable).
- in all cases: details of the date on which a person became a registrable person or RLE and the nature of his or its control.
If the particulars or identity of a PSC or RLE changes, the Register must be updated within 14 days. PSC information must also be filed at Companies House, and any changes to the Register must be notified within 14 days. The company’s PSC Register must be made available for public inspection free of charge or copies provided on request for an optional flat fee of £12.
Who is a PSC?
There are complex rules on who is to be regarded as a PSC or RLE, but broadly speaking a person will have significant control if they meet one or more of the following conditions:
- they hold, directly or indirectly, more than 25% of the nominal value of the company’s issued shares;
- they hold, directly or indirectly, more than 25% of the voting rights in the company;
- they hold the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
- they have the right to exercise, or actually exercises, significant influence or control over the company; or
- they exercise or have the right to exercise significant influence or control over a trust or firm, which itself meets any of the above conditions.
Two simple examples are set out below.
Company A: Person 1 and Person 2 are both PSCs because they each hold 50% of the shares in Company A. Each of those shares comes with 1 vote so Person 1 and Person 2 also each hold 50% of the voting rights in Company A. Company A must enter Person 1 and Person 2 as PSCs, meeting conditions (1) and (2) on its PSC register.
Company Z: Assuming that there are no joint arrangements (see below), and none of the shareholders meet any of the other conditions, Company Z will have no PSCs because none of its shareholders own enough shares. Company Z must enter the fact that it has no PSCs on its PSC register.
The government has spread the net deliberately wide, and there are further rules on what constitutes indirect holdings, which broadly arise where a person holds a majority stake in a legal entity which holds shares or rights in relation to the company, or through a chain of companies the last of which holds shares or rights in relation to the company. Nominee arrangements and arrangements under which individuals jointly agree to exercise their rights in a certain way are also captured. So, for example, if shares or rights in the company are held by a nominee, they are treated as if they are held by the person for whom the nominee is acting.
Even if a person does not satisfy any of conditions 1 – 3 they may be a PSC by virtue of having “significant influence or control” which is relevant for conditions 4 and 5. Government guidance has been published on the meaning of this term, which essentially revolves around whether a person can direct the company’s activities or ensure that the company generally adopts the activities which they desire.
What if the company is owned by a legal entity rather than an individual?
Where a company is owned by a legal entity, it will need to consider whether that entity is a relevant legal entity (RLE). An RLE is an entity which has significant control of the company in one of the ways described above and is a UK registered company, or a company with shares listed on certain markets (including the London Stock Exchange). The company only needs to register the first RLE in the chain above it.
So, in this example:
- Company A must enter Company B on its PSC Register because Company B owns 100% of the shares in Company A and Company B is a UK company that keeps a PSC Register. Company A is not required to look further at its chain of ownership for any indirect interests held via Company B.
- Company B must enter Company C on its PSC Register because Company C owns 100% of the shares in Company B and is a UK company with its own PSC Register. Person 1 also does not go on Company B’s PSC register even though he or she holds an interest in Company B indirectly.
- Company C must enter Person 1 on its PSC register.
The situation may be more complicated where there are overseas companies or trusts within the group. If the entity which owns the company is not an RLE (for example it is not a UK company), then it will be necessary to look at ownership and control of that entity, and so on up the chain until you either reach an individual or an RLE. At each level it will be necessary to establish a majority stake in the entity below.
The following example illustrates how this might arise in practice.
- Although B owns 100% of the shares in A, A cannot put B on its PSC register as B is an overseas company and therefore not an RLE. Instead A must look at the ownership and control of B.
- C has a majority stake in B (holding 100% of the voting rights), but it is also not an RLE and cannot be entered on A’s PSC register.
- A must therefore look at the ownership and control of C. Person 2 has a majority stake through holding more than 50% of the voting rights in C (which in turn has a majority stake in B). This means Person 2 is a PSC in relation to A and must be entered on its PSC register.
What action must the company take
Establish a PSC Register. From 26 June 2017, all AIM companies must now have a PSC Register, even if it only contains a statement that the company has not yet completed taking reasonable steps to find out if there is anyone who is a registrable person or RLE. Any statements included in the Register must be in the prescribed form.
Take reasonable steps to identify PSCs and RLEs
- Although disclosure of major shareholders is required under DTR5, the PSC regime is a very different beast. Interests in the company held by individuals, legal entities and trusts or firms, should be considered, and also whether there is evidence of any joint arrangements or of rights held through a variety of means that might ultimately be controlled by the same person.
- If a company does not have the necessary information in relation to its PSCs it will have to send notices to those that it suspects may be, or know the identity of, its PSCs.
- If someone refuses to provide the information the company may have to consider imposingrestrictions on any shares or rights they hold in the company. Note that a person who believes they may be a PSC is also under a legal obligation to voluntarily provide information to the company.
- Confirm information. A PSC’s required particulars must be confirmed with the PSC before theinformation can be entered on the Register.
- Record the required particulars. As well as the required particulars, the company must give details of the date on which a person became a registrable person or RLE and the nature of his or its control. Prescribed wording should be used for this.
- File the information at Companies House.
- Make the register available to the public on request, apart from residential addresses, which must be kept confidential.
This is not just an academic exercise – if a company fails to take reasonable steps to identify any PSCs, it commits a criminal offence and may be fined. An offence would also be committed by any director or other officer who failed to take all reasonable steps to prevent the company committing this offence, and those directors and officers might face 12 months imprisonment as well as a fine.
In view of the complexity of the legislation and the seriousness of the offences, we recommend that you liaise with your usual Freeths contact and/or your Registrars as regards the action to be taken to ensure compliance.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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