The New Regime for Disclosure of Persons with Significant Control
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Our UK corporate clients are busy preparing for the new PSC regime, which comes into force on 6 April 2016. Unlisted UK companies must identify individuals who have significant interests in their shares ("persons with significant control" or "PSCs"), and publicly disclose their details in a new company register, the "PSC Register". With 6 April just around the corner, these obligations are now being taken very seriously - non-compliance carries significant criminal penalties.
Background - The PSC regime derives from the 2013 G8 agreement to make it harder to use corporate structures to hide criminal activity, and foreshadows the new beneficial ownership register requirements of the Fourth Money Laundering Directive (MLD4) which will apply across the EU from 2017.
Scope – The regime applies to all UK companies and LLPs, other than companies listed in the UK (including on AIM) or on an equivalent market in the EU, US, Japan, Israel or Switzerland. UK subsidiaries of exempt listed companies will not themselves be exempt.
PSC conditions – A PSC is someone who holds, directly or indirectly, shares representing more than 25% of the issued share capital, more than 25% of the voting rights, the right to appoint or remove a majority of the board or otherwise has significant influence or control over the company's affairs, regardless of shareholding or voting interests.
For interests held by trusts and partnerships (whether onshore or offshore), often the case in complex structures where it can be difficult to ascertain who is in control, persons who have significant influence or control over the trust or partnership will also be caught. This will make it difficult for individuals to obscure their involvement with a particular company with the use of offshore trusts or similar arrangements, although there is scope for individual PSCs to apply to protect their identity from public view if they are at risk of violence or intimidation.
There are also anti-avoidance interpretation provisions built into the PSC regime, such as the requirement that shareholders who vote together in a pre-determined way will have their shareholdings aggregated, which may catch management teams and family members who might not otherwise meet the shareholding thresholds. We anticipate a lot of uncertainty as to the application of these interpretation provisions until case law has provided clarification.
The British Venture Capital Association has been closely monitoring the development of the PSC legislation to ensure that it operates in a workable fashion for the private equity community, which broadly it now does, and our private equity clients are working together with their portfolio companies to ensure they are compliant.
Guidance - Whilst elements of the PSC conditions will be familiar to many as a result of the anti-money laundering regime, the catch-all "significant influence or control" test will require factual analysis. The UK Government has produced statutory guidance which provides useful examples of "significant influence or control" and roles or relationships which will fall under a safe harbour (for example, most directors and advisers). Companies will also be relying extensively on the non-statutory BIS guidance on the PSC regime which describes the steps companies must take to avoid criminal penalties under the regime, and what they should put in the PSC Register itself.
Impact on M&A – One of the concerns for M&A practitioners is the sanctions regime. Companies are obliged to notify PSCs (or persons who may know about them) to obtain confirmation of their PSC status. A person who fails to respond to such a notice can have their share rights restricted, including voting, dividend and transfer rights, which could prevent a sale without a court order. We anticipate this restrictions regime giving rise to practical difficulties where a company is being sold.
Comment - The Companies Act PSC provisions are not at all straightforward and will impose a considerable administrative burden on many companies, particularly corporate groups with complex ownership structures. Individuals with significant shareholdings must also assess whether they have notifiable PSC interests, and those who prefer not to disclose their connection with a particular company, often for perfectly legitimate reasons, must prepare for the new transparency arrangements.
Our client guide on the PSC regime can be found here.