Transparency in the UK – new legislation

In 2013 the department for Business, Innovation and Skills (BIS), a department of the UK Government, published a discussion paper the stated purpose of which was to increase transparency in relation to the ownership and control of UK companies. The discussion paper set out a range of proposals which were intended to increase transparency so as to improve international trust in UK business. The Small Business, Enterprise and Employment Act 2015 (Act), which represents the culmination of the work that BIS has been undertaking following its initial paper for the last two years, came into legal effect on 26 March 2015. The different sections of the Act will come into force in stages between now and April 2016. Some of the key changes relating to improved corporate transparency in the UK effected by the Act and affecting companies in the United Kingdom are:

a requirement to maintain a publicly available register of individuals having significant control over a company (person with significant control (PSC));

• the abolition of bearer shares;
• a ban on corporate directors;
• clarification of the duties of shadow directors; and
• changes to the annual return process and company filing requirements.

PSC register Under the Act companies (other than companies whose shares or other securities are admitted to trading on any European Economic Area regulated market (for example the London Stock Exchange)), with effect from January 2016:

• are required to gather information (and the Act imposes obligations on others to supply information to the company);
• are required to keep a register of people with “significant control” over the company, and to make that register public (by means of the PSC register);
• (for private companies only) permits the company to use an alternative method of record-keeping; and
• may exclude certain prescribed material from the information made available to the public.

The PSC register must be kept available for inspection at the company’s registered office (or at another permitted location). Private companies may file the PSC information at Companies House rather than maintain a separate PSC register unless a person whose details will be included on the PSC register objects during a 14 day notice period before the election to file the register is made. Under the Act, a person with significant control over a company is defined as an individual who (either alone or as one of a number of joint holders of the share or right in question) meets one or more of the following conditions:

• the individual holds, directly or indirectly, more than 25% of the shares in the company. The 25% threshold is calculated by reference to the nominal value of the shares in the case of a company with a share capital. If the company does not have a share capital, this condition is met by an individual holding a right to share in more than 25% of the entity’s capital or profits;
• the individual holds, directly or indirectly, more than 25% of the voting rights in the company. Voting rights held by the company itself are disregarded for this purpose;
• the individual holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
• the individual has the right to exercise, or actually exercises, significant influence or control over the company. Guidance is to be issued as to the meaning of “significant influence or control”; and
• the trustees of a trust or the members of a firm that is not a legal person meet at least one of the other specified conditions (in their capacity as such) or would do if they were individuals, and the individual has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.

Pursuant to draft regulations issued by BIS the PSC register will be required to show which of the above five conditions has been met by the PSC and the extent to which the condition has been met (for example the register will give an indication of the percentage of voting rights held by the PSC). The draft regulations also set out proposals as to the sanctions that can be applied by a company in situations where a shareholder does not provide information which is required by the company in relation to a PSC. In such circumstances the regulations, if approved in their current form, would require the company to suspend all the rights relating to the shares held by the shareholder in question. The following required particulars are to be included in the PSC register:

• for individuals, their name, service address, country or state of usual residence, nationality, date of birth, usual residential address and, if restrictions on using or disclosing any of the individual’s PSC particulars are in force, that fact;
• for registrable relevant legal entities who are not individuals, its corporate or firm name, registered or principal office, legal form of the entity and law by which it is governed, details of the register of companies in which it is entered and registration number (if applicable); and
• in all cases, the PSC register must also contain details of the date on which a person became a registrable person or registrable relevant legal entity and the nature of his or its control.

No bearer shares UK companies are now prohibited from creating bearer shares, regardless of whether the company's articles permit such creation (i.e. shares which are issued but where no one is registered as the owner of the shares). Where bearer shares are already in existence, they are to be cancelled or converted into non bearer shares. Arrangements have been put in place for companies to implement this prohibition over a period of nine months (which commenced on 26 May 2015) following which if bearer shares are still in issue a company will be required to apply to court for their cancellation, which could be a costly exercise. When shares are cancelled by a court order there are certain documents which must be lodged with the Registrar of Companies, including a copy of the order and a statement of capital. If the company is a public company, and cancellation results in a reduction in share capital below the authorised minimum, the company must be re-registered as a private company before the cancellation is registered. If a company has outstanding bearer share warrants it will not be able to make an application for striking off the register of companies. The company is permitted to amend its articles without a special resolution or complying with any relevant entrenchment article for the purpose of removing a provision authorising the company to issue share warrants. No corporate directors In accordance with the Act a company is only permitted to have natural persons as directors. A purported appointment of a new corporate director is deemed to be void. If a purported appointment is made of a corporate director, an offence which is punishable by a fine is committed by:

• the company which is making the appointment;
• if the appointee is a body corporate or firm, the appointee; and
• any officer of the companies referred to above.

Existing corporate directors will have a period of one year from this provision coming into force to remove any corporate directors. Any corporate directors after the expiry of the year period will automatically cease to be directors. BIS recently published regulations which pushed back the implementation of this ban to an, as yet to be determined, date in 2016, which will no doubt come as a relief to many companies who make use of corporate directors. Shadow directors With effect from 26 May 2015 the general duties of directors (as set out in sections 170 to 177 of the Companies Act 2006) will now apply to shadow directors (i.e. persons who are not appointed as directors but who exercise such control over the decision making of the company’s directors that they are in effect fulfilling the role of a director) where and to the extent they are capable of applying. Filing requirements Companies will no longer be required to file an annual return. Instead, all companies will be subject to a new requirement to deliver a confirmation statement to Companies House stating that the company has delivered all the information it was required to provide in the period to which the confirmation statement relates, every 12 months. The confirmation statement must be provided within 14 days of the end of the relevant review period. The review period means the period of 12 months beginning with the day of the company’s incorporation and each period of 12 months beginning with the day after the end of the previous review period. The company can choose to provide a confirmation statement at any point prior to the due date (in which case the next 12 month period will run from the day after the confirmation date). The confirmation statement should include:

• details of a change of registered office;
• details of company registers relating to directors, company secretaries (if appropriate) and PSCs;
• any obligations that arise as a result of a decision by a company to keep any of its registers on the central register;
• details of where a company keeps company records if they are not kept at its registered office;
• any change in the company's principal business activities;
• if the company has a share capital, a statement of capital unless there has been no change since the last statement of capital was delivered to Companies House. The statement is to contain particulars which are largely the same as the particulars which are currently to be provided to Companies House as part of the annual return;
• confirmation as to whether any of its shares were admitted to any relevant market or any other market outside the United Kingdom and if so whether the shares were admitted to trading on any European Economic Area regulated market;
• for non traded companies, information in relation to its shareholders, unless there has been no change since the relevant information was last delivered to the Registrar. This requirement will not apply if the company has elected to keep its register of members on the central register at Companies House; and
• for certain companies whose shares are admitted to trading on a market which is not a European Economic Area regulated market, the name and address of each person who held at least 5% of the issued shares of any class in the company and the number and class of shares held. This obligation applies unless there has been no change since the relevant information was last delivered to the Registrar.

If the confirmation statement is not submitted when due an offence punishable by a fine is committed by the company, each director and secretary of the company, any other officer of the company who is in default and any shadow director of the company. Conclusion It is likely that BIS will have achieved its aim to increase transparency in relation to the ownership and control of UK companies through the measures brought in by the Act. That said, in doing so, it has increased the level of administration which UK companies will face through the requirement to maintain the PSC register and the obligation on the company to obtain information in relation to PSCs. The additional administration required by the PSC should be mitigated to some extent by the abolition of the annual return. The confirmation statement should hopefully prove to be a much quicker form of annual submission to Companies House. In other areas there is unlikely to be any change for the vast majority of UK companies. Bearer shares, for example, are already very rarely issued.