Accountants, solicitors, company secretaries and others responsible for maintaining statutory registers of companies and LLPs will soon be responsible for creating and maintaining a new register of people with significant control (the PSC register). This will be required for companies from 6 April 2016, which will be extended to LLPs by new regulations in 2016.
The PSC register of is one of the changes introduced by the Small Business, Enterprise and Employment Act 2015 to improve transparency regarding how companies are run. Other changes include the abolition of bearer shares in May 2015 and the requirement for all company directors to be natural persons from October 2016.
On the face of it, the PSC register will not look dissimilar to the register of directors. The PSC register must record the same particulars of individuals and organisations with significant control (PSCs) as the register of directors must record of directors, with the addition of details regarding the nature of their control over the company. As in the case of the register of directors, these particulars will be publicly available, with the exception of an individual's residential address and day of birth.
Identifying a company’s PSCs, however, is considerably more complicated than identifying its directors. Under the new rules an individual is defined to include not only natural persons but also corporations sole, governments, government departments, international organisations and UK local government bodies and authorities. Such an individual will be deemed to have significant control over a company where they:
- Hold more than 25% of the shares in the company
- Hold more than 25% of the voting rights in the company
- Hold the right to appoint or remove a majority of the board of directors of the company
- Have the right to, or do, exercise significant influence or control over the company; or
- Have the right to, or do, exercise significant influence or control over a trust or firm:
- which is not a legal person; and
- whose trustees or members meet any of conditions (1) to (4).
Conditions (1) to (3) are relatively simple to apply, while consideration of conditions (4) and (5) require reference to guidance published by the Department for Business Innovation and Skills. The guidance states that an individual has “significant influence” over an entity if they are able to ensure that it adopts those policies or activities which they desire and has “control” over an entity if they have “the power to direct its policies and activities”.
The guidance also sets out a number of “safe harbour” roles or relationships an individual may have with an organisation which will not ordinarily constitute significant influence or control. Notably, this includes directors and accountants where they perform these roles in the usual manner.
However while the guidance does provide helpful examples, in the absence of hard and fast rules it will be difficult to be certain whether an individual has the requisite influence or control, or whether an individual in a safe harbour position has strayed sufficiently beyond their traditional duties to be considered a PSC.
Once a company’s PSCs have been identified, matters are further complicated by the requirement that only 'registrable' PSCs be included in the register. A PSC will be registrable unless they meet the following exception:
- Each of their interests in the company is held through another legal entity (i.e. a company or firm which is a legal person); and
- They have significant control over this other legal entity; and
- This other legal entity is a ‘relevant legal entity’ in relation to the company, i.e.:
- it would have come within the definition of a person with significant control over the company had it been a person; and
- it is subject to its own disclosure requirements.
Where the conditions to exception are met, the ‘relevant legal entity’ referred to at (3) will itself be registrable, again subject to the exception, and the originally identified PSC will not be.
However, as with the test for identifying PSCs, the conditions of the exception require reference to other guidance. Condition (2) again requires reference to guidance on the meanings of significant influence and control. Condition (3) requires reference to a definition of ‘subject to its own disclosure requirements’ contained within the legislation itself, which refers further to any relevant regulations and to the FCA’s disclosure rules and transparency rules sourcebook.
The legislation demands that companies take reasonable steps to identify and record PSCs. Companies and their officers who fail to do so risk incurring a fine or imprisonment for up to two years, or both. However, as the rules expressly prohibit inclusion of 'non-registrable' PSCs in the register, a company cannot attempt to bypass the complexities outlined above by including every potential PSC in the register. To do so would risk the inclusion of a non-registrable PSC and a possible fine of up to £1,000 for the company and every officer in default, with a further fine of up to £100 a day for each day that the contravention of the rules continued.
Those responsible for maintaining statutory books therefore have no option other than to make every effort to meet the requirements of the new rules, and hope that there will be some leniency regarding errors and omissions while precedent and best practice is established.
The article was written by Richard Phillips and Penelope Jones. Richard is a corporate partner at Veale Wasbrough Vizards.