Originally appeared in Law360 on June 18, 2015.
—by David Gerber
In the final days of the previous U.K. coalition administration, measures were passed of striking breadth and scope which, in the government’s own words, were “designed to make the U.K. the best place in the world to start and grow a business.” The overriding aim of the legislation was to create a better environment for small U.K. businesses by giving them greater access to finance and making it easier for them to export goods and services made in Britain, whilst also targeting those firms that do not play by the rules whether by not paying the minimum wage or abusing zero-hours contracts.
The Small Business, Enterprise and Employment Act 2015 had been introduced into the U.K. Parliament in June 2014 and was passed into law by royal assent on March 26, 2015. Among the most significant measures introduced by the act are the changes to U.K. company law which, among other things, aim to increase transparency around who owns and controls U.K. companies and to deter and sanction those who hide their interest in U.K. companies to facilitate illegal activities. The British government plans to implement the act in stages over the next 12 months, coming fully into effect by April 2016. The key changes to U.K. company law highlighted by this note include:
- the abolition of bearer shares;
- the extension of directors’ general duties to shadow directors;
- the prohibition of corporate directors;
- the requirement to keep a register of people with significant control over the company; and
- the abolition of "annual returns."
Abolition of Bearer Shares — Effective May 26, 2015
With effect from May 26, 2015, U.K. companies are prohibited from issuing new bearer shares — that is, unregistered shares owned by whoever physically holds the share warrant — regardless of whether a company’s constitution expressly permits this.
Existing bearer shares in U.K. companies must be surrendered and exchanged for registered shares by no later than Feb. 26, 2016. Companies must give notice to their existing bearer shareholders of their rights to surrender and the consequences of not doing so by no later than June 26, 2015.
If any bearer shares have not been surrendered by Dec. 26, 2015, any dividends or other distributions to which holders are entitled after that date must be paid by the companies concerned into a separate bank account and a second notice must be given by the companies to their bearer shareholders of their rights to surrender and the consequences of not doing so by no later than Jan. 26, 2016.
If any bearer shares have not been surrendered by Feb. 26, 2016, companies must apply to court within three months for an order cancelling the share warrant and the shares specified in it.
Whilst bearer shares are no longer common, for those companies and shareholders that are affected, immediate steps need to be taken to comply with the new rules.
Extension of Directors’ General Duties to "Shadow Directors" — Effective May 26, 2015
With effect from May 26, 2015, the general duties of directors of U.K. companies (as set out in Sections 170 to 177 of the U.K. Companies Act 2006) apply to "shadow directors" — persons not formally appointed as directors but in accordance with whose directions or instructions the board is accustomed to act — "where and to the extent they are capable of applying." It is not yet clear how this will operate in practice and, indeed, what, if any, practical difference it will make to corporate governance. Investors should continue to be wary of blurring the line between oversight and control.
Prohibition of Corporate Directors — Intended to Become Effective October 2015
With effect from October 2015, subject to certain exceptions, U.K. companies will be prohibited from appointing new corporate directors.
The British government is currently consulting on exceptions to the general prohibition to apply where the use of corporate directors presents a low risk of illicit activity and is of high value to the running of the company — an example of which may be a U.K. company being a director of one of its subsidiaries.
Companies with existing corporate directors that do not fall within any of the permitted exceptions must remove them by no later than October 2016 and replace them with individuals where board meetings might otherwise be inquorate.
Appointment of Directors — Intended to Become Effective October 2015
With effect from October 2015, it will no longer be necessary to obtain a written consent to act from a new director on that person’s appointment. Instead, a company will be required to file a statement to the U.K. Companies House confirming that the new director has consented to act. The U.K. Companies House will then notify the new director who, if he or she has not, in fact, consented to act, can apply to be removed from the public register.
Register of People with Significant Control — Intended to Become Effective January 2016
With effect from January 2016, U.K. private limited companies will be required to maintain a register of people with “significant control” over the company (the “PSC register”), and, from April 2016, to make that register public.
A person with significant control will be an individual that (either alone or with others):
- holds, directly or indirectly, more than 25 percent of the shares in the company (calculated by reference to nominal value);
- holds, directly or indirectly, more than 25 percent of the voting rights in the company;
- holds the right, directly or indirectly, to appoint or remove a majority of the board; or
- exercises, or has the right to exercise, significant influence or control over the company (including through a partnership or trust). This is intended to capture individuals with a level of control broadly equivalent to those with an interest in more than 25 percent of the company’s shares or voting rights. The British government is expected to publish guidance on the meaning of "significant influence and control" in October 2015.
Persons will generally not need to be registered in the PSC register if they exercise significant control through another entity, which itself is required to keep a PSC register.
Specific provisions relevant to limited partnerships and interests held through limited partnerships are to apply. An individual will not meet the first three conditions above (holding more than 25 percent of the shares or voting rights in a company or the right to appoint or remove a majority of the board) by virtue only of being a limited partner, unless they are involved in the management of the partnership business. Similarly, individuals who directly or indirectly hold shares or rights in relation to a limited partner will not be considered to meet such conditions by virtue only of that interest.
Companies will have duties to investigate and keep up-to-date the information on the persons included in the PSC register, including obligations to take reasonable steps to identify such persons and making enquiries of other persons where the company knows or has reasonable cause to believe that that person knows the identity of a registrable person. Similarly, all registrable persons will be obliged to provide the required information to the company (whether or not they have received notice from the company).
These measures are the most significant and controversial of the changes introduced by the act to U.K. company law and will require proactive steps to be taken both by U.K. companies and its shareholders to ensure compliance. Whilst the British government’s attempts to deliver on its commitments to enhance corporate transparency can be welcomed, there are concerns over the potential breadth of the measures, including in particular the scope of the “significant influence and control” test and its application to, for example, general partners of U.K. private equity funds or limited partners in non-U.K. funds that are invested in U.K. portfolio companies. It is hoped that the government’s guidance due to be published in October will provide some necessary clarity before the measures come into effect.
Abolition of Annual Returns — Intended to Become Effective April 2016
With effect from April 2016, U.K. companies will no longer be required to submit to the U.K. Companies House an “annual return” (a summary of its shareholders, officers and share capital on a given date each year). Instead, U.K. companies will need to confirm at any time during a 12-month period by way of a “confirmation statement” that it has delivered all the required information in the last 12 months.
U.K. companies are likely to welcome this measure and the flexibility it provides, making it, amongst other things, easier to align corporate filing obligations with preparation of annual accounts.
 The act covers a wide range of legal areas in addition to company law, including the U.K.’s insolvency regime, public sector procurement, employment law and finance law. These areas are not addressed in this article.
 Please refer to the article by the same author titled UK Court Sheds Light on De Facto and Shadow Directors (http://www.law360.com/articles/587325/uk-court-sheds-light-on-de-facto-and-shadow-directors) for further commentary on the U.K. concept of shadow directors.
 Broadly, all U.K. companies other than companies that are subject to Chapter 5 of the U.K. Financial Conduct Authority’s Disclosure and Transparency Rules and so already have to make information about their major shareholders public. These provisions do not currently extend to limited liability partnerships although it is thought likely that the British government will, at some point, seek to ensure that they do so.
 These provisions were included following concerns raised by the British Venture Capital Association about the potential impact of the proposed PSC register on the U.K. private equity industry, particularly if limited partners in English limited partnerships (which do not have a separate legal personality) had to be disclosed as PSCs of the portfolio companies in which the private equity fund had invested. However, notwithstanding the inclusion of these provisions, private equity funds will still need to analyze whether a general partner of a U.K. limited partnership is a registrable person. Further, these provisions will not apply to limited partnerships not registered under the U.K. Limited Partnership Act 1907 (for example, Guernsey or Jersey limited partnerships). Limited partners of limited partnerships in other jurisdictions may therefore still be registrable.
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