Identifying People with Significant Control - a Warning Note for Local Authorities

On occasion, local authorities are not completely familiar with company law and its ramifications.

In this article, we set out some changes which have taken place or which are due to take place, and which every local authority should be familiar with. These changes are not arduous, but the consequences of getting this wrong are severe. So, the advice must be: read, digest and act!

From 6 April 2016, UK companies and limited liability partnerships (LLPs) must (with some very limited exceptions ), maintain a register of people with significant control (PSCs) over their entity. The purpose of these requirements is to help increase transparency over who controls UK companies and LLPs.

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. Companies and LLPs need to take steps now to identify their PSCs.

What do You Need to do?

A company or LLP will need to:

• take reasonable steps to identify their PSCs and to enforce the disclosure of information about PSCs
• if there are any PSCs, confirm the information needed for the PSC register
• record the PSC information on the PSC register
• provide the PSC information to Companies House when the next confirmation statement is submitted
• 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 company or 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.

A local authority which is a PSC must:

• promptly respond to any requests for information or to confirm information from the company or LLP or risk restrictions being applied to the interests held by it in the company or LLP (see non-compliance consequences below)
   
• alert the company or LLP to its status as a potential PSC if it has from the company or LLP within one month of becoming a PSC
   
• update the company or LLP if the PSC information (including the nature and/or extent of control) changes and if the local authority ceases to be a PSC

Identifying Whether a Local Authority is a PSC

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

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

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 the board of directors of a company or, in the case of an LLP, a majority of those members involved in the management of an LLP

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 company or LLP (see below)

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 applies to identifying PSCs, but as these overlap with the rules relating to local authority controlled companies, it should not be too difficult to for a local authority to identify whether it is the PSC of any company or LLP.

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

Consequences of Non-Compliance

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

If a local authority as a PSC fails (except with court approval) to comply with a disclosure notice and a warning notice, it risks restrictions being imposed on it. Interests which can be restricted include rights to vote, receiving a dividend or profit share, rights to transfer ownership of the shares or membership interest, as well as related exercisable powers (overriding any provisions in a shareholders' or LLP agreement or in a company's articles of association). These rights can be restricted until the local authority complies with the original disclosure notice.

Guidance

The Department of Business Innovation & Skills has published statutory and non-statutory guidance on the government's website. This includes guidance for entities which are PSCs, such as local authorities.

How can we help?

Companies and LLPs need to take action now to identify their PSCs and to set up their PSC registers to avoid committing a criminal offence and local authorities should take steps to identify where they are PSCs and to volunteer the information to the relevant companies and LLPs. We can help Local Authorities and their controlled companies and LLP to comply with the new requirements by:

• undertaking a PSC audit to help identify the PSCs
• providing guidance on identifying PSCs
• providing a suitable PSC Register
• advising on the specific information to be requested from or to be provided by 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