On 21 April 2014 the UK government published its response to the consultation on Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business.
As expected, the government decided to proceed with its proposal set out in its discussion paper published in July 2013, to require UK companies to maintain a register of beneficial ownership. To shed more light on the issue, this article will be looking at the proposals to analyse its impact on UK companies – in particular those considering coming to a regulated equity market, AIM or other growth markets, and especially in light of the recently proposed amended Shareholder Rights Directive.
The register was a commitment promoted by David Cameron at the Lough Erne G8 Summit last summer.
Which entities fall within the scope of the new register?
The new obligation to maintain a register of beneficial ownership will apply to UK bodies corporate generally, thus including not only private and public companies limited by shares but also private companies limited by guarantee and limited liability partnerships.
Only companies that already comply with the ownership disclosure requirements of the Disclosure and Transparency Rules (DTR) and companies whose securities are listed on a regulated market are proposed to be exempt. Thus, in addition to companies whose securities are admitted to the Official List and traded on the LSE, companies whose securities are quoted on AIM or the ISDX Growth Market would be exempt from this new requirement as these companies have to comply with DTR 5 which already requires them to provide ownership information. This exemption is sensible and avoids duplication.
The information on beneficial owners kept at the Companies’ register will be publicly available on a central register at Companies House (with the exception of the beneficial owner’s residential address and full date of birth).
Who is a ‘beneficial owner’?
The term ‘beneficial owners’ will be defined as the individuals ‘who ultimately own or control more than 25 per cent of a company’s shares or voting rights, or who otherwise exercise control over the company or its management’. Where such an interest is held through a trust, the trustee/s ‘or any individual/s who control the activities of the trust’ will be registered as the beneficial owner/s. Typically, this will only be the trustee/s but in some circumstances this could be the settler, beneficiary or protector of the trust where they exercise such control over the trust’s activities.
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The new obligation
Public companies already have the right (but are currently under no obligation) under the Companies Act 2006 to investigate who has an interest in their issued share capital (but not other issued securities). The government proposes to extend those provisions to all companies and LLPs and impose a direct obligation on companies to obtain beneficial ownership information where it ‘knows or has reasonable cause to believe’ that an individual falls within the definition of beneficial owner. This will be supplemented with a disclosure obligation on the beneficial owner. However, companies will still not have a right to discover who is behind the ownership of issued debt securities. This represents a significant and continuing risk to companies which issue debt instruments.
Importantly, the government recognises that companies cannot be held liable if the information provided by beneficial owners turns out to be false (unless the company knew or should have known otherwise).
The government’s proposals are much wider and far reaching than the European Commission’s proposal to introduce a new requirement in the amended Shareholder Rights Directive for intermediaries to identify the name and contact details of shareholders at the request of a company. Admittedly though, the UK government’s and the EC’s proposals aim to address different concerns – increased trust and transparency in UK business on the one hand and the facilitation of the exercise of shareholder rights and engagement between listed companies and shareholders on the other hand.
However, while the EC proposals may not go far enough, the benefit of making the beneficial ownership information publicly accessible (as opposed to making it accessible to certain governmental (in particular tax) authorities only) remains in our view questionable. Tracing beneficial ownership to owners outside the UK is often difficult in practice, not least due to the different national disclosure regimes within the EU itself.
Whilst a convergence of the initiatives between the European Commission, European Parliament and UK government would be desirable, this remains unlikely, despite the fact that greater transparency as to beneficial ownership of companies is one of the rare causes where the interests and objectives of the European Parliament and the UK’s prime minister are closely aligned.