What effect will the new PSC registers have on share charges?
The Small Business, Enterprise and Employment Act 2015 (the "Act") requires UK companies and LLPs and certain other entities to keep registers of people with significant control ("PSCs") over them – i.e. to obtain, hold and register information about who ultimately owns and controls them – unless they are subject to the disclosure requirements of DTR 5 (i.e. LSE Main Market and AIM companies, or companies or other legal entities whose voting shares are admitted to trading on an equivalent EEA regulated market or on certain other specified markets in Israel, Japan, Switzerland and the US). The purpose is to promote transparency, and to combat tax evasion and money laundering. Companies will be required to keep a PSC register from this coming 6 April , to file the relevant information on a central register at Companies House from 30 June 2016, and to confirm this information annually. Draft regulations on the register and guidance were published in January 2016. After briefly describing the new requirements, most of which are backed by possible criminal sanction, this note considers what effect this may have on security taken over shares.
The register must show the individuals and relevant legal entities who beneficially own or control (alone or jointly with others, and directly or indirectly) the company's shares. Companies must take reasonable steps to find out who their PSCs are, where necessary ask them (or others considered likely to know, such as banks, lawyers or accountants) to provide details, record the information on their own PSC registers, and file the information at Companies House. If those asked and having a relevant interest do not provide the information within one month, the company must send a warning notice requiring the information to be provided within one further month, failing which the company may decide that "taking reasonable steps" requires it to impose restrictions that effectively freeze the shares, although it must also consider whether doing so would have an unfair effect on third parties. Any transfer of the shares will then be void, and no rights relating to the shares may be exercised. PSCs have a corresponding obligation to provide the relevant information. Subject to certain safeguards, the information on the register will be publicly accessible. If an individual or relevant legal entity knows that it should be entered on a company's PSC register it must notify the company of this within one month of becoming a PSC.
A PSC includes an individual or relevant legal entity holding more than 25% of the nominal value of a company's shares, more than 25% of the voting rights, or the right to appoint, control or exercise significant influence over the company or its board of directors. This is broadly similar to the definition of "beneficial owner" under anti-money laundering regulation. The published guidance is helpful in explaining how the rules operate to the various companies where there is a corporate chain of ownership.
Lenders taking security over a significant proportion of shares in a relevant company may wish to ensure that the security provider complies with its obligations to supply the relevant information to the company, to avoid the risk that the shares become frozen, and to include appropriate representations and undertakings in the security document, to the extent existing representations and undertakings such as to comply with laws are not considered sufficient.
Whether or not the lender itself need be included by the company in its PSC register is likely to turn on issues already familiar in the context of taking share security. The lender should not normally be "holding" the shares, although if it takes a legal mortgage and is actually entered on the share register this must be arguable. In most cases, where the security provider remains the holder of the shares on the share register, the issue is likely to turn on its ability to exercise voting rights or to control the board. Under the Act, rights attached to shares provided by a person by way of security are treated as remaining held by that person (a) where, apart from the right to exercise them to preserve or enforce the security, the rights are exercisable only in accordance with that person's instructions and (b) where the shares are held in connection with loans granted as part of normal business activities, the rights are exercisable only in that person's interests, other than rights exercised for the purpose of preserving or enforcing the security. Assuming the security document follows the common pattern that the security provider may, subject to appropriate restrictions, exercise or direct the exercise of voting rights before the security has become enforceable on default, the security provider seems likely to remain the shareholder (and person to be entered on the PSL register) for these purposes. After that, the lender will need to monitor the situation for the purposes of the PSC register. A lender with share security will have one month to respond to any notice from the company asking if it is a relevant legal entity, or for information about relevant legal entities and PSC's, and may have an obligation to notify the company within one month of the security becoming enforceable.
In short, the possible application of the new regime should be considered when taking security over shares or interests in a UK company or LLP, and particularly if that security becomes enforceable.