The UK Government’s response to improving transparency and trust amongst UK companies and what it means if you are responsible for compliance for a UK registered company
The Department of Business Innovation and Skills (BIS) recently prepared a response to issues that have been raised regarding improving transparency and trust amongst UK companies. Recommendations raised in the response are likely to find their way into legislation in the near future. In the meantime London Corporate takes a look at what the legislation could cover.
We all know that transparency is an essential part of good corporate governance and in the words of BIS ‘it gives investors and others a means to hold companies to account and accountability creates a level playing field and an environment in which investors and honest entrepreneurs are prepared to undertake the activity the UK needs to promote growth and employment’. BIS first published their Transparency and Trust discussion paper in July 2013 and in it they sought views on how to improve corporate transparency and accountability in the UK. This also included how best to proceed with the corporate transparency proposals in the UK G8 Action Plan and a range of related measures to improve confidence in the UK’s regime for tackling company directors who have engaged in misconduct.
Those recommendations in detail:
1. A central registry of company beneficial ownership information
At the 2013 G8 meeting which the UK hosted, the UK’s G8 Action Plan set out a commitment to implement a central registry of company beneficial ownership information, to make it easier to identify and tackle the misuse of companies. This was on the basis that good corporate behaviour and tackling company misuse would be best served by greater transparency. The immediate impact means that information on individuals who ultimately own or control more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company or its management, will need to be obtained and held by the company and provided to the central registry. Where a qualifying beneficial interest in a company is held through a trust arrangement, the trustee(s) or any other natural person(s) exercising effective control over the activities of the trust will be required to be disclosed as the beneficial owner of the company.
UK bodies corporate that currently register information on their members at Companies House will be required to obtain and hold beneficial ownership information and provide it to Companies House. This will include Limited Liability Partnerships. However, in order to reduce burdens on business it is intended to exempt companies who comply with relevant disclosure rules under the Financial Conduct Authority’s Disclosure and Transparency Rules, or who have securities listed on a regulated market subject to equivalent disclosure requirements. It is also intended to place an obligation on both companies and individuals to identify and obtain information on beneficial ownership. Companies will be required to identify their significant beneficial owners; in other words, the beneficial owner of blocks of shares or voting rights which would give the holder an interest in more than 25% of the company. In addition, where the company knows or has reasonable cause to believe that there is any other beneficial owner; they shall also be required to obtain the relevant information on that individual. Public companies already have statutory tools which will help them to obtain this information and it is intended to replicate the necessary provisions in respect of private companies as well. In parallel, individuals with a qualifying beneficial interest in the company will need to disclose this to the company, as significant investors in listed companies are already required to do.
The register of beneficial owners will need to contain information on the beneficial owners’ including their full name, date of birth, nationality, country or state of usual residence, residential address, service address, date on which they acquired the beneficial interesting the company and details of that beneficial interest and how it is held. This register will be kept available for public inspection, with the exception of residential addresses. Companies will be required to update the information held in their register of beneficial owners if they knew or might reasonably be expected to have known that a change to their beneficial ownership had occurred. Beneficial owners will be required to inform the company of any changes to the information recorded in the register of beneficial owners. All of the information held by the company will be provided by the company to Companies House. It will be accessible publicly at Companies House with the exception of residential addresses and full dates of birth. This is consistent with the position in respect of company directors’ residential addresses and the outcome of the Company Filing Requirements consultation to suppress the ‘day’ of the date of the birth on the public register to assuage fraud and data privacy concerns. The month and year of birth will remain on the public record and it is also intended to allow applications to the Registrar of companies to protect beneficial owners’ full information from public disclosure in exceptional circumstances.
Specified UK and overseas enforcement authorities will be able to access protected information held at Companies House.
Companies will also be required to provide an initial statement of beneficial ownership on incorporation. They will not be registered at Companies House unless this information is provided. Companies will then be required to confirm that the information held at Companies House is correct at least once every 12 months, detailing all changes that have occurred in year. In addition, private companies will be able to hold and update their register of beneficial ownership at Companies House directly should they wish to do so. Should they choose to exercise this option, they would need to update the information held at Companies House as they become aware of changes (in the same way that they would otherwise be required to update their own beneficial ownership register).
It is likely that existing company law will be extended to cover for criminal offences to tackle situations where companies or individuals break the new rules.
2. Bearer shares and the opacity of company ownership
Bearer shares permit a level of opacity incompatible with the ambitions for the proposed corporate transparency. It is intended to prohibit the creation of new bearer shares and a set period of time will be provided for existing bearer shareholders to surrender their shares for conversion to registered shares. After the period set for surrender, companies with bearer shares remaining will be required to apply to court for an order cancelling those shares.
3. Opaque corporate control through corporate directors
Where a company uses a corporate director, that is a director that is another company (or legal person), it can result in a lack of transparency and accountability with respect to the individuals influencing the company. However, BIS has been persuaded by arguments that in some low risk areas corporate directors can perform a beneficial and legitimate business function. For that reason, BIS will move to prohibit the use of one company as the director of another company, but with specific exemptions where the use of corporate directors is of higher value and lower risk.
4. Opaque corporate control through irresponsible ‘front’ directors
BIS cited the potential for a lack of transparency and accountability when the appointed director acts irresponsibly as a front for another person, neglecting their duties while obscuring those who really exercise control. However, BIS agreed with those respondents to a consultation who expressed concerns that a register of “nominee” directors would be a disproportionate and an ineffective means of tackling this. As an alternative, BIS will seek to improve the information available with respect to directors’ general statutory duties, to increase awareness of the potential for breaching them by acting as a front. BIS will also seek to legislate, as soon as Parliamentary time allows, to underpin new and specific means of contacting individual directors to ensure they have understood their duties in discharging their role. BIS will also make clear that the court is required to take account of breaches of directors’ duties when considering the disqualification of a director and they will also consider whether there should be an increase in the accountability of individuals controlling a single director (or several directors) by bringing them into scope of legal liability and consider the potential application of the directors’ general statutory duties to those who control directors.
5. Updating the directors’ disqualification regime
It is proposed to take a series of measures to ensure the system is efficient and effective. BIS will seek to replace the current description of the matters determining unfitness of a director (in the Company Directors Disqualification Act; CDDA 1986) with a new, broader and more generic provision. This will cover consideration of the materiality of a director’s conduct, including breaches of law and the nature and extent of harm caused. In future, the court or the Insolvency Service (on behalf of the Secretary of State) will be required to take these into account in determining whether an individual should be disqualified and if so, for how long. It is also likely that courts will be able to take any overseas misconduct into account when deciding whether to disqualify a director in the UK. BIS will also move to provide the Secretary of State with the power to seek the disqualification of an individual from acting as a director in the UK when convicted of a relevant criminal offence overseas.
This article is based on the Department of Business Innovation and Skills ‘Government response to improving transparency and trust in UK companies’ document published in April 2014.
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The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.
© London Corporate July 2014