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Business Bill introduces a brave new world for corporate disclosure and accountability

Posted on 02 July 2014

Business Bill introduces a brave new world for corporate disclosure and accountability

The government has introduced to Parliament its Small Business, Enterprise and Employment Bill, a key focus of which is to fight corruption by increasing transparency and accountability in relation to UK corporates.  If the Bill is enacted, the UK will be the first nation to introduce a public register of "people with significant control" over unquoted companies.  Bearer shares and, subject to certain exceptions, corporate directors (seen by some as devices to disguise true ownership and control) will become things of the past, and directors and others who control companies will be made more accountable.  There will also be a simplified regime to replace annual returns and companies will even be able to elect to satisfy current requirements to keep corporate statutory registers by making them publicly available online at Companies House.

The Bill follows the Government's confirmation in April of its intention to proceed with most of the proposals it had set out in two 2013 discussion papers: "Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business" and "Red Tape Challenge: Company filing requirements".  We reported on the proposals in the first discussion paper in our April briefings, Business owners' details to be public in a register of beneficial ownership" and "The accountable director: 'front directors' and their controllers, corporate directors and compensating creditors" and have been following the arguments both for and against reform in our Business Shapers blog.  The key proposals which have made it into the bill are summarised below.

Register of people with significant control

A company will be required to keep a publicly available "register of persons with significant control over the company", to be called the "PSC register".  Except in certain exceptional circumstances, the register will include information on an individual’s name, date of birth, nationality, address, and details of the nature of their control of the company.

An individual (or individuals acting together) will be a "person with significant control" if one or more conditions are met. Those conditions are, broadly: ownership of 25% of the shares in a company; the right to exercise or control the exercise of more than 25% of the voting rights in a company; the right to appoint or remove a majority of the board; and (the anti-avoidance condition) other rights to exercise significant influence or control over the company.  The government will issue guidance on the last of these conditions; given its broad wording, it remains to be seen how they will interpret it and therefore how wide its scope will be.  Could it even extend, for example, to veto rights in shareholders' agreements?  If trustees of a trust meet any of these conditions in relation to a company and an individual has the right to exercise significant influence or control over the trust's activities, then that individual will also be a "person with significant control over the company".  Both direct and indirect control will be caught: the new provisions require looking up the chain of corporate ownership to find out who are the individuals really controlling the company.

Companies will be under a duty to take reasonable steps to find out if there are any persons with significant control and identify those people.  Those who know or ought reasonably to know that they are persons with significant control will also be under their own duty to disclose their status to the company, where the company itself has failed to identify them.

The Bill also introduces a right for companies to impose restrictions on the shares of persons with relevant interests with respect to that company who fail to comply with the new regime.  If the restrictions are imposed, the person may not, for example, transfer his shares or exercise voting rights.  There is also a right for a company to seek a court order that an interest subject to restrictions is sold.  It will be interesting to see whether these provisions, designed to incentivise compliance with the new regime, might also be used as tactical tools in litigation.

Bearer shares

The government views bearer shares as incompatible with its ambitions for corporate transparency. The Bill therefore introduces into the Companies Act a prohibition on a company issuing bearer shares, irrespective of whether a company's articles purport to authorise it to do so. There will be a transitional procedure for the cancellation of existing bearer shares or their surrender for conversion into registered shares.

Directors

As envisaged by the government's response to its consultation, there will be a requirement for all directors to be natural persons. Corporate directors will therefore be prohibited. In its response to its consultation the government had said it was considering exemptions to this general prohibition in relation to group structures including large listed companies, group structures including large private companies and charities. None of these are exempted pursuant to the revised Companies Act provisions introduced by the Bill, but the Secretary of State will have the power to make exceptions by regulation.

The Bill extends the application of the Companies Act general duties of directors, so that they will apply to shadow directors "where and to the extent that they are capable of so applying". Again, the Secretary of State will have the power to specify that certain duties are adapted for shadow directors or that certain duties do not apply.

The Bill will also allow the Secretary of State to apply to the court for a disqualification order on the grounds that a director has been convicted of certain offences overseas.

Changes to company filing requirements

Companies will no longer be required to file an annual return. They will instead be required to file at Companies House a confirmation statement to the effect that they have delivered all the information required to be delivered to the registrar for the relevant confirmation period. This can be filed when any other filing is made, but must be filed at least annually.

The Bill also amends the Companies Act so that there will no longer be a requirement to include in a company's statement of capital the amount paid up and unpaid on each share. This has been problematic for companies with a complex share capital history. In a welcome move, a company will instead be required to include in its statement of capital only the aggregate amount unpaid on the total number of shares.

Finally, the Bill amends the Companies Act so that a private company will be allowed to opt to keep on the public register held by the Registrar of Companies certain information that it currently keeps on private registers, including its register of members, register of directors, register of directors' residential addresses and register of secretaries. Private companies will also have this option in relation to their registers of persons with significant control. Much is left to delegated legislation, but if this is carefully implemented and companies take up this option, it will be the first time that live and completely up to date information identifying the shareholders of a company is publicly available at Companies House (this information can currently be up to a year out of date, depending on when the last annual return was filed).

Next steps

The measures set out in the Bill will be discussed in Commons Committee in the autumn, after which the Bill will go to the House of Lords for debate.  The Bill, as drafted, will bring about significant change to UK company law and, as it passes through Parliament, we can expect continued debate as to whether increased disclosure requirements are proportionate to the benefits likely to be brought in tackling corruption and as to whether the bill will increase or decrease the UK's competitiveness as a venue to incorporate a company and do business.  Even when it is enacted, there will be some way to go before all the changes become a reality, as many of the proposals depend on delegated legislation being passed and system change at Companies House.

For more information please contact:

Kate Higgins

KATE HIGGINS

Legal Director, Corporate
+44 207 440 7433
kate.higgins@mishcon.com

Kate Higgins

Nicholas McVeigh

Professional Support Lawyer, Corporate
+44 207 406 6259
nicholas.mcveigh@mishcon.com

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