People with Significant Control: Piercing the Corporate Veil
Since 6 April 2016, UK companies and limited liability partnerships (LLPs) and UK registered Societates Europaeae (SEs) (hereafter referred to collectively for simplicity as “UK corporates”) have been required to maintain a register listing “People with Significant Control” (PSCs) in relation to the UK corporate. Partnerships which are not LLPs are not subject to the regulations and neither are Charitable Incorporated Organisations. There are also exemptions for UK corporates subject to the Financial Conduct Authority’s Disclosure and Transparency Rules and for those with voting shares admitted to trading on a regulated market in the UK or European Economic Area or on specified markets in the USA, Japan, Switzerland and Israel.
With effect from 30 June 2016, it has been a legal requirement that a UK corporate provides the information listed on the register of People with Significant Control to Companies House when it files its Confirmation Statement (the new replacement for the Annual Return).
The idea of such a register was first floated at the G8 summit which the UK chaired in 2013. Its avowed purpose was to prevent corruption by greater transparency in the business arena. The People with Significant Control regulations require UK corporates to provide details of individuals who meet the following conditions:
- Directly or indirectly hold more than 25% of the shares
- Directly or indirectly hold more than 25% of the voting rights
- Directly or indirectly hold the right to appoint or remove a majority of directors
- Otherwise have the right to exercise, or actually exercise, significant influence or control.
- Have the right to exercise, or actually exercise, significant influence or control over the activities of a trust or firm which is not a legal entity, but would itself satisfy any of the first four conditions if it were an individual.
If the corporate is not owned or controlled by individuals who are PSCs. It will nevertheless be required to disclose the existence of any relevant legal entities (RLEs) which satisfy conditions 1 to 4 above and are either required to maintain their own PSC register, are subject to the FCA’s Disclosure and Transparency rules or are traded on the regulated markets referred to above. Only UK corporates will be RLEs, so UK corporates owned or otherwise controlled by non-UK corporates will not have to disclose that ownership or control on the People with Significant Control register on the basis of the current rules.
Where a shareholder is not a PSC or an RLE, it is necessary to ascertain whether any individual or RLE has a majority stake in the shareholder entity. An individual or RLE has a majority stake if
- They hold a majority of the voting rights in the legal entity
- They are a member of the legal entity and have the right to appoint or remove a majority of its board of directors;
- They are a member of the legal entity and control a majority of the voting rights by agreement with other shareholders or members; or
- They have the right to exercise or actually exercise dominant influence or control over the legal entity.
If a person with a majority stake is an individual, he or she will be a PSC for the purposes of the register. If the person is neither an individual nor an RLE, it is again necessary to establish whether a person who is the shareholder entity has a majority stake. If the repetition of this process does not result in a PSC or RLE with a majority stake being identified, this fact must be entered on the register.
Particular issues may arise with trusts and trustees. If an individual trustee meets any of the PSC conditions, his or her details will need to be entered on the register. If the trustee is a non-UK corporate trustee, its corporate structure will need to be established and any identified PSCs will need to be disclosed. It will also be necessary to look at the terms of the trust in order to ascertain whether any settlor, protector, beneficiary or other adviser meets any of the conditions by virtue of any of the provisions of the trust.
The UK is the first jurisdiction to introduce such an ownership register and is in many respects out of step with other major economies. However, the European Union’s 4th Money Laundering Directive requires member states to incorporate similar provisions into their own domestic law by July 2017. Afghanistan, Kenya and Nigeria have signalled that they will draw up similar beneficial ownership registers but most significant non-EU jurisdictions have made no such commitment. Even the OECD’s Tax Policy Director, Pascal Saint-Amans, has said that the time is not right for public registers of beneficial ownership, citing the opposition of the US and Japan to the concept. And of course, the UK’s own dependencies and overseas territories, many of which are tax havens with relatively few requirements concerning public disclosure of financial information, are rather unlikely to follow the UK’s example in the immediate future.
People with Significant Control can avoid some of their personal details being available to the public if they can demonstrate that disclosure would pose a serious risk of violence or intimidation. However, there are, of course, many reasons why individuals and businesses might seek privacy and confidentiality in their personal and commercial dealings, the vast majority of which have nothing whatsoever to do with corruption or other forms of criminality. As the UK enters a new era in its international economic relationships following the vote for Brexit, it remains to be seen whether this new openness will help or hinder this process. The UK has been a substantial beneficiary of the practice known as tax inversion, where companies re-domicile from jurisdictions where corporate tax rates are high to lower tax jurisdictions. For privately held companies and groups, the PSC rules may be a deterrent. Indeed, we could see a trend for UK businesses to be run through overseas entities in order to avoid the PSC rules. Where PSC disclosures are a serious issue for individuals and businesses, advice should be sought; trusts and alternative holding structures could be appropriate in some circumstances.