This article was originally published in the August 2017 issue of Estate Planning.
US fund managers, entrepreneurs, members of a family's consolidated investment partnership, and many other US persons are often surprised by the long reach of the UK's regime for making public the identities of those who manage or control certain UK entities. Generally speaking, this could apply to any person with significant influence or control over UK companies or UK limited liability partnerships.
Under a program introduced last year, called the UK 'people with significant control' (PSC) regime, any person with significant influence or control over UK companies or UK limited liability partnerships (and also some other entities) must report certain personal information (such as name, address, and relationship to the entity, as described further below) to the entity's PSC register. This reporting requirement is wider reaching than many other disclosure regimes. The UK's PSC regime is designed to make the ownership and control of UK companies and other UK entities more transparent.
Reporting to the PSC register has been an obligation since 4/6/2016, and was introduced in the UK's Small Business, Enterprise and Employment Act 2015 (SBEEA), which inserted new provisions into the UK's Companies Act 2006.
Who is a PSC?
There are two types of PSC under the UK PSC regime:
1.Those with direct control or influence.
2.Those with indirect control or influence.
Direct control or influence. A person may be a PSC if he or she has the right to exercise, or actually exercises, significant influence or control over a UK company, UK limited liability partnership (UK LLP), or other UK legal entity directly.1 A person who satisfies one or more of the following five specified conditions in respect of a UK company or UK LLP is a PSC:
- Direct or indirect holding of more than 25% of a company's shares (or, in the case of a UK LLP, direct or indirect holding of rights over more than 25% of the surplus assets on a winding up).
- Direct or indirect holding of more than 25% of the voting rights.
- Direct or indirect holding of the right to appoint or remove a majority of a company's directors or, in the case of a UK LLP, of those involved in management.
- Otherwise having the right to exercise, or actually exercising, significant influence or control over the company or UK LLP.
- Being a person with the right to exercise, or actually exercising, significant influence or control over a trust or firm, where the trustees of the trust or the members of the firm (which is not, under the law by which it is governed, a legal person) meet any of the other specified conditions (in their capacity as such), or would do so if they were individuals.
This final condition catches trusts and may result in not only individual trustees but some settlors, protectors, enforcers, and beneficiaries of trusts being PSCs.
The specified conditions must be considered in turn and, to the extent that a PSC falls within either of the first two conditions, the relevant PSC register entry must include the level of his or her shareholding/entitlement to surplus assets or voting rights (i.e., greater than 25% but no more than 50%; more than 50% but less than 75%; and 75% or more).
If a PSC satisfies any of the first three specified conditions, there is no need to consider separately whether he or she would also be caught by the fourth. It is important to note that a person may be a PSC by virtue of an indirect interest held through one or more legal entities as a result of the application of the “majority stake” test (discussed below).
Indirect control or influence. The PSC regime requires one to consider 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, the person involved holds 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:
- The person holds a majority of the voting rights in a legal entity.
- The person is a member of the legal entity and has the right to appoint or remove a majority of its board of directors.
- The person is a member of the legal entity and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights of that legal entity.
- The person has the right to exercise, or actually exercises, dominant influence or control over the legal entity.
In some situations, it will be easy to evaluate whether a person (including the trustees of a trust or the members of a firm) has a majority stake. However, consideration also needs to be given as to whether 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 that 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.
Relevance to US persons
A US person who meets any of the five specified conditions in respect of a UK company or UK LLP (as listed above) would be a PSC and would need to be disclosed as such on the UK entity's PSC register. By way of example, PSC disclosure may be required of:
- An entrepreneur, fund manager, family member, or other US person who is a settlor, protector, appointor, or beneficiary of a trust, the trustees of which meet one of the five specified conditions, and whose ongoing advice to the trustees is considered to be equivalent to an instruction.
- An entrepreneur, fund manager, family member, or other US person who has the right to appoint or remove the trustees of a trust where the trustees of that trust meet one of the five specified conditions.
- An entrepreneur, fund manager, family member, or other US person who has the right to revoke a trust where the trustees of that trust meet one of the five specified conditions.
- An entrepreneur, fund manager, family member, or other US person who has the right to direct the distribution of trust funds or assets in respect of a trust where the trustees meet one of the five specified conditions.
When applying these rules, the following observations are relevant:
Where the above-mentioned rights have been given to another person, the PSC regime may attribute them to the entrepreneur, fund manager, family member, or other US person if the other person exercises the rights in accordance with the entrepreneur's, fund manager's, family member's, or other US person's wishes.
Entrepreneurs, fund managers, family members, or other US persons may find that tax authorities treat the trustees of a trust or the governing body of other fiduciary vehicles as having control, while the PSC regime attributes control to the entrepreneur, fund manager, individual family members, or other US person. This could cause tax authorities to put ownership structures under renewed scrutiny.
Disclosures for other purposes, e.g., disclosure of interests in listed companies, may trigger disclosure of the trustees of a trust as indirect owners but would not usually trigger the disclosure of named individual entrepreneurs, fund managers, or family members as indirect owners. In contrast, the PSC regime may attribute control to the individuals behind a trust or other fiduciary vehicle. UK listed companies are mostly exempt from the PSC regime although AIM companies and Nex Exchange Growth Market companies may cease to be exempt from 6/26/2017.
For instance, a beneficiary, settlor, protector, or appointor of a trust might be disclosed as an indirect holder of shares in a UK private company under the PSC regime if the trustees tended to act in accordance with their suggestions in a way which is suggestive of “instruction.” There is arguably no need to show that the trustees have acted in breach of fiduciary duty for this to happen.
Could managers of US LLCs be PSCs?
On the assumption that a typical US LLC will be treated as an association taxable as a corporation for UK tax purposes (as so defined under the SBEEA), it is then necessary to examine who has the right to vote at general meetings of the LLC on all or substantially all matters in order to determine whether a person satisfies the majority stake test in respect of that LLC. The LLC's operating agreement will need to be carefully examined to evaluate the division of powers between the members and the managers and to ascertain whether the members or the managers will be treated as holding a majority of the voting rights in the LLC. Ordinarily, one would expect the members and not the managers to have a majority stake for the purposes of the PSC regime but this may not always be the case.
Advisory boards or committees to an LLC
An advisory board or committee to an LLC may satisfy the majority stake test in relation to that 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, regardless of whether 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.
How would a limited partnership be treated under the PSC regime?
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 (i.e., 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” may need to be analysed under 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 partners would likely lose their limited partner status) would be at risk of disclosure on the UK's PSC register for underlying UK legal entities. As with an LLC, an advisory board or committee to a limited partnership may satisfy the majority stake test 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.
Treatment of foundations
When looking at a foundation, consideration would need to be given to whether a guardian (person with oversight, much like a trust protector) or settlor effectively controls the exercise of rights held by the members of the foundation council and whether 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 for the purposes of the PSC regime. Alternatively, some or all of the members of the foundation council may be party to a joint arrangement and may be PSCs of an underlying UK entity given that there is no separation of powers in a foundation such that members of the foundation council control rights equivalent to members at a general meeting of a company. Any by-laws relating to the foundation should be examined, as well as the foundation deed and any supplementary foundation deed.
Other considerations for US investors
US wealth planning structures often include chains of US LLCs and limited partnerships. The US rules for these do not have corresponding governmental disclosure requirements, although registered agents or agents for the service of process are typically identified and recorded at the secretary of state's office upon formation of LLCs and other business entities.
Similarly, disclosure of those with authority is increasingly required by banks and other financial institutions for the purposes of their banking “know your customer” obligations. US federal tax filings will also require disclosure of a “tax matters partner” or a “responsible person” when filing income tax returns or applying for a tax identification number.
As mentioned above, the PSC regime will track who has the voting control of LLCs and limited partnerships and may result in disclosure up to the individual entrepreneur, fund manager, or family member. This may be the case even if their only form of participation is membership of an advisory committee or board given that a pattern of consistently voting in the same way might be a joint arrangement which might then result in all the members of the committee or board or those who together exercise a majority of the votes being PSCs of an underlying UK entity.
The long-standing “s793 regime” in the UK should also not be forgotten (when there is a direct or indirect holding in an English plc) because under that regime when a trust is attributed with an interest in a UK plc, all the beneficiaries (except minors) have to be disclosed.
Advisors should also be aware that the PSC regime is likely to be extended to direct and indirect interests in other entities such as “active” Scottish limited partnerships and Scottish general partnerships where all the partners are body corporate (vehicles which have been attractive for Latin American structures) from 6/26/2017 and will also be extended to non-UK companies that hold property in England or that wish to bid on UK government contracts. The disclosure threshold may also be reduced to 10% in some or all circumstances. These changes are still under discussion in the EU at the time of writing in June 2017.
If a PSC notice requesting information about PSCs is not complied with or a person fails to identify himself or herself as a PSC within one month of becoming a PSC, the person commits a criminal offense. As a further sanction for non-compliance, the UK company may also obtain a court order to freeze any dealing in the shares in the UK company (or the exercise of any rights attaching to the shares).
The statutory guidance on the meaning of “significant influence or control” over companies in the context of the PSC regime published by the UK government on 4/14/2016 sets out certain “excepted roles” which, if applicable, would prevent a person from being a PSC, if he or she might otherwise be caught by the fourth condition. These are mostly professional relationships which will not, in the ordinary course of events, require the UK company or UK LLP to register the people acting in those roles as PSCs. These include:
- The provision of professional services such as legal, accountancy, consultancy, and financial advisory services.
- Involvement on a commercial basis such as suppliers, customers, or lenders.
- Persons operating under an enactment such as a regulator or liquidator/receiver.
- Persons who are employees acting in the course of the employment and persons who are directors acting as such.
- Rights exercised on behalf of employees in an employee-owned company.
- Professional organizations or networks.
This list should not be considered definitive in all circumstances. If a person is acting in any of the roles above in a manner that is not “ordinary,” and in such a way that they have significant control or influence over the UK company or UK LLP, they may still need to be entered onto the entity's PSC register.
Obligations of keeping a PSC register
UK companies and UK LLPs are required to keep a PSC register, which must be available for inspection at their registered office. Private companies may elect to keep information about their PSCs at Companies House (the UK's registrar of companies) rather than having to maintain a separate PSC register.
Entities that fall within the PSC regime have a duty to investigate, obtain, and update information on their PSCs and have been given the means to procure such information by serving notices on someone the entity in question knows or has reasonable cause to believe (1) is a PSC; (2) knows the identity of a PSC; or (3) has ceased to be a PSC.
A criminal offense is committed by a UK entity and its officers if the entity fails to take steps or give notices required under the Companies Act 2006 as amended by the SBEEA. Such offenses are punishable by up to two years' imprisonment and/or a fine.
Wholly owned UK subsidiaries of UK companies and UK LLPs fall within the PSC register regime. However, the subsidiary may need to note only its parent entity as its PSC and one would need to look to the PSC register of the parent entity to identify the ultimate PSC of the holding structure.
Information included on PSC register
The PSC register must include the name, service address, country or state of usual residence, date of birth, and usual residential address of a PSC, as well as the nature of the PSC's control over the UK entity (and, in relation to the first two specified conditions, which of the three percentage bands the PSC's holding or rights fall into), the date when the PSC became registrable,2 and any restrictions on disclosure.
The usual residential address of the PSC will not be made publicly available on the PSC register held by the entity itself or at Companies House (unless provided as a service address), although it must still be provided. Only the month and year of a PSC's birth will be available from the public register at Companies House but a PSC's birthday must be available for public inspection in the entity's own PSC register. Notwithstanding the above, law enforcement agencies will have access to all information held by Companies House, which will also make residential addresses available to credit reference agencies and certain public authorities.
UK companies and UK LLPs have a duty to keep their PSC register up-to-date. If a private company has elected to keep its PSC register at Companies House, it must inform Companies House of any changes in real time without waiting until its next confirmation statement is filed. If the entity keeps its own PSC register, it must keep it up-to-date but it does not have to update the Companies House records until it files its next annual confirmation statement. With effect from 6/26/2017, however, changes may need to be notified more promptly and Companies House have indicated that changes will need to be filed within 14 days.3
When the entity becomes aware that someone has ceased to be a PSC, it must update its own PSC register accordingly as soon as reasonably practicable and update Companies House records when filing the next annual confirmation statement.
A UK company or UK LLP must keep historical records of its past PSCs for ten years, while information about former PSCs would be available at Companies House indefinitely.
Who can access PSC registers?
Any person or entity may access PSC information about a UK entity whether it is held by the entity itself or at Companies House. Although a request must include the purpose for seeking the information and this purpose must be “proper,” the guidance provides that the term “proper purpose” is intended to have a wide interpretation and application.
The UK government has stated4 that investigative journalism would be considered a proper purpose and the general purpose of the publicly available PSC register is to provide transparency of company ownership and control, so it appears that only in very limited circumstances would a request about a PSC be considered improper.
Can access to PSC information be restricted?
In exceptional circumstances a PSC, or the company or UK LLP on the PSC's behalf, will be able to make an application to suppress all PSC information from public disclosure or to prevent the PSC's residential address being accessible by credit reference agencies. The company or UK LLP would still need to comply with its PSC requirements, and the information will remain accessible by law enforcement agencies.
An individual PSC's application for protection must contain evidence of a serious risk of violence or intimidation to the PSC or someone living with him or her. If the application is to prevent all of the PSC's information from being publicly available,5 the risk must come from either:
- The activities of the UK entity.
- The PSC's association with the UK entity.
Applications will be assessed on a case-by-case basis, so there is no set list of circumstances where protection will be granted. The Registrar of Companies in the UK will make a decision after consulting law enforcement agencies like the National Crime Agency. The Registrar will write to confirm a response to the application. If the application is unsuccessful, the applicant can appeal within 42 days, during which time protection continues. Once an application is granted, the PSC information is protected indefinitely.
Can a legal entity be a PSC?
In most cases a PSC will be an individual, although there are exceptions. A legal entity will have to be put on the PSC register if it is both relevant and registrable in relation to the company or UK LLP in question.6 It will be a relevant legal entity (RLE) if it meets any of the specified conditions set out above and also:
- Holds its own PSC register.
- Is subject to Chapter 5 of the Financial Conduct Authority's Disclosure Guidance and Transparency Sourcebook (except that it is possible that non-UK AIM companies and Nex Exchange Growth Market companies may be excluded from 6/26/2017, meaning that they would have to be 'looked through').
- Has voting shares admitted to trading on a regulated market in the UK or European Economic Area (EEA) or specified markets in Switzerland, the USA, Japan, and Israel. An organization whose members include two or more countries, territories, or their governments, or a local authority or a corporation sole, should be treated as an individual for the purposes of the PSC regime and should be entered into the underlying UK entity's PSC register where applicable although such entities are not themselves registrable RLEs.7
An RLE will be registrable on the PSC register if it is the first RLE in the company or UK LLP's ownership chain. This can lead to an individual who holds both a direct interest in the underlying company and an indirect interest in the same vehicle through RLEs having to be entered as a PSC in the registers of RLEs as well as having to declare the combined value of the shares in the underlying entity's PSC register.
The non-statutory guidance for companies, Societates Europaeae, and UK LLPs states that in such circumstances it might be unreasonable to expect the underlying company or UK LLP to identify the person's indirect control. It would fall on the individual PSC to declare his or her interest held through intermediate companies.
Keeping a PSC register updated
An entity that is obliged to keep a PSC register must take reasonable steps to identify if any individual or legal entity meets one or more of the specified conditions in respect of it and, if so, who that person or registrable RLE is, even if the final determination is that the entity has no PSCs. What amounts to reasonable steps will depend on the particular circumstances of the case. It is highly advisable that a UK company or UK LLP keeps an accurate and up-to-date record of the steps it has taken.
Unlike information about a registrable RLE, information about an individual PSC must be confirmed before it can be entered in the PSC register. In both cases, the information about each particular PSC must be complete before it is entered. It must be put on the register as soon as it is complete in relation to each PSC-even if it means that the entity is still in the process of taking reasonable steps to identify and confirm information about other PSCs.
If the company has identified an individual or an RLE as a PSC but does not have the information required or, in the case of an individual PSC, does not have confirmed information, it must serve a notice on the relevant PSC by either post or email asking him or her to provide or confirm the relevant information and should keep a record of its communication.
If the company has been unable to identify a PSC but has a reason to believe that one exists, it should consider serving notices requesting information on anyone the company knows or has reasonable cause to believe knows the identity of the PSC, relevant RLE, trust or firm, or could know someone likely to have that knowledge. For example, intermediaries or advisers such as lawyers, accountants, banks, corporate service providers, or any known associates could be sent notices.
If the entity fails to take reasonable steps or give the notices required under the Companies Act 2006, a criminal offense is committed by the UK entity and its officers (including, where applicable, directors, company secretaries, or designated members). Such offenses are punishable by up to two years' imprisonment and/or a fine.
Obligations on recipients of notices and PSCs
A person who receives a notice from a UK entity investigating its PSCs (as described above) has a duty to respond to it. It is an offense to fail to respond to the notice or knowingly or recklessly to make a false statement when responding to the notice, although an addressee would not be required to disclose information about a PSC if he or she could maintain legal professional privilege in respect of such information in legal proceedings.
A person in receipt of a notice who fails to comply with it within one month of its service without providing a valid reason for his or her failure to reply may be guilty of a criminal offense. (In the authors' experience, the only valid reason given as an example to date is long hospitalization; logistical issues would not suffice). The legal entity serving the notice may serve that person a “warning notice” that it intends to issue a “restrictions notice” in respect of a relevant interest. The entity may issue a restrictions notice if it has not received the requested information in response to the warning notice within a month of issuing the warning notice. The statutory wording prescribed for both warning and restrictions notices must be used, and the addressee must be informed of his or her rights and obligations in the notices.
No court order is needed for a restrictions notice to be served. Its effect is to freeze any dealing in, or exercise of, the relevant interests in the shares, including voting rights, dividend rights, or the right to remove any director, until the relevant PSC information is obtained and the restrictions are lifted. It should be noted that the UK entity can restrict the “relevant interest” of anyone who fails to respond to requests for information about a PSC provided he or she has one, even if his or her interest would not make the individual a PSC. Given that the recipient of a notice without a relevant interest in the entity will have nothing for a restrictions notice to attach to, the government hopes that a risk of being convicted of a criminal offense would be a sufficient deterrent.
An entity is not required by law to impose restrictions, but its directors must consider doing so as part of its taking reasonable steps. A board that decides against the imposition of restrictions should be able to justify this decision in the light of their duties to the company or UK LLP.
Imposing restrictions on relevant interests does not exhaust the entity's obligation to take reasonable steps. It should continue to take reasonable steps until it has identified all PSCs and registrable RLEs or there is nothing more it can reasonably do.
There is also a pro-active obligation on someone who has not received a notice but knows, or ought reasonably to know, that he or she is a PSC of the relevant entity and his or her details are not already on the relevant entity's PSC register. If such circumstances have continued for at least a month, the PSC has one month to make the notification of his or her interest.