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'People with Significant Control' - Guidance for Independent Schools

on Thursday, 14 April 2016.

With effect from 6 April 2016, all companies, including charitable companies, are required to maintain a register of People with Significant Control.

Summary

From 6 April 2016, there is a new requirement for independent schools constituted as companies (or which have companies within their group structure) to maintain a register of 'People with Significant Control' (PSCs) and, from 30 June 2016, to report annually to Companies House.

In practice, most charitable independent schools will not identify any such PSCs (although see below as to whether the Head, Principal or Chief Executive may be considered to be a PSC), but nonetheless governors who are directors and company secretaries (typically bursars) need to:

  • be aware of the requirement;
  • maintain a register (even if no PSCs are recorded on it)
  • report annually to Companies House

A separate register will need to be maintained for any group companies (eg. trading subsidiaries, incorporated fundraising foundations and joint venture companies). In most such cases the school will own all or at least 25% of the shares or member rights and will therefore needed to be added to the PSC Register as a Relevant Legal Entity.

The position is likely to be more complicated for independent schools that are privately owned.

For more detailed guidance, please read on.

Background

With effect from 6 April 2016, all companies, including charitable companies, are required to maintain a register of 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 charitable companies 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.

Which schools are affected?

Not all independent schools will be affected by the PSC rules. Schools that are operated through companies (including companies limited by both shares and by guarantee) and community interest companies are within the rules. A subsidiary company owned by an independent school is also affected, regardless of whether the school itself is itself a company.

Unless they own a subsidiary company, schools structured in any one of the following ways will not be affected by the PSC rules:

  • schools incorporated by Royal Charter
  • schools that are statutory corporations and formed under private Act of Parliament
  • schools structured as Charitable Incorporated Organisations
  • schools where the trustees are incorporated under the Charities Act 2011
  • schools that are established as an unincorporated trust or by Charity Commission Scheme or which are an unincorporated association

What does this mean in practice?

Any school within the scope of the PSC rules 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 school has no PSCs.

As from 30 June 2016, any school which is obliged to maintain a PSC register must also deliver the information in the 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 school 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 school itself but any failure by the school to comply with the rules may constitute a criminal offence by its governors (or directors).

Who are a charity's PSCs?

A PSC is any individual who exercises 'significant control' over a company which is affected by the PSC rules. The rules do not therefore apply to other companies which exercise significant control over a company (although there are specific rules which do catch a 'Relevant Legal Entity' and which will apply to subsidiaries - please see below).

The PSC rules provide that an individual will have 'significant control' if they meet any one of the following five conditions:

  • Condition 1
    They hold (directly or indirectly) more than 25% of any shares in the company. This test will not apply to companies limited by guarantee, so will not be relevant to most charitable independent schools.
     
  • Condition 2
    They hold (directly or indirectly) more than 25% of the member voting rights in the company. This is relevant to companies limited by guarantee.
     
  • Condition 3
    They have the right (directly or indirectly) to appoint or remove a majority of the directors of the company.
     
  • Condition 4
    They have the right to exercise, or actually exercise, 'significant influence or control' over the company.
     
  • 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 schools where eg. rights to appoint and remove its governors are vested in a trust, in which case the individual trustees of that trust may be PSCs.

Whether or not a school or subsidiary 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 a school's governors as PSCs. While they are responsible for the way in which a school is managed, governors will already be clearly identified in the 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 many schools, applying the PSC conditions is likely to be a straightforward process. By way of example:

  • A school established as a company limited by guarantee whose governors also act as its members will only have PSCs if it has fewer than 4 governors, each of whom holds equal voting rights as a member; if there are 4 or more governors, none of them will hold more than 25% of the voting rights in the school in their capacity as members (assuming they all have equal voting rights).
     
  • A school with a group of members separate from its trustees will only have PSCs if it has fewer than 4 members, each of whom holds equal voting rights as a member; if there are 4 or more members, again, none of them will hold more than 25% of the voting rights in the school in their capacity as members (again, assuming they all have equal voting rights).

However, if any of Conditions 1 to 3 are met, then a school will have PSCs and must complete and maintain its PSC register accordingly. But even if they are not met, a school 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 school, whereas 'significant influence' allows a person to ensure that the school adopts the policies and activities that he or she wishes.

Significant influence and control can go beyond the financial and operating polices of the school and covers both a direct and indirect right to exercise actual control or influence (whether created by provisions in the school's articles 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 school
     
  • being involved in the day to day management of the school when they are not a governor or a member of the school
     
  • 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 school's business plan or changing the nature of the school's business
  • taking additional borrowing from lenders
  • appointing or removing the Head or Principal

The guidance also makes it clear that exercising significant control is not limited to situations where a person may be considered to be a 'shadow director' and will include a 'person, who is not a governor, 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 a school may result in a person being a PSC in relation to the school irrespective of whether the right is actually exercised.

Heads, Governors and Advisers

The guidance begs the question whether a school's Head or Principal may exercise significant influence and control where their views do actually influence the decisions made by the governors.

The PSC rules contain a number of exceptions from qualifying as a PSC, including anyone acting in the course of their employment. In general, a Head or Principal is 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'.

In most cases, the likelihood is that a Head or Principal will fall within this exception, but the position will need to be assessed in the light of the specific circumstances which apply to the school.

Other exceptions will apply to governors and to people who advise the board (eg. lawyers and accountants) provided that they are not acting outside their usual role. This means that governors will not usually be PSCs unless they are also members (and there are fewer than 4 members - please see above) or they are acting outside their usual role. Regulators will also generally fall within the exception, so that eg. statutory advice given by the Charity Commission to the trustees of a charity under the Charities Act 2011 on a specific issue will not mean that it is exercising significant influence or control.

Relevant Legal Entities

A PSC is by definition an individual and not a legal entity. However, the PSC rules require any 'Relevant Legal Entity' (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 a school is a subsidiary company (ie. more than a 25% interest is owned by other companies or charities, including a joint venture charity) or where a school has a subsidiary company (where the school will be the company's RLE), in which case the parent/subsidiary relationship will need to be detailed in the PSC register. 

Action

Schools should now take the following steps in order to respond to the PSC rules:

  • Carry out an assessment of whether the school 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. Schools may consider using a precedent form of notification in order to make this process as straightforward as possible and we can assist with this if necessary.
     
  • Create and update a PSC register. Again, we can assist by providing a template register on request.
     
  • Update Companies House with the information held in the PSC register as part of the annual Confirmation Statement. Although unlikely to apply in the context of a school, 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 serious 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 the school can comply with their obligations under the PSC rules.
     
  • Update governors and the directors of any subsidiary companies on the requirements of the PSC rules.

Further Advice

The guidance in this briefing is general in nature and should not be relied upon in relation to any individual school. We would be pleased to discuss your school's position in more detail.


Please contact our Independent Schools specialists Emma-Jane Dalley on 0117 3145 465 or Barney Northover on 0117 3145 395 for more information.

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