New LLP Control Transparency Rules: Identifying People with Significant Control

The purpose of these requirements is to help increase transparency over who controls UK LLPs and companies.

From 30 June 2016 the PSC information will become publically available as it will form part of the annual confirmation statement (previously known as the annual return) which is submitted to Companies House. LLPs and their subsidiaries need to take steps now to identify their PSCs.

• What do you need to do?
• Identifying your PSCs
• Significant influence or control
• Consequences of non-compliance
• Guidance
• How we can help
   

What do you need to do?

A LLP and its subsidiaries will need to:

1. take reasonable steps to identify their PSCs and to enforce the disclosure of information about PSCs
2. confirm the information needed for the PSC register, if there are any PSCs
3. record the PSC information on the PSC register
4. provide the PSC information to Companies House when the next confirmation statement is submitted
5. update the PSC register when there are any changes to the PSC information and update the records held by Companies House as may be required when each subsequent confirmation statement is submitted

The PSC register must never be empty. Prescribed statutory wording must be used to reflect the status of obtaining information about every PSC. A LLP which has concluded that it has no PSCs will still be required to maintain a PSC register but will include a statement to that effect in the register.

Identifying your PSCs

Essentially, a PSC is every individual, every registrable 'relevant legal entity' (RLE) (broadly being any UK company incorporated under the Companies Act, or a UK LLP, or an overseas company with shares listed on a recognised stock exchange), every governmental body, corporation sole that directly or indirectly satisfies one or more of the five conditions below in relation to the LLP or company.

Condition 1: The person has rights over more than 25% of the surplus assets on a winding up of the LLP or owns more than 25% of a company's issued shares

Condition 2: The person holds more than 25% of the voting rights at a members' meeting (whether generally or on particular issues)

Condition 3: The person is able to appoint or remove a majority of those members involved in the management of an LLP or, a majority of the board of directors of a company and every such person not satisfying one or more of conditions 1 - 3, who nonetheless:

Condition 4: has the right to exercise or actually exercises significant influence or control over the LLP or company (see below) or

Condition 5: has the right to exercise or actually exercises significant influence or control over a trust or a firm that is not a legal entity, which would satisfy any of conditions 1 - 4 if it were an individual.

There is a complex set of rules which apply to identifying PSCs. These could make identifying PSCs particularly challenging for those LLPs that have group structures and chains of ownership which extend beyond the UK.

Condition 4 - Significant Influence or Control

What constitutes significant influence or control is very broad and will depend on each entity's circumstances. Examples of where an individual has significant influence or control (whether or not exercised) include:

• having absolute decision rights or veto rights relating to running the business, such as: adopting or amending the business plan; changing the nature of business; authorising additional borrowing; establishing a profit sharing scheme; granting share options; appointing the CEO
• having rights to receive more than 25% of profits from an LLP
• veto rights that are included in a LLP agreement (but these are unlikely to constitute control where the rights are only protecting fundamental rights of minorities)
• the cumulative effect of the person's relationship with the LLP, for example through the ownership of important assets to influence key decision makers
• where the person's recommendations are almost always followed by the management board or by the members

There are some exceptions, albeit a person who may fall within an exception may be a PSC for another reason. The exceptions include:

• acting as a designated member of an LLP or a director of a company
• acting in the course of employment as nominee for an employer
• providing advice in a professional capacity
• being an insolvency practitioner or an industry regulator
• engagement through commercial agreements with customers
• suppliers and lenders; and those individuals making recommendations on a one-off basis.

As you will need to review your LLP agreement and other relevant agreements to assess whether they confer rights of significant influence or control, you may wish to take the opportunity to review and update your LLP agreement.

Consequences of Non-Compliance

Failure to take steps to identify PSCs or to give notices required under the PSC regulations to potential PSCs is a criminal offence which is punishable by imprisonment or a fine (or both).

The PSC regulations enable LLPs and companies to impose restrictions on a PSC who (except with court approval) fails to comply with an information disclosure notice. Before imposing restrictions, a warning notice must be served. Interests which can be restricted include rights to vote, receive a profit share, rights to transfer ownership of the membership interest, as well as related exercisable powers (overriding any provisions in a LLP or shareholders' agreement or in a company's articles of association). These rights can be restricted until the person complies with the original disclosure notice.

Guidance

The Department of Business Innovation & Skills has published statutory and non-statutory guidance on the government website.

How we can help?

LLPs and their subsidiaries need to take action now to identify their PSCs and to set up their PSC registers to avoid committing a criminal offence. We can help you to comply with the new requirements by:

• undertaking a PSC audit to help you identify your PSCs
• providing guidance on identifying your PSCs
• providing you with a suitable PSC Register
• advising on the specific information to be requested from PSCs
• providing the form of wording for information disclosure notices, warning notices, restriction notices and withdrawal notices
• advising on appropriate restrictions to impose on a PSC

Our professional Partnership team can also assist with any other LLP or partnership related queries and matters, including reviewing and updating your LLP agreements or partnership agreements.