Over the last couple of years we have tracked the progress of the new requirement to keep a ‘PSC Register’ which comes into force on 6 April this year (see our previous post Companies: Do you know your beneficial owners?). The new register is a key element of the Government’s drive for more transparency over the identity of owners and controllers of UK businesses.
From 6 April, all UK companies (other than listed companies already subject to the Disclosure and Transparency Rules) and LLPs will have to maintain, and make available for inspection, a register containing details of any person who has significant control or influence (a PSC) over the company.
Who is a PSC?
By way of a reminder, a person will be a PSC if it satisfies any one of five conditions. The application of the first three conditions is relatively straightforward: a person will be a PSC if they have:
- a shareholding of more than 25%; or
- control of more than 25% of the voting rights; or
- the right to appoint and remove the majority of the directors.
The application of the fourth condition, however, is more subjective and potentially far more wide-ranging in scope. That condition states that a person will be a PSC if they have the right to exercise, or actually exercise significant influence or control over a company.
For those directors and PSCs who for legitimate commercial reasons might prefer not to disclose their significant influence or control over a particular company, the new PSC register is likely to cause quite a headache. Failure to comply with the disclosure requirements could lead to directors and/or PSCs committing a criminal offence.
The latest draft guidance from the Department for Business, Innovation and Skills will have done little to soothe these headaches. The guidance on the fourth condition is so broad as to leave little (if any) scope to avoid full disclosure of the identity of any person who has the right to exercise, or actually exercises significant influence or control over a company – which, after all, is the point of the new transparency provisions.
Having the right to exercise significant influence or control
The guidance suggests that a person might have a right to exercise significant influence and/or control as a result of a variety of circumstances. A number of specific examples are provided, but the guidance makes it very clear that this is not an exhaustive list. In order to have a right to exercise significant influence and/or control a person needs to have an absolute right to make a decision relating to the running of the business – that is, an ability to make a decision without reference to, or collaboration with, anyone else.
The examples given of having the right to exercise significant influence or control include:
- adopting or changing the company’s business plan;
- changing the nature of the company’s business;
- taking on additional debt; or
- establishing some sort of incentive scheme for employees.
Actually exercising significant influence or control
The guidance also gives examples of situations which would be indicative of a person actually exercising significant influence or control. All relationships that a person has with the company or the individuals running it have to be taken into account when considering whether the cumulative effect of those relationships puts the individual in a position where they actually exercise significant control or influence.
The guidance states a person would satisfy this condition if:
- they are not a director but they are involved in the day to day management and direction of the company, perhaps consistently directing or influencing a significant section of the board and the decisions it makes; or
- their recommendations are followed by shareholders who hold the majority of the voting rights – the specific example given here is a former founding shareholder who no longer has a significant shareholding but who makes recommendations to the other shareholders.
The wide ranging scope of the fourth condition is highlighted by the inclusion of various so called ‘safe harbours’ – a list of roles and relationships (some of which are listed below) that in the normal course would not result in a person being considered to be exercising significant influence or control. These include:
- the company’s professional advisers, such as lawyers, accountants, management consultants and financial advisers;
- third parties under commercial agreements, such as suppliers, customers or lenders; and
- directors or employees acting in the course of their employment.
But even someone who is apparently ‘safe’ might still be a PSC if:
- the role or relationship differs in material respects from how the role is generally understood; or
- the role or relationship forms one of several opportunities which that person has to exercise significant influence or control over.
Companies should be taking steps now to identify their PSCs so they have the necessary information to complete their PSC Register on 6 April.