'People with Significant Control' - Guidance for Academy Trusts
With effect from 6 April 2016, all companies, including charitable companies, are required to maintain a register of 'People with Significant Control' (or PSCs).
This requirement is contained in the Companies Act 2006 and reflects the government's drive for greater transparency, which originally formed part of the agenda for the UK's G8 presidency in 2013.
In essence, the aim of the PSC rules is to oblige UK companies to significantly increase the level of transparency about who exercises significant control over them.
As with much of the legislation that applies to UK companies generally, the PSC rules have not been drafted with charities specifically in mind and the rules, which are complicated, do not take into account or cater for the additional complexities that a company's charitable status creates in some circumstances.
Because all academy trusts are established as charitable companies limited by guarantee, they are caught by the PSC rules.
The PSC rules will increase the regulatory burden for academy trusts although, if effective administrative procedures are put in place, it should be possible to ensure that the ongoing burden is limited in practice.
- What does this mean in practice?
- Who is an academy trust's PSC?
- Significant influence or control
- Chief Executive Officers, Trustees and Advisers
- Relevant legal entities
- What academy trusts should do
- Further advice
What does this mean in practice?
Every academy trust must take 'reasonable steps' to identify all of those people who exercise 'significant control' over it and must then record their details in a dedicated PSC register. A PSC register must be maintained even if the academy trust has no PSCs.
As from 30 June 2016, every academy trust must also deliver the information in the PSC register annually to Companies House as part of its 'Confirmation Statement' (which is replacing the Annual Return made to Companies House from that date). Companies House will in turn make this information publicly available in a central register of PSCs.
The academy trust must also then update the information on its own PSC register when it changes, and update the information at Companies House when it makes its next Confirmation Statement.
The Companies Act 2006 places the obligation to comply with the PSC rules on the academy trust but any failure by the academy trust to comply with the rules may constitute a criminal offence by its trustees.
Who is an academy trust's PSC?
A PSC is any individual who exercises 'significant control' over an academy trust. The rules do not therefore apply to other companies which exercise significant control over an academy trust (although there are specific rules which do catch a 'Relevant Legal Entity' and which will apply to some sponsors and subsidiaries of academy trusts - please see below).
The PSC rules provide that an individual will have 'significant control' over an academy trust if they meet any one of the following five conditions:
- Condition 1
They hold (directly or indirectly) more than 25% of any shares. This test will not apply to companies limited by guarantee and so is not relevant to academy trusts.
- Condition 2
They hold (directly or indirectly) more than 25% of the member voting rights. This is relevant to academy trusts because they are established as companies limited by guarantee.
- Condition 3
They have the right (directly or indirectly) to appoint or remove a majority of the academy trust's trustees.
- Condition 4
They have the right to exercise, or actually exercise, 'significant influence or control' over the academy trust.
- Condition 5
They have the right to exercise, or actually exercise, 'significant influence or control' over a 'trust' or 'firm' which is not itself a legal entity but which would satisfy any of the four conditions mentioned above if it were an individual. This last condition is likely to be relevant to academy trusts where eg. rights to appoint and remove its trustees are vested in a trust which acts as a sponsor, in which case the individual trustees of that trust may be PSCs.
Whether or not an academy trust has any PSCs will depend upon an analysis of its specific governance arrangements in order to determine whether there are any individuals who meet any one of these five conditions.
It is important to bear in mind that the PSC rules are not generally intended to treat an academy trust's trustees as PSCs. While they are responsible for the way in which an academy trust is managed, trustees will already be clearly identified in an academy trust's register of directors and their details filed at Companies House. The PSC rules are aimed at obliging companies to identify those members and others who exercise significant control over the way in which a company operates, and whose identity would not otherwise be apparent.
For most academy trusts, applying the PSC conditions is likely to be a relatively straightforward process. By way of example:
- An academy trust with fewer than 4 members, all of whom are individuals holding equal voting rights, will have PSCs (Condition 2).
- An Academy Trust with 4 or more individual members (again, assuming that all hold equal voting rights) will not have PSCs (unless Conditions 4 or 5 are met).
- If an individual (eg. a sponsor) has the ability to appoint a majority of the trustees, he or she will be a PSC (Condition 3).
- If a trust acts as sponsor and has the ability to appoint a majority of the academy trust's trustees, the individual trustees of the sponsor are likely to be its PSCs (Conditions 3 and 5).
While Conditions 2 and 3 are likely to be most relevant to academy trusts, it is important to appreciate that, even if they are not met, an academy trust will have PSCs if Conditions 4 or 5 (which relate to 'significant influence or control') are met.
Significant Influence or Control
Conditions 4 and 5 are likely to be more difficult to apply in practice because they are less certain in their scope. The Department for Business Innovation and Skills (BIS) has issued draft statutory guidance on the way in which these conditions apply.
The guidance is not intended to be an exhaustive statement of what constitutes 'significant influence' and 'control', but does provide some principles and examples which will help in applying Conditions 4 and 5.
In essence, 'control' means that an individual has the right to direct the policies and activities of the academy trust, whereas 'significant influence' allows a person to ensure that the academy trust adopts the policies and activities that he or she wishes.
Significant influence and control can go beyond the financial and operating polices of the academy trust and covers both a direct and indirect right to exercise actual control or influence (whether created by provisions in the academy trust's articles, a members' agreement or otherwise).
The guidance gives some examples of rights to exercise significant influence or control:
- having absolute decision rights or veto rights over decisions relating to the running of the academy trust's business
- being involved in the day to day management of the academy trust when they are not a trustee or a member of the academy trust
- making recommendations that are always or almost always followed by the members when they decide how to vote
Absolute decision rights will include the ability to decide on:
- adopting or amending the academy trust's business plan or changing the nature of the academy trust's business
- making additional borrowing from lenders
- appointing or removing the academy trust's CEO
The guidance makes it clear that exercising significant control is not limited to situations where a person may be considered to be a 'shadow director' (which, in line with the Academies Financial Handbook, academy trusts are not permitted to have in any event) and will include a 'person, who is not a trustee, but regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board'.
The guidance also highlights that the right to exercise significant influence or control over an academy trust may result in a person being a PSC in relation to the academy trust, irrespective of whether the right is actually exercised.
Chief Executive Officers, Trustees and Advisers
The guidance begs the question whether an academy trust's Chief Executive Officer (or Executive Headteacher/Principal) may exercise significant influence and control where their views do actually influence the decisions made by the academy trust's trustees.
In the majority of academy trusts, the Chief Executive Officer will also be a trustee and will not be caught by the PSC rules. This is because the PSC rules except the trustees of an academy trust from being PSCs, except where a trustee has a role or relationship with the academy trust which ''differs in material respects or contains significantly different features from how the role or relationship is generally understood'. Where a Chief Executive Officer is acting in line with the role generally expected of the trustees of an academy trust, they will not therefore be a PSC.
The PSC rules also except anyone acting in the course of their employment from being a PSC. This means that where an academy trust's Chief Executive Officer is not also a trustee, they are likely to fall within this exception, unless their role or relationship 'differs in material respects or contains significantly different features from how the role or relationship is generally understood'. The position will, however, need to be assessed in the light of the specific circumstances which apply to the academy trust.
Other exceptions will apply to people who advise an academy trust's trustees (eg. lawyers and accountants) provided that they are not acting outside their usual role. Regulators will also generally fall within the exception, so that eg. statutory advice given by the Charity Commission to an academy trust's trustees under the Charities Act 2011 or by the Department for Education or Education Funding Agency on a specific issue will not mean that it is exercising significant influence or control over the academy trust.
Relevant Legal Entities
A PSC is by definition an individual and not a legal entity. However, the PSC rules require any 'Relevant Legal Entity' (or RLE) to be added to the PSC register where it meets any of the PSC conditions and is itself required to maintain a PSC register. The aim is to ensure that, from the point of view of transparency, it is clear which individuals ultimately exercise significant control.
The provisions in relation to RLEs are likely to be relevant where an academy trust is a subsidiary company, eg. where more than 25% of the voting rights in the academy trust are exercisable by a charitable company which acts as its sponsor. In those circumstances, the academy trust would need to include details of the sponsor as an RLE in its PSC Register.
Where an academy trust has a wholly owned subsidiary company, the academy trust will be the company's RLE. The subsidiary will therefore need to include details of its parent academy trust in its PSC Register.
What Academy Trusts Should do
Academy trusts must now take the following steps in order to respond to the PSC rules:
- Carry out an assessment of whether the academy trust (or any subsidiary company of the academy trust) has PSCs and/or RLEs.
- Notify the PSCs and/or RLEs that they have been identified as such, and confirm the information that must be added to the PSC register. PSCs and RLEs are obliged to respond to such requests. Academy trusts should consider using a precedent form of notification in order to make this process as straightforward as possible. BIS's guidance contains some forms of notification which may be helpful.
- Create and update a PSC register. The guidance issued by BIS specifies the statements about PSCs and RLEs which must be included in the PSC Register.
- Update Companies House with the information held in the PSC register as part of the annual Confirmation Statement. There are provisions which can enable information about PSCs to be withheld from the public register at Companies House in exceptional circumstances where a PSC is at a series risk of intimidation or violence.
- Put in place procedures which will enable the PSC register to be updated on an ongoing basis in order to ensure that charities can comply with their obligations under the PSC rules.
- Update the academy trust's trustees and the directors of any subsidiary companies on the requirements of the PSC rules.
Further Advice
The guidance in this note is general in nature and should not be relied upon in relation to any individual academy trust. We would be pleased to discuss your academy trust's position in more detail.