LLPs and "persons with significant control"

Background

In April 2016, new provisions were incorporated into the Companies Act 2006 requiring UK incorporated companies to maintain registers of persons with significant control over them (PSCs). The move was part of the UK government’s drive to promote greater transparency in relation to the ownership and control of corporate vehicles.

The new PSC regime was applied to UK limited liability partnerships (LLPs) by the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016. This meant that with effect from 06 April 2016, all LLPs were required to prepare and maintain a PSC register and from 30 June 2016, they had to disclose that PSC information by way of a Confirmation Statement filed at Companies House. All LLPs should have delivered their initial PSC information to Companies House by 30 June 2017.

Changes were made to the PSC regime, with effect from 26 June 2017, in order to comply with Article 30 of the Fourth Money Laundering Directive. These changes were implemented by the Information about People with Significant Control (Amendment) Regulations 2017 (the Amendment Regulations).

Who is a “person with significant control”?

Only an individual (ie a natural person) can be a PSC. An individual will be a PSC if they meet any of the following conditions:

1. they directly or indirectly hold rights over more than 25% of the surplus assets on a winding up of the LLP
2. they directly or indirectly hold more than 25% of the voting rights in the LLP (note that this relates to votes at meetings of the members as opposed to, for example, votes held for the purposes of meetings of a committee of the LLP)
3. they directly or indirectly hold the right to appoint or remove the majority of those involved in management of the LLP
4. they have the right to exercise, or actually exercise, significant influence or control, or
5. they otherwise have the right to exercise, or actually exercise, significant influence or control over the activities of a trust or firm which, whilst not a legal entity, would itself satisfy any of the conditions set out in (1) to (4) above if it were an individual.

Whilst it may be straightforward to establish who is a PSC for the purposes of conditions (1) to (3) above, establishing who is a PSC under conditions (4) and (5) will not be as self-evident. In order to assist identifying persons who have “significant influence or control”, statutory guidance has been prepared.

The statutory guidance sets out a non-exhaustive list of examples where a person may have significant influence or control. The list includes where a person:

• is likely (or more likely than not) to receive more than 25% of the profits of an LLP, including profits allocated automatically or otherwise
• has absolute decision rights over decisions relating to the running of the business of the LLP, for example relating to:
  • amending the LLP agreement
  • adopting or amending the LLP’s business plan
  • changing the nature of the LLP’s business
  • making any additional borrowing from lenders
  • establishing or amending any financial incentive scheme, or
• holds absolute veto rights over decisions relating to the running of the business of the LLP, for example relating to:
  • amending the LLP agreement
  • adopting or amending the LLP’s business plan, or
  • making any additional borrowing from lenders (except as a minority protection).

Notably, the statutory guidance also provides that if a member holds a veto right in relation to certain fundamental matters for the purposes of protecting their own or a minority interest in the LLP, then this is unlikely, in of itself, to constitute “significant influence or control” over the LLP. Examples of where a member of an LLP might not be treated as having significant influence or control in these circumstances include where it is protecting its minority interest by exercising a veto right in relation to:

• amending the LLP agreement
• any matter which would dilute its interest in the LLP (including through the admission of new members)
• any requirement to contribute additional capital to the LLP
• making any additional borrowing from lenders, outside previously agreed lending thresholds, or
• winding up the LLP.

In addition, the Department for Business, Innovation & Skills has published final, non-statutory guidance for companies and LLPs in respect of the PSC register requirements generally, which can be found here - non-statutory guidance.

When must legal entities be entered on the PSC register?

A legal entity must be placed on the PSC register if it is both relevant and registrable.

A legal entity will be "relevant" if it would have met any of conditions (1) to (5) if it were an individual, and:

• it is required to hold its own PSC register, or
• it has voting shares admitted to trading on a regulated market in the UK or elsewhere in the EEA or on specified markets in Switzerland, the USA, Japan or Israel.

A relevant legal entity (RLE) will be "registrable" in relation to an LLP if it is the first RLE in the LLP’s ownership or control chain.

By way of example, if an LLP has a member which is a limited company, and that limited company would have met one or more of conditions (1) to (5) and it is required to maintain its own PSC register, then it will be an RLE in relation to the LLP. In these circumstances, the LLP’s PSC register should only include certain prescribed information in relation to that RLE - it should not include any information in relation to any shareholder in that RLE, or in relation to any individual or entity that has control over that RLE, as such individuals and/or entities will appear on the PSC register of the RLE itself.

Do indirect control arrangements need to be disclosed?

In the interests of transparency, LLPs must "look through" their structures in order to identify and disclose individuals or entities that have indirect control over the LLP.

An example of where an LLP will be required to consider its ownership structure for such purposes is where an entity has significant control over the LLP, but is not an RLE because that entity is a non-UK company and therefore not required to keep its own PSC register. In these circumstances, the LLP must look at the ownership and control of such an entity (Entity X) to identify any individuals or RLEs who have a “majority stake” in Entity X.

A person or entity will have a “majority stake” in Entity X if:

• they hold a majority of the voting rights in Entity X
• they are a member of Entity X and have the right to appoint or remove a majority of its board of directors
• they are a member of Entity X and control a majority of the voting rights by agreement with other shareholders or members, or
• they have the right to exercise or actually exercise dominant influence or control over Entity X.

An individual or RLE with a majority stake in Entity X must be entered on the LLP’s PSC register. If there is another legal entity which is not an RLE but which has a majority stake in Entity X, the LLP must look at the ownership and control of that legal entity (and so on) until an individual or an RLE with a majority stake is identified. If it is established that no such individual or RLE exists, then this must be entered on the PSC register.

“Excepted roles”

The draft statutory guidance sets out a non-exhaustive list of roles and relationships that would not, on their own, result in a person being considered as exercising significant influence or control over an LLP.

Generally, the list extends to third party advisers and service providers. However, it also provides that the role carried out by a member as a designated member is an “excepted role” and that any person who is a director, employee or CEO of a third party (for example, a corporate member of an LLP) will not, solely by virtue of such capacity, be treated as having significant influence or control over the LLP.

What are the initial filing obligations at Companies House in relation to PSC information?

From 30 June 2016 onwards, anyone seeking to incorporate a new LLP is required to file a “statement of initial significant control” at Companies House alongside the other usual incorporation documents. This filing includes particulars relating to any person who will be a registrable PSC or RLE of the LLP on incorporation. If there is no registrable PSC or RLE, then a statement to that effect should be made instead.

Prior to the changes to the PSC regime in June 2017, all LLPs were required to deliver the information in their PSC register to Companies House from 30 June 2016 onwards. The information was required to be delivered annually at the same time that the LLP made its Confirmation Statement (which replaced the Annual Return from June 2016.) All LLPs should, therefore, have delivered their initial PSC information to Companies House by 30 June 2017.

The Amendment Regulations have now separated the delivery of information to Companies House from the annual Confirmation Statement process and information is now required to be filed independently on separate forms (see “Does the PSC register have to be updated?” below). LLPs continue to have an obligation, however, to annually confirm that the PSC information on the central register is correct.

What information must the PSC register contain?

The LLP’s PSC register must contain each PSC’s name, service address, residential address, nationality, date of birth, date of becoming a PSC and the nature of control.

For RLEs, the LLP’s PSC register must contain the name of the entity, its registered office, its legal form, the law by which it is governed, the register in which it appears (for example, the UK Companies House register), the entity’s registered number, the date when it became a registrable RLE and the nature of its control.

From 30 June 2016, the same information was also required to be filed at Companies House. This was initially included in the LLP’s Confirmation Statement but since 26 June 2017, all PSC information must be notified to Companies House on specific Companies House forms – LL PSC01 – LL PSC 09 (see “Does the PSC register have to be updated?” below).

In order to prevent identity fraud, the public register will not show a PSC’s residential address or the day on which the PSC was born (only the month and year).

The wording the LLP should use when setting out the nature of a PSC’s or an RLE’s control in its PSC register is set out in Schedule 2 of the Regulations.

If a person is a PSC or an RLE by virtue of: 

• conditions (1) or (2), the PSC register must state whether the PSC’s or the RLE’s rights to surplus assets on a winding up or voting rights (as applicable) are above 25% but below 50%, above 50% but below 75%, or above 75% 
• condition (3), the PSC register must state that the person holds the right, directly or indirectly, to appoint or remove a majority of the persons who are entitled to take part in the management of the LLP, or 
• condition (4), the PSC register need simply state that the person has the right to exercise, or actually exercises, significant influence or control over the LLP, without any requirement to provide further information as to why that PSC or RLE has met the condition.

In respect of condition (5), the required statement must first provide if the condition applies to a person who has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm. It should then separately set out the wording required in order to identify the trust’s or the firm’s control over the LLP (using the same wording applicable in identifying which of conditions (1) to (4) apply to a PSC or an RLE, as referred to above).

The PSC register must set out all of the conditions which a PSC or an RLE satisfies, save that if one or more of conditions (1) to (3) is met, then there is no requirement to include any reference to condition (4).

Can PSC information be suppressed?

In the interests of transparency, PSC information will be public. However, residential addresses are protected and are not a matter of public record. It is possible in some circumstances to protect a PSC’s information, and applications may be made by either the PSC or the LLP on the PSC’s behalf to do so. The guidance indicates that protection will only be granted if the application contains evidence proving a serious risk of violence or intimidation to the PSC or someone who lives with the PSC.

Where must the PSC information be maintained?

The default position is that an up-to-date PSC register must be kept at the LLP’s registered address and must be open for inspection by any person without charge.

LLPs. are also required to provide their PSC information to Companies House (see “What are the initial filing obligations at Companies House in relation to PSC information?” above ) and keep it updated. This means that most of an LLP’s PSC information will be publicly available on the central register as well as being available for inspection at the LLP’s registered office.

From 30 June 2016 an LLP can elect (subject to no objection being raised by its PSCs and RLEs) to keep its PSC register at Companies House instead of at its registered address. On making any such election, it should be noted that, the full date of birth of PSCs will be visible and the LLP must continue to keep its old PSC register accessible at its registered address. The register kept at Companies House will also have to updated in the same way as if the LLP was maintaining its own register – i.e. information must be filed at Companies House as soon as it would have been entered in the LLP’s own register (see “Does the PSC register have to be updated?”) below.

Does the PSC register have to be updated?

LLPs are required to keep the information on their PSC register up-to-date and failing to do so is a criminal offence.

In relation to an LLP’s own PSC register that is kept at the registered office, any information that is no longer correct must be updated within 14 days of the LLP becoming aware of the change. This means that:

• the particulars of any new PSC or RLE should be entered on the register within 14 days of the PSC’s particulars being confirmed or, in relation to an RLE, within 14 days of the reporting LLP first having details of those particulars, and
• any relevant change to the particulars of a PSC or RLE already entered on the register must be noted on the register within 14 days of the change to the PSC’s particulars being confirmed or, in relation to an RLE, within 14 days of the reporting LLP first having details of that change.

If the new information is not immediately available, the PSC register should be updated to show when the old information ceased to be correct and to indicate the status of any investigation into the replacement information (including whether a notice requesting information has been served.)

From 26 June 2017, any change to an LLP’s PSC register must be filed with Companies House within 14 days of the change being made. Companies House Forms LL PSC01 – LL PSC09 should be used to notify Companies House of all changes to PSC information.

Prior to 26 June 2017, LLPs were only required to notify Companies House of changes to their PSC register on an annual basis, by filing a Confirmation Statement. The change to the regime (implemented by the Amendment Regulations) separated the delivery of updating information to Companies House from the annual Confirmation Statement process. LLPs are, however, still required to file an annual Confirmation Statement confirming that all changes to their PSC information have already been filed (using forms PSC01-PSC09) and that the information on the central register is correct as at the date of the Statement.

If a LLP updated its PSC register at any time before 26 June 2017, but this change was not notified to Companies House (for example by filing a Confirmation Statement) then that LLP must notify Companies House of the change by 10 July (14 days after 26 June 2017.)

If a LLP has elected to keep its own PSC register at Companies House, the PSC information must be kept up-to-date in the same way as if the LLP was maintaining its own register. PSC information must, therefore, be filed at Companies House as soon as it would have been entered in the LLP’s own register.

Who is responsible for gathering the information?

The LLP is principally responsible for gathering information. The LLP must take reasonable steps to determine whether any individuals or legal entities meet the conditions set out in the Regulations and then obtain the details needed to complete the PSC register. Whilst the non-statutory guidance sets out a number of steps which should typically be taken, they are not definitive or exhaustive. Ultimately therefore “reasonable steps” will depend on the specific fact pattern and the LLP should consider what a reasonable person would do in the same circumstances with the same knowledge.

Where it is not clear if an individual or entity is a PSC or an RLE, or if the LLP requires further information regarding a prospective PSC or RLE in order to confirm their status, the LLP must issue information request notices to those individuals or entities. A recipient of such a notice from the LLP has one month to comply with the request for information after which point the LLP may issue a warning notice. Failure to respond to a warning notice within a further month allows the LLP to issue a restrictions notice (effectively “suspending” a member’s interest in the LLP).

In addition, there is also a disclosure obligation imposed by the Regulations on PSCs and RLEs. Individuals or entities that become PSCs or RLEs, and remain so for one month but do not receive an information request notice from the LLP, are under an obligation to inform the LLP of their status themselves and have a further month (ie two months from the date of becoming a PSC) to do so.

Who can access the register?

As long as they have a "proper purpose", any member of the public (whether an individual or an organisation) can request access to the up-to-date PSC register held at the LLP’s registered address. The request must be in writing and set out the name of the applicant (or, if an organisation, the name of the responsible individual), their address and the purpose in seeking access. The LLP must provide access for free, although a fee can be charged where a copy of the register is requested. The LLP has five business days to either comply or apply to the court on the basis that it does not believe that the request was made for a "proper purpose".

The guidance states that ‘proper purpose’ is intended to have a wide interpretation and application, so presumably the courts will only prevent an applicant from having access to an LLP’s PSC register in very limited circumstances.

Any member of the public can access the PSC information filed at Companies House in relation to a particular LLP.

What are the consequences of failing to comply with the new legislation?

Under the Regulations, failure to comply with the PSC register requirements is a criminal offence and can result in sanctions for both the LLP and its members. The LLP can be subjected to a fine if, for example, it fails to keep its PSC register up-to-date, does not take reasonable steps to establish who its PSCs are or refuses a request to access its register without applying to the court. In such circumstances, the LLP’s designated members can also be subjected to a fine and/or imprisonment, whilst individuals and entities that fail to respond to notices requesting information can also face sanctions.