All major beneficial owners of UK companies and LLPs to be publicly identifiable

United Kingdom

Major beneficial owners of UK companies and limited liability partnerships will have to be identified and their names, nationality and addresses publicly disclosed, the Government has decided. In other measures designed to enhance transparency and trust in UK companies, corporate directors will be largely prohibited and bearer shares will be phased out. And to make it easier to obtain redress from those who exercise influence or control over a company via a “front” or stooge director, the Companies Act is likely to be amended to specify that a person who controls a director will be treated as a shadow director, and that shadow directors are subject to directors’ general statutory duties.

Disclosure of beneficial owners

Companies will have a continuing obligation to identify and record who their beneficial owners are. To enable them to do so, new powers will be introduced that are expected to be similar to those currently used by public companies to investigate which persons are “interested” in their shares (using so-called section 793 notices). Beneficial owners will also have a continuing obligation to disclose their identity and certain details to the company, including how their beneficial interest is held. A central registry of company beneficial ownership information will be created and maintained by Companies House. Members of the public will be able to inspect both the register kept by Companies House and that kept by the relevant company, subject to certain exceptions: for example, as with the existing rules relating to directors’ details, a person’s residential address will not be open to public inspection, and a person at serious risk of violence or intimidation will be able to apply for his details to be kept from the public. The Government is considering further how far members of the public should be able to see information that would normally be kept confidential for legitimate commercial reasons – such as the details of trust arrangements, limited liability partnership agreements and shareholder agreements.

To be incorporated, the founders of a company will have to provide an initial statement of beneficial ownership, and the company will have to confirm that this information is correct at least once every 12 months, or provide details of any changes.

Under proposals put forward in a related BIS consultation paper on Simplifying a company’s statutory filing requirements, private companies will have the option of not keeping their register of directors, register of members and certain other statutory registers at their registered office (or other specified address) provided that they ensure that the information on the public register at Companies House is up-to-date. This option would also apply to the proposed new register of beneficial owners. But public companies will always have to create and maintain their own register of beneficial owners, as well as notifying changes to Companies House.

A beneficial owner for this purpose will be a person who “ultimately” owns or controls 25% of a company’s shares or voting rights or who “otherwise exercises control” over the management of the company: this is the same test as is used in “know your client” checks done by banks and professional advisers for anti-money laundering purposes. To prevent the unscrupulous avoiding the disclosure requirements by splitting a 25% holding up among their family and friends, the holdings of associates will have be aggregated. Where a qualifying beneficial interest is held through a trust, the trustees and any other natural persons who exercise control over the trust will need to be disclosed and registered.

The requirement to obtain, hold and file beneficial ownership information at Companies House will apply to UK bodies corporate that currently file information on their members at Companies House. Companies limited by guarantee and limited liability partnerships will be subject to similar requirements. The Government is considering whether Scottish limited partnerships – which, unlike English limited partnerships, have separate legal personality – should also be caught. But UK companies with shares traded on AIM or the Main Market of the London Stock Exchange, which are already required by chapter 5 of the UKLA’s Disclosure and Transparency Rules (DTR) to disclose to the market details of holdings of voting rights at 3% and above, and UK companies with shares traded on an overseas regulated market with equivalent rules, will be exempt.

Non-UK companies will not be subject to the new rules, but the Government will continue to lobby other jurisdictions, especially via the G8, G20 and EU, to introduce similar rules requiring the disclosure of beneficial owners.

Corporate directors

Unlike Germany, Australia and some other countries, UK law currently permits the use of corporate directors. According to the Government, “this can result in a lack of transparency and accountability with respect to the individuals influencing the company”. The Government is therefore persuaded that corporate directors should generally be banned. However, it recognises that in some circumstances their use can be legitimate and proper: it therefore proposes to allow corporate directors to be used in “group structures including large listed companies… and large private companies”, in charities and OEICs, and as corporate trustees, although it is going to consider such circumstances further. Companies with an existing corporate director that is not used in one of the permitted circumstances will be given a year to comply with the new rules.

Bearer shares

It will no longer be possible to create new bearer shares, and companies will be given a period of time – likely to be nine months from the date when the new legislation receives Royal Assent - to convert existing bearer shares to ordinary registered shares. After the specified period, companies with bearer shares remaining will have to apply to court for an order cancelling the shares. Bearer shares (technically known as share warrants to bearer) are shares the legal title to which is evidenced by possession of a certificate, rather than entry of the owner’s name in the company’s register of members. Ownership of bearer shares can therefore be transferred simply by delivering the certificate to another person, without the company being involved or knowing of the transfer. It is unusual for a UK company to issue bearer shares, but they are more common in some other jurisdictions.

Timing and further refinement of proposals

According to the Government, the reforms are “significant and complex” and many will require primary and secondary legislation, which the Government intends to introduce as soon as Parliamentary time allows. Existing companies will be given a period of time to adjust to the new rules – e.g. to create the necessary register of beneficial owners and to replace their corporate directors with natural persons. In the meantime, the Government intends to develop and refine the detail of its proposals – e.g. to clarify what is meant by “control”; when beneficial holdings must be aggregated; what information should be open to public inspection; when and how companies should be required to identify changes in their beneficial owners; and in what circumstances corporate directors are permitted.

Disqualification of directors

Changes will also be made to the directors’ disqualification regime, to make it easier to disqualify directors who are guilty of misconduct in the governance of a UK or overseas company: see our separate Law-Now article for further details.

Although it seems clear that the Government’s intention is to require public disclosure of each “ultimate” major beneficial owner of every non-exempt UK company, until draft legislation and/or further details are published it will not be clear whether this aim can be achieved. A particular challenge will be addressing the scenario where a person wants to disguise the fact that he is the ultimate controller of a UK company (UK Co), and arranges for the shares in UK Co to be legally and beneficially owned by a non-UK company (Foreign Co). Where the Foreign Co does not even know who its owners are - e.g. because all its shares are in bearer form, or are held by a trust – it is difficult to see how UK law alone can force disclosure of the ultimate controller of UK Co.

Certainly the new rules will add to the administrative burden and compliance costs of all non-exempt companies.

While the Government appears committed to introducing these proposals, it is likely to be some months or possibly even years before the changes come into force. A number of points of detail need to be worked out before draft legislation can be drawn up and published for consultation, and it will then be a question of finding sufficient Parliamentary time to approve the changes. Although secondary legislation may be sufficient to introduce some of the changes, others will require primary legislation; and it seems probable that the Government will want to introduce all of the changes at the same time. Further consultation(s) can therefore be expected over the next year or so.

Government response paper

The Government response paper, Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business, can be found here.

The related consultation on Simplifying a company’s statutory filing requirements can be found here.