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People with significant influence or control

February 19, 2016 | Company/Commercial, Latest Thinking, News

New reporting requirement on People with Significant Influence or Control (PSC) is going to be effective from 6 April 2016 onwards for all UK companies, Societas Europaea (SE), and limited liability partnerships (LLP). The new requirement, imposed through the Companies Act, mandates the registration of PSC over the companies, SE, or LLP with the Companies House.

Who are “People with Significant Influence or Control (PSC)”?

The simple definition for a PSC is a person who

  • Holds at least 25% of the shares of a company;
  • Holds at least 25% of the voting rights of a company; or
  • Has the power to appoint/remove the majority of the board of directors.

However, there are 2 more conditions that a person would be qualified as PSC, namely,

  • A person who has the right to exercise, or actually exercises, significant influence or control over the company; or
  • Where a trust or firm would satisfy one of the first four conditions if it were an individual, any individual holding the right to exercise, or actually exercising, significant influence or control over the activities of that trust or firm.

From the guidance published online so far, what constitutes “significant influence or control” is entirely a matter of construction, whereas title or the role of a person in the company is usually non-conclusive. A PSC must be able to direct the activities of the company, i.e. control, or ensure that the company generally will adopt the activities that he/she desires, i.e. significant control.

The person will usually have the right to exercise significant influence or control if he/she has absolute, sole, and unqualified right to adopt or amend the company’s business plan, change the nature of company’s business, make any additional borrowing from lenders, etc. Yet, whether an absolute veto right is a right to exercise significant influence may not be so clear-cut. Most of the time, veto rights are kept for the sake of protecting minorities’ interest, such rights, when being exercised, will not be construed as a significant influence or control over the company. This is when precedents of Company Law will come into play in order to ascertain the objectives of such veto rights.

In order to determine whether a person actually exercises significant influence or control over a company, all relationships that a person has with the company or its managers should be taken into account. Especially when they are significantly involved in the management and direction of the company, or their recommendations are always followed by the majority shareholders, then those people are likely to be PSC.

Registration requirement

After identifying the PSC(s), the company must record the details on the company’s register and provide the information to Companies House as part of the annual Confirmation statement. Such information includes name, date of birth, nationality, domicile, and service address of the PSC(s). Company should also provide the date when the person became PSC, and under which category is he/she qualified as a PSC. Even though a PSC is by definition a human being, a company may need to register legal entities if they are relevant or registrable, for example, parent companies.

Starting from the implementation of the policy, companies are expected to take reasonable steps to identify their PSC(s). If no PSC has been identified after such steps are taken, the company must tell the Companies House that there isn’t PSC for the company, or the company is still in the process of identifying them. PSC failing to provide information or companies failing to register PSC may attract criminal liability of a maximum 2-year imprisonment period or a fine.

Implications

With the implementation of this new registration requirement, it is expected that companies will have extra administrative workload. For most of the companies, the extent of influence or control one has is usually proportionate to the shares one has in the company. Yet, given the fluidity of shareholders of publicly listed companies, a company may have to do a lot more to ascertain the identity of shareholders in order to fully comply with the requirement. Problem will arise especially when the shares are held by mutual funds, where the company will have to look even beyond the mutual funds in order to identify PSC.

However, the plus side of the policy is that investors can understand more about the companies, including but not limited to potential political affiliation and sources of capital behind. They can then make more holistic and well-informed investment decisions.

If you are uncertain about whether your company has PSC, or how to register PSC, please do not hesitate to contact Rahul Batra, Managing Partner on +44 (0)20 3318 5794 or email us at rahul.batra@hudsonmckenzie.com.

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