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Trust and transparency - what it means for private equity

15 July 2014

As part of its efforts to tackle what Vince Cable labelled the "darker side of capitalism" the government has introduced draft legislation in the Small Business, Enterprise and Employment Bill which is intended to increase the ability of the public to scrutinise the 'true' ownership and control of companies.

A new company register - 'persons with significant control'

The headline policy in the Bill requires companies to keep a register of persons (referred to as 'PSCs') who exercise 'significant control' over it.

In this context, a person will be a PSC if he or it, directly or indirectly:

  • holds 25 per cent. of the shares in the capital of the company (calculated by reference to their nominal value), or
  • is entitled to exercise 25 per cent. of the voting rights in the Company, or
  • is entitled to appoint the majority of the board of directors (or control their appointment or subsequent removal), or
  • is otherwise able to exercise 'significant influence or control' over the company.

Clearly, the drafting of the final bullet point is circular and its effect unclear. The Department for Business, Innovation and Skills is required by the Bill to produce guidance as to the how the test will be applied.

It is difficult at this stage to be definitive as to whether this test will require private equity funds to disclose the identity of any of their investors.

However, as noted by the BVCA in its response to the July 2013 consultation paper which first mooted this provision, we would suggest that as investors in private equity funds are, by definition, passive, they should not be taken to exert any influence or control over a company. However, definitive guidance on this point would be welcome.

A company's PSC register would need to be made available for free inspection at the company's registered office. Although there would be no requirement to keep the information at a central registry, the information on the PSC register will need to be included in the company's annual 'confirmation statement', a new form of annual return, which will be publically available at Companies House.

To support the requirement to keep the PSC register, companies will also be under a positive obligation to take reasonable steps to identify those individuals the company knows or suspects are PSCs. Likewise, PSCs will also be required to tell the company if they suspect that they are PSCs. Failure to do so will constitute an offence.

The Bill also provides that if a person whom the company has reasonable cause to believe is a PSC fails to provide the requested information, the company will be entitled to suspend the rights attached to that person's shares in the company.

Certain companies will be exempt from the requirement to keep a PSC register. The Bill explicitly applies this exemption to companies subject to the Disclosure and Transparency Rules but provides scope for the Secretary of State to exempt further companies where they are subject to 'broadly similar' disclosure requirements. There is a significant lobbying effort to exclude companies, such as private equity managers, which are regulated by the FCA from the requirement to keep a PSC register.

It will also be possible to make an application to Companies House to exempt certain information from being publicly disclosed on the PSC register in exceptional circumstances. Although the Bill does not specify what those circumstances are, the discussion paper suggested that these are likely to be where disclosure would put a person at risk of violence or intimidation.

Abolition of corporate directors

The Bill introduces a new requirement that all company directors are individuals and prohibits the appointment of corporate directors. There will be a one year transitional period for existing corporate directors to be removed.

The Bill allows the Secretary of State to introduce exemptions to this general prohibition. These are thought to include group structures where the use of corporate directors is low risk from a transparency perspective and of significant practical advantage.

Where corporate directors are currently used in a structure, the company's constitutional documents will need to be looked at to ensure that quorum requirements will continue to be met.

Bearer Shares

Relatively rarely used in UK companies presently, the Bill proposes the prohibition of the creation of new bearer shares and bearer share warrants within two months of it being passed.

For companies who have bearer shares in issue, they will be required to inform shareholders of their right to surrender the shares after which there will be a transitional period of seven months during which the holder of bearer shares may voluntarily surrender the shares for conversion into registered shares.

After that initial period, and provided that a specified process is followed, the company will be required to apply to court to have any outstanding bearer shares cancelled.

Conclusions for private equity

The proposals, originally contained in the discussion paper, Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business were criticised by various parties, including the BVCA who were concerned about the time requirement and associated cost of the added layers of administration required and their utility given the increasingly stringent regulatory regime that already applies to private equity.

Although the abolition of bearer shares and corporate directors will be unlikely to affect private equity houses or their portfolio companies, the requirement to keep a PSC register will be relevant. 

Although the proposals in the Bill as regards the disclosure of beneficial interests has been narrowed from the discussion paper, there will clearly be additional time, effort and cost incurred in order to ensure compliance.

It is suggested that the discussion paper's impact assessment does not accurately reflect the time it will take for companies to understand and implement the new requirements and seek to gather the necessary information to comply with their new obligations.

The Bill also lacks a good deal of the detail that is needed to truly understand its effect on private equity. Guidance is awaited both in relation to whether FCA regulated entities will be excluded from the requirements to maintain a PSC register and as to how the 'significant influence or control' test will operate.

This article was written by Richard Coleman.

For more information contact Richard on +44 (0)20 7427 1059 or richard.coleman@crsblaw.com