SBEEA 2015 – Will EIS fund managers need to register as persons with significant influence over their investee companies?

The Small Business, Enterprise and Employment Act 2015 contains major amendments to the Companies Act 2006 and should be given due consideration by all UK incorporated companies in the coming months. It has a number of objectives including the promotion of corporate transparency and the simplification of company filing requirements.

To provide a brief summary of some of the more newsworthy provisions:

Reporting on payment practices

Small suppliers are some of the worst affected by late and poor payment practices in the UK. According to a report published by Bacs Payment Schemes Limited this year, the overall amount of late payment owed to small and medium sized businesses in January 2015 was £32.4 billion. Whereas the total amount owed to large corporates was £9.1 billion. To mitigate this problem, the UK’s largest companies will be required from April 2016 to report on their payment practices bi-annually. The template report currently available on the government website solicits a fair amount of detail and completed reports will be uploaded to a single website accessible to the public. This will raise awareness of those companies that employ good payment policies and those that do not, as well as who do and do not pay their invoices promptly. This should help the negotiation of fairer deals between large and small companies.

Company ownership

One of the more onerous provisions of the Act requires companies to create and maintain a public register of individuals that exercise significant control over their company. This will be known as a PSC register. Increasing transparency around who owns and controls companies in the UK should help to deter instances of money laundering and perhaps tax evasion, as individuals won’t be able to hide their interest in UK companies for criminal purposes. This part of the Act applies to all UK incorporated companies except those required to comply with Chapter 5 of the FCA’s Disclosure and Transparency Rules sourcebook or those companies made exempt by the Secretary of State by regulation. This essentially exempts companies that have shares admitted to trading on UK regulated or prescribed markets, such as AIM or the London Stock Exchange, and therefore already make information about major shareholders public.

A person with significant control is someone for whom any of the following applies:

(a) owns more than 25% of the company’s share capital;

(b) holds more than 25% of the voting rights in the company;

(c) holds the right to appoint or remove a majority of the board of directors of the company;

(d) exercises significant influence or control over the company.

In relation to subsection (d), technical statutory guidance as to what constitutes ‘significant influence or control’ is due to be published in October 2015, and so how far reaching this provision might be remains unknown. Clearly if its meaning is widely drafted this stands to significantly increase the persons identifiable on the PSC register and could mean that some companies will struggle to implement the register by January 2016.

Not everyone that exercises significant control over a company has to be registered. In some circumstances a ‘relevant legal entity’ rather than an individual may be noted in the PSC register. A legal entity is a ‘relevant legal entity’ in relation to a company if (1) it would have come within the definition of a person with significant control over the company if it had been an individual; and (2) it is subject to its own disclosure requirements. Therefore if you hold interest in a company through one or more ‘relevant legal entities’ over which you exercise significant control, the company will only need to provide information about the relevant legal entity rather than about you. This aims to avoid repetitive reporting on beneficial ownership.

Companies must take reasonable steps to find out if there is anyone who is a registrable person in relation to the company and if so, to identify them. What constitutes reasonable steps is pretty far reaching, as this includes giving notice to persons that know the identity of someone likely to know a registrable person. Failure either to identify registrable persons or relevant legal entities or to keep information stated in a company’s PSC register up to date will be a criminal offence punishable by fine and/or imprisonment.

The governance structure of EIS Funds is such that the fund manager’s nominee company will typically own 100% of the share capital of each investee company. The nominee company would therefore have to be identified on the company’s PSC register. As to whether the fund manager will need to be registered as a person with significant influence is uncertain at this stage. Though the nominee company holds the investee company shares, investors in the fund hold the beneficial interest in those shares and each investor usually has the right under the investor’s agreement to require the nominee to appoint them as its proxy to vote in respect of their shareholding. On this basis it seems unlikely that the fund manager will need to be registered and instead technically speaking it is the individual investor that would need to be registered where he or she owns more than 25% of the company’s share capital or voting rights (though this is rarely the case). This is however speculation and the October guidelines will require close scrutiny to determine this question.

Prohibition on corporate directors

The Act also introduces a prohibition on companies appointing corporate directors. Any appointment made once this section of the Act comes into effect will be both void and a criminal offence. Though there are some limited exceptions available, this means that companies must now always have at least one director who is a natural person. The focus of this legislative change is again on transparency, as when companies have directors that are corporate entities there is less clarity regarding who really controls that entity and what influence they bring to bear on the direction of the company.

There is a one year transition period for companies with existing corporate directors, so any director in October 2016 that not within the scope of exceptions in section 156B of the Act, will cease to be a director.

The Act addresses a variety of other matters, including:

• Outlawing exclusivity clauses in zero hours contracts so that employers cannot prevent their low paid staff with little or no guaranteed hours of work per week from working for another employer.

• Increasing access to finance for small businesses. Where banks refuse to loan to an SME they will, if authorised, pass on that company’s details to designated online platforms to match them with alternative finance options.

• Introducing a faster process to strike a company off the Companies House register. A voluntarily strike will now take approximately two months as opposed to three or four.

Given that non-compliance can in some instances amount to a criminal offence, companies are minded to review their internal policies to bring them in line with relevant changes and to remain abreast of any published accompanying guidance.