Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...
By Ben Simpson
Ben Simpson is Special Counsel in Withers’ corporate team, based in London. Ben advises on private equity, mergers and acquisitions, joint ventures and on company law and partnership/LLP law. He advises a number of clients on their controlling interests in quoted companies and the associated regulatory implications, and participated in consultations with the Takeover Panel on the close relatives and related trust concert party presumption and with the ICSA regarding the PSC regime which came into force on April 6, 2016.
U.S. fund managers, entrepreneurs and members of their families who are beneficial owners are often surprised by the long reach of the UK’s PSC Regime for making public the direct and indirect controllers of UK entities. Since 6 April 2016, most UK companies, limited liability partnerships ('LLPs') and some other entities have had to keep a register of individuals who have significant control over them ('PSCs') and this includes indirect controllers. Where UK entities are ultimately controlled by US persons, this will often result in a US individual being publicly disclosed in the records of the UK’s Registrar of Companies which are accessible online.
The UK’s Small Business, Enterprise and Employment Act 2015 (the ‘SBEEA') introduced the PSC regime by inserting new provisions into the UK’s Companies Act 2006 (the ‘Companies Act'). The requirements in Part 21A of the UK Companies Act and the Register of People with Significant Control Regulations 2016 (the ‘PSC Regulations') as amended by the Information about People with Significant Control (Amendment) Regulations 2017 (the ‘Amending Regulations'), apply to UK incorporated companies limited by shares (including companies admitted to AIM and the NEX Exchange), companies limited by guarantee, unlimited companies, unregistered companies and Societas Europaea ('SEs'). LLPs are also subject to the requirements. The regime for eligible Scottish Partnerships (SLPs and SQPs) is set out in The Scottish Partnerships (Register of People with Significant Control) Regulations 2017 (the ‘Scottish Regulations'). Even if an entity in question is not required to keep its own PSC register, please note that the entities which fall outside the scope of our PSC legislation may still be required to disclose their ownership or control of companies which have to identify and register their PSCs.
The PSC Regime implements what the UK Government believes to be all, of the UK’s obligations under the Fourth Money Laundering Directive ('4MLD') which came into force on 25 June 2015. The Fifth Money Laundering Directive ('5MLD') was adopted by the European Parliament on 19 April and, subject to final approval by Council of the European Union, will need to be implemented by Member States in late 2019/2020. Whether or not the UK will enact equivalent measures to those in 5MLD following Brexit has yet to be determined. Key changes to be introduced by 5MLD are anticipated to include (i) access to beneficial ownership on trusts (and similar legal arrangements) by any person who can demonstrate a legitimate interest, and (ii) access to beneficial ownership of trusts upon written request, where the trust (or similar legal arrangement) owns a controlling interest in any body corporate or other legal entity incorporated outside of the EU (so disclosure might be required of trust and other legal arrangements which own a controlling interest in a US entity). The 5MLD trust disclosure regime will apply to trusts where the place of establishment or residence of the trustee (or person holding an equivalent position in a similar legal arrangement) is in the EU or when the trustee (or person holding an equivalent position in a similar legal arrangement) enters into a business relationship or acquires real estate in the EU in the name of the trust or similar legal arrangement. A further disclosure measure is also being introduced in the UK which will require overseas entities that own property in the UK or enter into government contracts to disclose their beneficial ownership on a register which is expected to be operational by early 2021.
There are two elements to the UK PSC Regime. First, an individual may be a person with significant control ('PSC') if they have the right to exercise, or actually exercise, significant influence or control over a UK company, UK LLP or other UK legal entity directly. Other UK entities, such as companies limited by guarantee and Scottish limited partnerships and Scottish ‘qualifying’ general partnerships are also subject to the PSC Regime. A person will be a PSC if they satisfy one or more of the five conditions set out in Part 1 of Schedule 1 to this note.
Secondly, the PSC Regime also catches indirect significant influence or control. A person may be identified as a PSC (as a result of an indirect interest) because either individually or together with other persons they hold a ‘majority stake’ in a legal entity (whether incorporated in the UK or elsewhere). A person may also be identified (as a result of an indirect interest) because the trustees of a trust or the members of a firm hold a majority stake in a legal entity and the person has the right to exercise, or actually exercises, significant influence or control over that trust or firm. A majority stake can be held in any of the following circumstances (Please see further commentary on the majority stake test in Schedule 2 to this note.) :
Whilst in some cases it will be easy to evaluate whether or not a person (including a trust or firm) has a majority stake, consideration also needs to be given as to whether or not two or more persons may be deemed to hold a majority stake by virtue of a ‘joint arrangement’ or a joint interest. A person may be treated as being a party to a joint arrangement notwithstanding that no ‘arrangement’ exists which has any effect in law. This is relevant to both direct and indirect significant influence or control.
A joint arrangement is defined as an arrangement between the holders of shares (or rights) that they will exercise all or substantially all the rights conferred by the respective shares (or rights) jointly in a way that is predetermined by the arrangement. The definition of arrangement goes beyond legally binding arrangements and includes ‘any scheme, agreement or understanding, whether or not it is legally enforceable, and any convention, custom or practice of any kind’. It is therefore wide-ranging in practice.
There is one caveat which is that ‘something does not count as an arrangement unless there is at least some degree of stability about it (whether by its nature or terms, the time it has been in existence or otherwise)'.
The official UK guidance on the PSC Regime would suggest that where family members are participants in an entity, a joint arrangement is quite likely to occur. However, the guidance stops short of suggesting that there will be a presumption that family members are party to an arrangement.
The breadth of the definition of joint arrangement means that a person with a small stake in an entity which holds an indirect stake in an underlying UK legal entity could be found to satisfy the majority stake test by virtue of a joint arrangement. That person may then be attributed with the rights of the underlying legal entity in which they have a majority stake and be a PSC, notwithstanding that they have no involvement in practice with the entity in question. Please see Schedule 3 to this note for an illustration of indirect PSCs who are party to a joint arrangement or have a joint interest.
The other aspect of the majority stake test, as it applies to trusts or firms, is that it then brings in persons who actually exercise, or have the right to exercise, significant influence or control over the trust or firm which, in the case of a trust and depending on the circumstances may result in a settlor, protector, appointor or a beneficiary being a PSC of the underlying UK entity.
A person may also be caught as a PSC because they control a legal entity, such as a US limited liability corporation ('LLC') which acts as the managing member of another LLC.
A person will be attributed with significant control of a UK entity which is subject to the PSC Regime if they meet one or more of the five specified conditions referred to in paragraph 1 above, including by virtue of having a majority stake in an entity further up the chain. The fourth specified condition refers to otherwise having the right to exercise, or actually exercising, ‘significant influence or control’ over a company or LLP and the fifth specified condition contains similar language. There is both Statutory and Non-Statutory Guidance on the meaning of ‘significant influence or control’ in this context and this is explained further in Part 3 of Schedule 1 to this note.
As explained in the response to Question 1, if a joint arrangement exists, persons holding minority interests may be treated as being party to that joint arrangement and attributed with a majority stake in the relevant entity collectively - as a result they may end up on the PSC register of an underlying UK company or LLP. A person may also be caught as a PSC because they control a legal entity, such as a US LLC which acts as the managing member of another LLC.
No. Whilst it might be thought that a managing member would be treated like an individual director of an English company and be ‘excepted’, where there is one managing member which is itself an LLC or other legal entity, it will be attributed with a majority stake. If, however, management of the LLC has been delegated to a person who is not a member, that person would be unlikely to have a majority stake unless they have the right to, or actually exercise, dominant influence or control.
On the assumption that a typical US LLC will be treated as a body corporate (as so defined under the Small Business, Enterprise and Employment Act 2015 ('SBEEA')), one or more members may also be attributed with a majority stake as a result of the rights they hold under the LLC’s operating agreement. It is then necessary to examine who has the right to vote at general meetings of the LLC on all or substantially all matters that shareholders in a UK company would have the right to vote on in respect of that company (the ‘Voting Rights Test'). The LLC’s operating agreement will need to be carefully examined to evaluate the division of powers between the member(s) and the manager(s) and to ascertain whether or not it is the member(s) or the manager(s) who will be treated as satisfying the Voting Rights Test in respect of the LLC. In most LLCs certain key powers will have been reserved to the member(s) such as the right to amend the LLC’s operating agreement, the power to appoint the manager(s) and the power to wind up the LLC and this will often be sufficient to prevent an argument being made that the manager(s) satisfies the Voting Rights Test. A manager who is a member and which is a legal entity may, however, be attributed with a majority stake as explained above.
If a manager did satisfy the Voting Rights Test, that manager or, if acting pursuant to a joint arrangement, the managers, may be attributed with a majority stake in the LLC and may then be PSCs of the underlying UK entity. It may not be possible to sustain an argument that a manager occupies an excepted role in that scenario because the excepted role concept assumes a normal distribution of powers between shareholders and directors in an English company.
A member of an LLC will often satisfy the majority stake test in respect of that LLC by virtue of having the right to appoint and/or remove a majority of the managers (it being assumed that the managers are the equivalent management body to the board of directors of an English company).
Please see Schedule 4 to this note for an illustration of the identification of PSCs of an underlying UK entity in an LLC holding structure.
An advisory board or committee to an LLC may satisfy the majority stake test in respect of the LLC by virtue of actually exercising dominant influence over the LLC even if it does not have the legal levers to give it the right to exercise dominant influence. An advisory board or committee may be treated as exercising dominant influence where the operating and financial policies of the LLC are set in accordance with the wishes of the advisory board or committee and for their benefit, whether or not the wishes are explicit.
The members of such a board or committee might all then be PSCs of the underlying UK entity if they acted pursuant to a joint arrangement (see the answer to Question 1 above).
The British Venture Capital Association ('BVCA'), which represents the private equity industry in the UK, lobbied to ensure that limited partners in English limited partnerships were not treated as PSCs. The reason for the BVCA’s concern was that, under English law, the rights of an English limited partnership are treated as being held jointly (as tenants in common) by all of the partners (ie both the limited partners and the general partner). On this basis, without a specific exemption being introduced to the PSC Regime, the risk was that the indirect controllers of limited partners in UK limited partnerships would end up on the PSC register.
Amendments were therefore made to the SBEEA to exempt limited partners in limited partnerships from disclosure. Limited partners in a ‘foreign limited partnership’ will also be exempted from disclosure if the foreign limited partnership ‘consists of at least one person who has no, or limited, liability for the debts and obligations of the arrangement and that person does not take part in the management of the arrangement’s business’.
The concept of ‘take part in the management’ would be determined in accordance with English law. A limited partnership which does not operate in accordance with its constitution and whereby limited partners do, in practice, take part in the management of the limited partnership’s business (which should be unlikely given that in such a situation the limited partner(s) would likely lose their limited partner status) would be at risk of disclosure on the UK’s PSC Register for underlying UK legal entities. Please see Schedule 5 to this note for an illustration of the identification of PSCs of an underlying UK entity in a limited partnership holding structure.
As with an LLC, an advisory board or committee to a limited partnership may satisfy the majority stake test in respect of the limited partnership by virtue of actually exercising dominant influence even if it does not have the legal levers to give it the right to exercise dominant influence. An advisory board or committee may be treated as exercising dominant influence where the operating and financial policies of the limited partnership are set in accordance with the wishes of the advisory board or committee and for their benefit, whether or not the wishes are explicit.
The members of such a board or committee might all then be PSCs of the underlying UK entity if they acted pursuant to a joint arrangement (see the answer to Question 1 above).
Under the PSC Regime, special rules apply to trusts. For example, a person who has the right to appoint or remove one or more of the trustees, except through application to the courts or as a result of breach of fiduciary duty by the trustees, would be seen as a PSC of an underlying UK entity in which the trustees had a majority stake by virtue of having significant influence or control over the relevant trust. Other powers in relation to trust which may result in someone being treated as a PSC of an underlying UK entity include having the right to amend the trust deed, the right to revoke the trust, the right to direct the distribution of funds or assets or a right to direct investment decisions of the trust.
A person is likely to exercise significant influence or control over a trust if they are regularly involved in the running of the trust; for example, they are a person who has issued instructions, which are generally followed, as to the activities of the trust. This may be a settlor who is actively involved in directing the activities of the trust. It could also be a beneficiary. This is ultimately a question of fact and it may be that no surrender of discretion is required by the trustees for another person to be a PSC of an underlying UK entity in which the trustees have a majority stake. This was, in any event, the approach taken by the UK’s Court of Appeal looking at a similar test for ‘shadow directors’. Trustees could therefore find that a court considers there to be a PSC under condition 5 even if the trustees continue to exercise their discretion in accordance with their fiduciary duties. In a recent case, the English High Court has determined that a trust’s assets were held by the settlor rather than by the trust given the settlor’s ongoing control of the trust arrangements. Accordingly the robustness of any trust should be considered when analysing the position under the PSC Regime.
If there is a corporate trustee, it is necessary to look not only at who has significant influence or control over the trust (ie the fifth specified condition) but also whether anyone satisfies the majority stake test in relation to the corporate trustee itself. Please see Schedule 6 to this note for an illustration of the identification of the PSCs of an underlying UK entity owned by a corporate trustee.
If the shares in the UK PTC are owned by a purpose trust, there may not be a PSC of the PTC by virtue of share ownership or voting rights. However, if there is an enforcer who can appoint and/or remove the trustee of the purpose trust, the enforcer (if an individual) is likely to be a PSC of the PTC. The directors of a PTC would not ordinarily be deemed to be PSCs of it themselves.
The Statutory Guidance provides that a person has the right to exercise ‘significant influence or control’ over a trust or firm if that person ‘has the right to direct or influence the running of the activities of the trust'; for example:
As mentioned in response to Question 8 above, a person is likely to exercise significant influence or control over a trust if that person is regularly involved in the running of the trust; for example if that person has issued instructions, which are generally followed, as to the activities of the trust.
Where UK PTCs are operated by professional trustees, the owners of the trust company may be PSCs if they have a majority stake in the trust company. This might arise, for instance, where you have a partnership which indirectly owns a trust company and where all the partners will be deemed to jointly own the trust company and therefore all be attributed with a majority stake in it.
If the protector and/or enforcer is a body corporate, a person who has control of the protector or enforcer may be a PSC of the underlying UK entity. ‘Control’ includes a situation where a right of the protector and/or enforcer is exercisable only (i) by that person, (ii) in accordance with that person’s directions or instructions, or (iii) with that person’s consent or concurrence. Where a trust indirectly owns a regulated business (eg a financial services business) the requisite control may not be held if the exercise of rights is subject to regulatory approval.
Where other vehicles are used, such as foundations, consideration needs to be given as to whether or not a guardian or settlor effectively controls the exercise of rights held by the members of the foundation council and those rights are equivalent to voting rights held by shareholders or members in a company – if so, this may attribute the guardian or settlor with a majority stake in the foundation. Any bye laws relating to the foundation should be examined, as well as the foundation deed and any supplementary foundation deed(s).
A person who has not received a notice asking them to confirm whether or not they are a PSC of a UK entity but who knows, or ought reasonably to know, that he or she is a PSC, is required to notify the underlying UK entity. The obligation to notify arises once the circumstances have continued for at least a month and provided that the person’s details are not already on the relevant entity’s PSC Register.
The first condition for LLPs is different to that for UK companies and looks at whether a person holds, directly or indirectly, the right to share in more than 25% of any surplus assets of the LLP on a winding-up. Even though, therefore, a person may have no indirect interest in an LLP’s voting rights, they may nonetheless be caught as a PSC of the LLP if they indirectly have an interest in more than 25% of any surplus assets of the LLP on a winding-up, perhaps by virtue of having a majority stake in entities in a holding structure. A similar test applies to Scottish Limited Partnerships and ‘qualifying’ Scottish Partnerships.
We have set out the five conditions out in Part 1 of Schedule 1 to this note.
We have set out the definition of ‘majority stake’ in Schedule 2 to this note.
Yes. A shareholder in a public company (whether unlisted or listed) incorporated in England and Wales may be required by notice issued in accordance with the Companies Act 2006 to disclose its ultimate beneficial ownership. There is no minimum threshold for disclosure and disclosure may ultimately be required up to the top of a chain of ownership (and by reference to economic rights rather than voting rights). Please see Schedule 7 to this note for a detailed explanation of these disclosure rules and Schedule 8 to this note for an illustration of how the rules work in the context of example corporate structures.
Companies listed on UK markets either have to comply with the Disclosure Guidance and Transparency Rules sourcebook ('DTR') or will adopt equivalent disclosure obligations (or equivalent rules in another country will apply to them). Generally speaking, the DTR requires disclosure of interests (direct or indirect) of 3% or more in the voting rights of relevant listed companies but does not attribute control to the same extent as the PSC Regime. However, it should be noted that UK incorporated companies listed on AIM or the NEX Exchange additionally have to comply with the PSC Regime.
1. The first condition – ownership of shares The first condition is that X holds, directly or indirectly, more than 25% of the shares in Company Y .
2. The second condition – ownership of voting rights The second condition is that X holds, directly or indirectly, more than 25% of the voting rights in Company Y . In respect of the first and second conditions (relating to share ownership and voting rights), there are three broad bands to indicate whether a PSC holds:
A PSC who meets the first or second condition would need to be included on the PSC register under the relevant ‘band’
3. The third condition – right to appoint or remove directors The third condition is that X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Company Y.
The reference to the right to appoint or remove a majority of the board of directors of the legal entity is to the right to appoint or remove directors holding a majority of the voting rights at meetings of the board on all or substantially all matters. A right will be held indirectly if the person has a majority stake in the intervening legal entities. Please see Schedule 2 to this note for an explanation of what will constitute a majority stake. Please note, however, that interests of other persons may be aggregated if there is any non-legally binding custom or practice or other ‘arrangement’ and certain rights may be ignored for the purposes of calculations, eg if subsidiary companies hold voting rights in holding companies.
4. The fourth condition – significant influence or control The fourth condition is that X has the right to exercise or actually exercises significant influence or control over Company Y. A person may have significant influence or control where they have absolute decision rights or voting rights over decisions relating to the running of the business of the company or over the appointment of the majority of the directors (or persons holding the majority of voting rights at board meetings). Examples of persons who would actually exercise significant influence or control include:
Please note that, if a person already meets one of the first three conditions, the company does not have to record in its PSC register if and how that person meets the fourth condition.
5. The fifth condition – trusts, partnerships etcThe fifth condition is that (a) the trustees of a trust or the members of a firm that, under the law by which it is governed, is not a legal person meet any of the other conditions (in their capacity as such) in relation to Company Y, or would do so if they were individuals; and (b) a person has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.
Similar conditions apply to LLPs, Scottish Limited partnerships and Scottish ‘qualifying’ general partnerships with amendments to reflect the corporate governance structure of LLPs and these are set out in Part 2 of this Schedule 1.
Limited Liability Partnerships
Scottish Limited Partnerships and qualifying Scottish General Partnerships in eligible Scottish Partnership
The terms ‘significant influence’ or ‘control’, which are used in the fourth and fifth conditions, are not defined in the legislation governing the PSC Regime. Instead, the UK Government published statutory guidance on the meaning of ‘significant influence or control’ over companies in the context of the Register of People with Significant Control issued on 14 April 2016 (the ‘Statutory Guidance').
The Statutory Guidance provides that ‘significant influence’ and ‘control’ are alternatives. Where a person that can direct the activities of a company, trust or firm, this would be indicative of ‘control’. Where a person can ensure that a company, trust or firm generally adopts the activities which they desire, this would be indicative of ‘significant influence’. The ‘control’ and ‘significant influence’ do not have to be exercised by a person with a view to gaining economic benefits from the policies or activities of the company, trust or firm.
Generally, being a director of a company (or the foreign equivalent) is an ‘excepted role’ and a person would not be a PSC of a company under the fourth condition purely because they are a director of it, unless they were carrying out their role in a manner which was ‘out of the ordinary’, or if their role as a director forms one of several opportunities which they have to exercise significant influence or control.
Aside from directors, a person might hold a right to exercise significant influence or control over a company for the purposes of the fourth condition as a result of a variety of circumstances including the provisions of the company’s constitution, the rights attached to the shares they hold, a shareholders’ agreement or some other agreement. For example, a person might have significant influence or control if they have absolute decision rights or veto rights over matters such as adopting or amending the company’s business plan, changing the nature of the company’s business, establishing a share option scheme or similar, or making additional borrowing from lenders.
As mentioned in Part 1 of Schedule 1, examples of persons who would actually exercise significant influence or control for the purposes of the fourth condition include:
However, a person’s relationship with a company would need to be considered on a case by case basis for the purposes of determining whether they meet the fourth condition. In addition, the directors of a UK company would need to carefully consider whether as a matter of fact they regularly take decisions based on the views or recommendations of any persons.
The Statutory Guidance sets out a number of examples of rights which might constitute a right to exercise significant influence or control together with examples of rights which would not.
If a person has absolute decision rights over decisions relating to the running of the business of the relevant company, such as adopting or amending the company’s business plan, changing the nature of the company’s business, making additional borrowing, appointing or removing the CEO, establishing a bonus or incentive scheme or granting options, then this might give them significant influence or control over the company.
If a person has absolute veto rights over decisions related to the running of the business of the relevant company, such as adopting or amending the company’s business plan, or making additional borrowing, or if the person holds absolute veto rights over the appointment of the majority of directors, then this might give them significant influence or control over the company.
‘Absolute’ in relation to decision or veto rights means that a person has the ability to make or veto a decision without reference to or collaboration with anyone else (although regard still must be had to whether the person is acting under a joint arrangement ).
In terms of the fifth condition, according to the Statutory Guidance a person has the right to exercise significant influence or control over the activities of a trust if they have the right to direct or influence the running of the activities of the trust, for example, the right to appoint any of the trustees, except through application to the courts, the right to direct the distribution of funds or assets, the right to direct investment decisions of the trust, the right to amend the trust deed or declaration of trust, or the right to revoke the trust.
A person actually exercises significant influence or control over a trust if they are regularly involved in the running of the trust, for example a person who issues instructions, which are generally followed, as to the activities of the trust to the trustees. This may be a settlor or beneficiary who is actively involved in directing the activities of the trust.
1. Majority holding
2. What is dominant influence (as referred to in paragraph 1(c)(iv) above)?
3. Fifth condition and majority stake
2. Interest in Shares
3. Indirect interests
3.1 What does ‘accustomed to act in accordance with his directions or instructions’ mean?
3.2 What about agreements to acquire interests in shares?
3.3 What about the interests of a non-UK person?
5. Non-UK issuers
6. Inspection of the section 793 register
7. Enforcement of section 793
7.1 Restrictions which may be imposed pursuant to a company’s articles
7.2 Court order restrictions
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)