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New transparency rules could put off investors in private businesses

New reporting rules requiring private businesses and LLPs to keep a register of people with significant control in their affairs could put off investors and need to be introduced with care, according to corporate law specialists at Shakespeare Martineau.

shutterstock_375018883The Register of People with Significant Control (PSC) Regulations, which are being implemented as part of the Small Business, Enterprise and Employment Bill, will take effect on 6th April 2016. From this date, all businesses incorporated in the UK (except for those listed on financial markets in the UK, another European Economic Area state, or in the US) will be required to keep a register of anyone who has a significant shareholding and/or operating interest. This is defined as anyone who owns more than 25% of the firm’s shares or 25% of its voting rights; has the right to appoint or remove senior level staff or who exercises or has the right to exercise control over the business and its activities.

In addition to maintaining the PSC register, the Board will need to be able to demonstrate that ‘reasonable steps’ have been taken to identify those with significant control and to file information at Companies House about them as part of the firm’s annual confirmation statement. This information will effectively become a matter of public record and, in addition to specifying the extent of each individual’s interest in the business, their name, address, date of birth and nationality will be given.

Roy Botterill, corporate law partner at Shakespeare Martineau, said: “The PSC register represents yet another burden for private businesses, the vast majority of which have been operating entirely legitimately whilst enjoying the privacy that comes from running a business concern without the backing of public shareholders.

“Under the new regime, private businesses need to be aware that information about any person with a significant control in their affairs will be on public record. They also need to be aware that failing to comply with the new regulations could attract a fine or criminal sanction.”

According to Shakespeare Martineau, this degree of transparency could cause disruption for some private businesses. Roy Botterill explained: “The introduction of the PSC register is intended to promote transparency and avoid fraud. But it does so in a manner which removes the individual right to privacy. This could discourage investors and cause significant disruption for some businesses. Some investors could even choose to withdraw their investments. For example, individuals who are well known locally, or nationally, may not wish to make their investments known to all.

“There may also be scenarios where greater awareness of the business interests of key individuals could have a bearing on commercial dealings. For example, a business may be in the process of acquiring a land bank for future development and may not wish the seller to know exactly how much land is owned already. Making information on beneficial ownership readily available could force up the price of the land being sold.”

To comply with the new law, Boards should write to shareholders to inform them about the changes and to seek confirmation that any shares held in their name are owned for themselves alone. They should also be prepared to act on any suspicious or incomplete information received. It may also be appropriate to approach people with significant control individually to explain the impact of the new rules and to discuss the matter with them.

More information about the PSC register and how to comply with the Register of People with Significant Control (PSC) Regulations is available here.