The Government is planning to introduce a new corporate “register of people with significant control” (the PSC register), which will contain 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 and its management. We have a section dedicated to the introduction of the PSC register on osborneclarke.com here.
Draft legislation contained in the Small Business, Enterprise and Employment Bill (the SBEEB), currently going through Parliament, sets out the legal framework that will govern the PSC register.
The SBEEB also contains provisions increasing the accountability of shadow directors, and prohibiting corporate directors.
The BVCA, “the industry body and public policy advocate for the private equity and venture capital industry in the UK”, has submitted written evidence to Parliament, giving its views on the PSC register, on shadow directors and on the abolition of corporate directorships. That evidence is here.
The PSC register: the BVCA’s view
The BVCA is concerned about the impact of the PSC register where companies are held indirectly through limited partnership-style investment funds; specifically, through the standard vehicle of an English limited partnership. The BVCA evidence sets out the problem – which is that all individuals who are limited partners might have to be disclosed on the PSC register:
“As a matter of partnership law, each partner in a limited partnership is deemed to have an indivisible interest in the assets of the ELP even though its economic interest and voting rights will be calculable based on the limited partnership agreement in place. However, depending upon how the ELP has chosen to hold the legal title, there may be an argument that the shares are held by the partners, including the LPs, jointly…
… If shares or rights are deemed to be held ‘jointly’ by LPs in an ELP, this might cause all individuals that are LPs to be disclosed on the PSC register, irrespective of their economic interest or voting rights. Our view is that this does not accord with the policy intent when those individuals are passive investors in a fund structured as an ELP and have an economic interest in the CA company that is less than 25% (in many cases, such percentages will be negligible). The number of LPs varies across fund structures for a number of reasons (typically size) and it is not uncommon to have over 200 LPs in a fund. The disclosure of all individual LPs will be misleading. Those individual LPs, who do not have day-to-day connections with one another and who have delegated management to another legal entity (which, if a CA company, would typically be a relevant legal entity in relation to the CA company), cannot be said to have any meaningful influence over the underlying CA company, and to suggest so would be misleading and would obscure meaningful information.
We would argue that the policy intent would be best achieved in this case by disclosure only of any individuals who have an interest in the ELP (itself ‘holding’ >25% shares/rights etc. in a CA company) which would equate to a “majority stake” in a limited partnership with legal personality.”
Shadow directors: the BVCA’s view
The SBEEB will, as currently drafted, extend the range of directors’ duties which apply to shadow directors. The BVCA is concerned that these provisions:
- will create uncertainty, on the basis that the courts will be left with discretion as to the precise application of those duties; and
- in applying the duty to avoid conflict of interest to shadow directors are misguided, as normal mechanisms for dealing with director conflicts (recusal from meetings, prevention from voting, approval by other directors) would not be available to shadow directors.
Abolition of corporate directors, and corporate members of LLPs: the BVCA’s view
The BVCA would like the use of corporate directors to be permitted in structures (such as private equity acquisition structures, for example for the structural subordination of senior debt) where a private company is in effect a subsidiary of another private company. The BVCA acknowledges that in that type of structure, the top company in the group should not have any corporate directors.
The Government is expected to consult on whether the prohibition of corporate directors should be applied to corporate members in LLPs. The BVCA is “very concerned” about this, for the good reason that “members of LLPs are not equivalent to directors and do not usually have the same functions or duties”. The BVCA continues that:
“Whilst some LLP members may have a fiduciary relationship with the LLP, others may not, and this will be entirely dependent on how individual members’ roles and responsibilities have been defined in the LLP’s governing documents. Therefore, extending a general prohibition to corporate members in LLPs will be equivalent to preventing corporate ownership in a company as, in many cases, corporate members are simply equivalent to shareholders (as co-owners of the residual profits of the business, with certain shareholder-like rights). This is clearly not the policy intention.”
The BVCA argues that prohibiting LLPs from having corporate members will be likely to shut down the use of LLPs as vehicles for consortium arrangements and joint ventures; and would stop companies converting to LLPs (i.e. where the company transfers its business to the LLP in exchange for an LLP interest) – something often done by fund management companies.
The SBEEB continues its passage through Parliament.