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The PSC Register: Looking Behind the Corporate Veil

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About The Author

Former Author (Assistant Editor)

Author is a King's College London Law graduate, currently working as a corporate paralegal for a firm based in South West England. Author is due to begin his BPTC at the University of Law in September 2015, having attained a scholarship from Middle Temple.

The Small Business, Enterprise and Employment Act 2015 has recently received Royal Assent which may have a significant impact on the way that companies are structured in the United Kingdom. The government set out its agenda to increase transparency of corporate ownership and issued a consultation entitled ‘Transparency & Trust’ in July 2013. The main elements of the proposal were to: create a central registry of UK company beneficial ownership, prohibit the use of corporate directors, and improve accountability of directors more generally.

In the ministerial foreword to the initial consultation, Vince Cable, the Secretary of State for Business Innovation and Skills (BIS) set out clearly his vision for the effects of the Small Business, Enterprise and Employment Act:

Enhanced transparency of company ownership will help us to tackle tax evasion, money laundering and terrorist financing. It will improve the investment climate and make doing business easier.

The Bill was subject to significant consultation and amendment during its legislative journey to give adequate time to consider its impact, as shown by it taking almost two years from initial consultation to Royal Assent. The question now for those working in the corporate sector and those wishing to take advantage of the information supplied in the Persons of Significant Control (PSC) registers, is how far does it take us behind the corporate veil? Will individuals still be able to hide their assets through the use of trusts or limited partnerships such that instead of increasing transparency, the PSC register will only drive people further to conceal assets?

The Transparency Agenda

Corporate structures in the United Kingdom have long enjoyed protection from extensive disclosure, with the requirements for maintenance of shareholder history being fairly limited. Under the Companies Act 2006, each private limited company is obliged to maintain a register of members which sets out the shareholders of the Company and the number and class of shares which they hold, and to submit to Companies House an Annual Return each year setting out the shareholders, made up to a particular date. The Annual Return is available to view at Companies House, and the statutory books of the company must be available for inspection on request at the company’s registered office address (or alternative registered location).

The register needs to state the name and address of the shareholder, which can be another company, limited partnership or private trust. The Annual Return submitted to Companies House only needs to provide the name of the respective shareholder, as well as other key information about the company such as a list of directors and the registered office address. Large group corporate structures can include several layers of ownership, through holding companies whose purpose is often, but not always, to increase tax efficiency and often to conceal ownership. This is what the PSC register aims to address. It will be a register publicly available at Companies House that sets out any individual who holds ‘significant control’ of a company after considering the layered approach to ownership that currently exists.

The transparency agenda has already had a significant impact on public limited companies, which have been subject to transparency requirements for almost 10 years. The Disclosure and Transparency Rules (DTR), originally known as the Disclosure Rules, came into force on 1 July 2005 implementing the European Market Abuse Directive (2003/6/EC). The rules regarding disclosure of the identity of shareholders is extensive; for a fuller explanation of the DTR rules, see the FCA Handbook which sets out the regulatory approach to compliance with DTR. The European Union is progressing with the creation of a fourth Money Laundering Directive which will further increase the need for transparency across all types of corporate entity, but the United Kingdom have led the way with the introduction of the PSC register for all private limited companies.

The Small Business, Enterprise and Employment Act 2015

The Act has introduced several changes to the way that company administration is carried out. Although the PSC register is one of the clearest changes, the Act has also removed the requirement to submit an Annual Return after April 2016 and removing the power of corporate entities to act as directors. The intention of removing the power of Companies to act as directors is that to do so conceals the person with day-to-day control of the company.

In respect of the PSC register itself, the register is to be implemented by January 2016 and will need to include the name, registered address, date of birth and nationality of any person with ‘significant control’ of a company, regardless of whether they are resident inside or outside the UK. The usual residential address of the person will not be included in the open register, whether at Companies House or within the company's own register; such information will only be available to certain public authorities and credit reference agencies. Persons with 'significant control' include any person who:

  • holds, directly or indirectly, more than 25% of a company’s shares;
  • is entitled, directly or indirectly, to exercise (or control the exercise of) more than 25% of the voting rights in a company;
  • is entitled, directly or indirectly, to appoint or remove (or control that appointment or removal) of a majority of a company’s directors; or
  • has the right to exercise significant influence or control over a company.

There are specific provisions in Schedule 3 of the Act which relate to indirect holdings through complex arrangements, including layered holding companies, interests held on trust and limited partnership interests.

The most important element that will affect the operation of the PSC register will be the statutory guidance that the government are due to release in the coming months. The statutory guidance will include greater signposting of what ‘significant control’ entails in the context of multi-layered corporate structures involving limited partnerships, trusts and other arrangements.

Limited Partnerships and complex structures

The PSC register has already been significantly altered during the consultation stage, with UK limited partnerships being initially exempt from the need to disclose beneficial entitlement in a company. As reported by Osborne Clarke, the British Venture Capital Association (BVCA) lobbied strongly for exemptions for limited partnerships because of the concerns over the need to disclose full details of all limited partners if the collective LP had significant control. The BCVA state the position thus: ‘each partner in a limited partnership is deemed to have an indivisible interest in the assets of [a limited partnership]’ even if the constitution of the partnership may explicitly provide differently.

Limited partnerships (distinct from Limited Liability Partnerships) are a commonly used vehicle for private equity investment. The structure for limited partnerships is two-tiered, being either a general partner or limited partner. General partners are responsible for the day-to-day management of the partnership and have unlimited liability for the operations of the partnership. Limited partners, as the title implies, are only liable as far as provided for in the partnership deed entered into by the parties. Individual investors will become members of partnerships firstly to shield themselves from unlimited liability, and also it affords the individual the anonymity of being an LP member rather than a sole individual investor.

The Bill, as first published, included a requirement for limited partnership members to be included in the register, but this was amended at Committee stage such that only those partners who held ‘significant control’ in their own right would be included on the register. This amendment will mean that the administrative burden for LPs will not be as high as first may have been feared by the BVCA and the statutory guidance on the meaning of ‘significant control’ highlighted above will determine whether each limited partner of the LP is required to be registered as a PSC in his or her own right.

The concern expressed on behalf of investors was that it is ‘not uncommon to have over 200 limited partners in a fund’ and the disclosure of the names of all of the individuals would be misleading, over-representing the ownership and control that each partner has across their respective investment portfolio. This fear of over-exposure might dissuade investors from pursuing investment in small and medium-sized companies which often rely on private equity investments to expand.

However, the problem that will arise for an authority wishing to determine the true control of a limited partnership is that it does not have to submit its partnership deed to Companies House under current legislation, and thus there is very limited scope for looking behind the corporate veil to discover the respective rights of the individuals involved.

Although the amendment may seem to balance the interests of venture capital investors more equally with the overall agenda of transparency, it is hoped that the future government are as robust as possible in the definition of ‘significant control’ such that the rules are not undermined even before their implementation.

Considering Transparency

The transparency agenda which has driven the introduction of the PSC register can be identified across the legal landscape. The Supreme Court decision in Prest v Petrodel identified the circumstances in which the law will look beyond ownership of corporate entities when determining assets held by a particular individual. The government is right to tackle complex corporate structures, as complexity necessarily leads to confusion, making it far harder to ensure that companies are paying their fair share in tax and those individuals benefiting from the success of corporate groups are also paying their requisite share of tax.

A further boon for the UK government will be the ability to share information on individuals and consider whether individual ownership of companies extends in a particular sector so as to involve the Competition Authority. As noted above, the statutory guidance will be crucial in determining the effectiveness of the reforms, and it is hoped that the government will be as tough as possible.

I believe that concerns over dissuading investment are overstated, provided that confidential information regarding investors, such as residential addresses, can be withheld entirely in extenuating circumstances, individuals should not fear their name being associated with a corporate group. The question I am left asking when considering those opposed to a PSC register is, if an individual is afraid of being subject to public scrutiny, is this person truly suitable to be investing in or managing a business in the first place?

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Tagged: Commercial Law, Company Law

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