BRIEFING CHARITY FAQS THE PEOPLE WITH SIGNIFICANT CONTROL REGIME CHARITIES

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1 BRIEFING CHARITIES CHARITY FAQS THE PEOPLE WITH SIGNIFICANT CONTROL REGIME April 2016 Set out in this briefing are some charity-specific FAQs on the PSC regime which came into force on 6 April (These are intended as a guide only and do not constitute legal advice.) Nicola Evans (Charity Counsel) E nicolaevans@bdb-law.co.uk T +44 (0) DOES THE PSC REGIME APPLY TO CHARITIES? There is no exemption for charities, or their wholly-owned trading subsidiaries, so charities need to consider whether they fall within the regime. The regime applies to UK companies and LLPs (unless exempt). If the charity is itself a company (usually a company limited by guarantee), it will fall within the regime. Even if the charity is not a company, it can still be affected if it has any UK company or LLP within its structure or, potentially, its operations, eg: it may have a trading subsidiary company; or there may be a company in respect of which the charity has some power, eg a power to appoint directors, or where the charity has some interest (whether through membership or otherwise) which may amount to significant influence or control under the regime. Where there is a UK company or LLP within the charity s structure, or even its wider operations, the company/llp will fall within the regime and the charity, and/or its charity trustees, may need to be entered on the PSC register. WHY AREN T CHARITIES EXEMPT? The only exemptions are for companies listed on UK regulated or specified international markets (broadly equivalent to exemptions in the money laundering rules). The regime aims to make the control of UK companies (and LLPs) transparent; the principle is that the exempted companies are already subject to transparency requirements. Although charities are also subject to transparency requirements, as well as a specialist regulatory regime, the policy decision is that there is no exemption for them. WHAT ABOUT OTHER CORPORATE CHARITIES ARE WE IN THE REGIME? Not directly, no. CIOs, charitable corporations established by Bircham Dyson Bell LLP Broadway London SW1H 0BL

2 2April 2016 Royal Charter or statute and community benefit societies are not within the regime and are not required to keep their own PSC register....the REGIME IS DRAFTED DELIBERATELY WIDELY... Similarly, non-corporate charities, whether trusts or unincorporated associations, are not within the regime. However, the regime is still relevant to all of these if there is a UK company or LLP within their structure or, in some cases, in their operations. The regime is drafted deliberately widely, so that a right or power which would not in the usual course be considered to amount to influence or control over a company/llp can make someone registrable under the PSC regime. WHAT DO CHARITIES NEED TO DO? The regime applies to UK companies and LLPs. The first thing to do is to identify whether the charity is itself a company and whether there are any UK companies (or LLPs) within the charity s overall structure or operations. If the charity is a company, it will need to keep its own PSC register. This means that it must take reasonable steps to identify whether anyone needs to be entered on that register and, if so, to obtain the registrable details for them. If there is a company (or LLP) within the charity s structure or operations: the company/llp will (unless exempt) need to keep its own PSC register; and the charity will need to determine whether it and/or its charity trustees may need to be entered on the company s (or LLP s) PSC register. If they are registrable, they are under a duty to notify the company (or LLP) and provide the relevant details for the register. HOW DO WE WORK OUT WHO THE PSCS ARE? The answer is it depends. There are 5 conditions (set out in the BDB briefing) any one of which, if satisfied, can mean that someone has sufficient influence or control over a company to be registrable in the PSC register. The charity needs to work through the 5 PSC conditions, together with

3 3...IF THE CHARITY IS A COMPANY, IT WILL NEED TO KEEP ITS OWN PSC REGISTER... the available guidance, to identify possible PSCs. We have attached some worked examples. You should be aware, however, that these are only a guide to help understand the nature of the regime; who the PSCs are in each case will be dependent upon the particular facts. It needs to be remembered that the regime is designed to be interpreted widely, so can apply in circumstances which might not be obvious. Some of these are demonstrated in our worked examples, eg be aware of casting votes (whether in general meeting in older companies or in board meeting), rights to appoint or remove directors or trustees and jointly held rights. Note, in particular, that where a charity (other than a charitable company) has a wholly-owned trading company, it is likely that all charity trustees of the charity will be PSCs of the trading company; this is because the charity trustees will be assumed to hold, indirectly, a joint interest in more than 25% of the trading company s shares. HOW DOES SIGNIFICANT INFLUENCE AND CONTROL AFFECT OUR INDEPENDENCE AS A CHARITY? The PSC regime is a company law regime and not designed with charities in mind. The April 2016

4 4April 2016 regime aims to identify the ultimate beneficial owners of a company or LLP, a concept which is at odds with a charity, which is not owned but exists to pursue its charitable purposes. The regime also interprets someone as having significant influence or control over a company/llp in circumstances where charity law would not consider the person to have any real influence or control; for example, under the regime a power to appoint a single trustee of a charitable trust can make a person a PSC of the charity s trading company. In such cases, although company law says one thing, the charity s independence should not be impugned. IS OUR FOUNDER OR CEO A PSC? The (statutory) guidance for the regime provides that a person would exercise significant influence or control (under the 4th PSC condition) if they are significantly involved in the management and direction of the company, an example being a person who is not a member of the board of directors, but regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board.

5 Many charities may regard a founder or CEO as someone who would be consulted regularly by the board and who may be considered to hold some sway. There may be a concern that, in such cases, the founder or CEO would be a PSC. However, provided that the charity s governance is working effectively, so that the charity trustees make their own independent decisions in managing the charity, the founder or CEO should not be in a position of influence or control for this purpose....many CHARITIES MAY REGARD A FOUNDER OR CEO AS SOMEONE WHO WOULD...HOLD SOME SWAY... It will, however, depend upon the facts of each case and your charity may need advice on its governance. IT WILL BE DANGEROUS FOR OUR DETAILS TO BE MADE PUBLIC WHAT CAN WE DO? Most of the details in the PSC register will be made public on the Companies House register and available to the public via inspection of the company s/ LLP s PSC register. Residential address: the public details will not include the person s residential address (unless it happens to be their service address), but the residential address can be given out to credit reference agencies as well as to law enforcement agencies; and there is a limited protection regime for the residential address not to be disclosed to credit reference agencies where the PSC can show a reasonable belief of serious risk that they, or someone who lives with them, will be subjected to violence or intimidation as a result of the activities of the company/llp. Other registrable details: the PSC s name, date of birth (month and year in the public register), nationality, country of normal residence and service address will appear in the PSC register, together with the date they became a PSC of the company/llp and the relevant condition(s) which make(s) them a PSC; there is a limited protection regime for the PSC s registrable information to be 5 April 2016

6 6April 2016 suppressed from the public and company registers where the PSC can show that, if the information was disclosed, then either the activities of the company or one or more characteristics or personal attributes of the person when associated with the company will put the person, or someone living with them, at serious risk of being subjected to violence or intimidation; and where an application to suppress information is successful, the restrictions on disclosing the information must be noted in the register. ARE THERE ANY PRACTICAL ISSUES TO BE AWARE OF? Although the regime is in its early stages, some practical points are already becoming apparent. For example, companies/llps need to be aware that the PSC register must be kept up-todate and this will be a constant process. Companies and LLPs need to be alive to circumstances which can cause the details in the PSC register to change. Some examples are: where all the charity trustees of a charity are PSCs of an underlying

7 company, the PSC register of the company must be amended every time the charity trusteeship of the charity changes; similarly, if a charitable company has no PSCs because it has 4 members and no other registrable PSCs, if one member dies, the other 3 members immediately become PSCs (as they will each then hold more than 25% of the company s votes) and the company needs to amend its PSC register. As it is a criminal offence to fail to take reasonable steps to identify and obtain information about PSCs, it would be prudent for companies/llps to keep a record of the reasonable steps which they take. Such a record will help the company/llp to answer any subsequent accusation that the company/llp has failed to take reasonable steps. Charities need to be aware of where they and/or their charity trustees are registered in the PSC register of a company/llp. They will be under a duty to notify the company/llp of any change in the register details, so should set up arrangements to deal with this. An action point may be added to a checklist dealing with changes to the charity trustees. As for the company/llp, it would be prudent for the charity/ trustees to keep a record of their notifications to the company/llp....companies/ LLPS NEED TO BE AWARE THAT THE PSC REGISTER MUST BE KEPT UP-TO-DATE AND THIS WILL BE A CONSTANT PROCESS... The PSC register should be kept with the other company books of the company/llp. It will be need to be available for inspection to anyone with a proper purpose. A response to a request to inspect the register must be made within 5 working days. Access to the register must be free but the company can charge up to 12 for a copy of the PSC register. A company can only refuse inspection by making an 7 April 2016

8 8April 2016 application to court within 5 working days of receipt of the request, challenging that the request is for a proper purpose and notifying the requester that it has done so. However, proper purpose is to be interpreted widely, in line with the transparency aims of the regime, so it is not clear in what circumstances such an application would succeed. IS THERE GUIDANCE AVAILABLE? Yes see government/publications/ guidance-to-the-people-withsignificant-controlrequirements-for-companiesand-limited-liabilitypartnerships. It will be worth checking the guidance page at regular intervals, as further guidance, in particular on the filing requirements at Companies House, is expected in coming weeks and months. This publication is not meant as a substitute for advice on particular issues and action should not be taken on the basis of the information in this document alone. This firm is not authorised by the Financial Conduct Authority (the FCA). However, we are included on the register maintained by the FCA ( so that we can offer a limited range of investment services (including insurance mediation activities) because we are authorised and regulated by the Solicitors Regulation Authority (the SRA). We can provide these services if they are an incidental part of the professional services we have been engaged to provide. Mechanisms for complaints and redress if something goes wrong are provided through the SRA and the Legal Ombudsman. Bircham Dyson Bell LLP processes your personal data in connection with the operation and marketing of a legal practice and will occasionally send you information relating to the firm. If you would prefer not to receive this information or would like us to amend your contact details and/or mailing preferences, please notify us by databasecoordinator@bdb-law.co.uk. Bircham Dyson Bell LLP is a member of Lexwork International, an association of independent law firms. Printed on sustainable paper. FIND US ON

9 INFORMATION THE PSC REGIME: SOME CHARITY EXAMPLES We have set out below some charity scenarios and our thoughts on how these work within the PSC regime. Please note that they are intended only as a guide and do not constitute legal advice. It is important to remember that how the regime applies to any charity structure will depend upon the details of that structure. (Some charity trading subsidiary examples are available separately). 1 A CHARITABLE COMPANY LIMITED BY GUARANTEE (CLG) HAS 3 DIRECTORS WHO ARE ALSO THE MEMBERS WHAT GOES IN THE PSC REGISTER? Each member holds more than 25% of the voting rights in the company, meaning that they each satisfy one of the PSC conditions (the 2nd condition) and will be PSCs of the charitable company. Member Member Member Charitable company There may, of course, be other PSCs, depending upon the constitution and operations of the charitable company. 2 IS THE ANSWER TO QUESTION (1) DIFFERENT IF THE CHARITABLE CLG HAS 4 DIRECTORS WHO ARE ALSO ITS MEMBERS? Member Member Member Member Charitable company In this case, no member holds more than 25% of the voting rights in the company, so the 2nd PSC condition is not satisfied. April 2016 Unless there are other circumstances which may cause people to be registrable, the charitable company would have no PSCs and must record that in its PSC register. Bircham Dyson Bell LLP Broadway London SW1H 0BL

10 2April IS THE SITUATION DIFFERENT IF THE CHARITABLE CLG S ARTICLES RETAIN THE RIGHT FOR THE CHAIR TO HAVE A CASTING VOTE IN GENERAL MEETINGS? Where the company is one whose articles still permit the Chair to have a casting vote on members votes, it is arguable that the Chair qualifies as a PSC, either: as having more than 25% of the voting rights in the CLG (the 2nd condition); or as having the right to exercise, or actually exercising, significant influence or control over the company (the 4th condition). However, it can vary according to the facts of the case. The Statutory Guidance provides (paragraph 2.4) that a right does not have to be exercised in order to qualify as a right to exercise significant influence or control over a company. However, if the right, if exercised, would not in practice affect the decision, it could be argued that the Chair s casting vote does not make them a PSC. 4 A CHARITABLE CLG HAS 4 DIRECTOR/MEMBERS. ONE DIES. WHAT IS THE IMPACT ON THE PSC REGISTER? Technically, the 3 remaining members automatically become PSCs on the death of the 4th member. This is because they change from holding 25% of the voting rights in the company to having more than 25%, and hence qualify under the 2nd PSC condition. Until another director/member is appointed, the company s PSC register would have to be updated to reflect the change. (It would then have to be changed again if a 4th director/member is appointed). 5 A CHARITABLE CLG HAS 4 DIRECTOR/MEMBERS. A GOVERNMENT MINISTER HAS THE RIGHT UNDER THE ARTICLES TO APPOINT 2 CHARITY TRUSTEES, ONE OF WHOM WILL BE CHAIR OF THE BOARD WITH A CASTING VOTE IN BOARD MEETINGS. WHAT GOES IN THE PSC REGISTER? A person qualifies as a PSC (under the 3rd condition) where they hold the right to appoint (or remove) the majority of the board of directors, which for this purpose means a right to appoint (or remove) directors holding a majority of the voting rights at meetings of the board for all or substantially all matters. In this case, the government minister does not have power to appoint a majority of the directors by number, but, because the Chair has a casting vote in board meetings, it seems that the minister does have power to appoint a majority of the voting rights in board meetings, making the minister a PSC of the CLG. As in other cases, there may, of course, be other PSCs, depending upon the constitution of the charitable company. 6 A CHARITABLE CLG HAS 8 DIRECTORS WHO ARE ALSO ITS MEMBERS. ITS CEO IS THE CHARITY S FOUNDER, A DOMINANT PERSONALITY WHO ATTENDS BOARD MEETINGS AS A MATTER OF COURSE AND WHOSE PROPOSALS TEND, ALSO AS A MATTER OF COURSE, TO BE FOLLOWED BY THE BOARD. WHAT GOES IN THE PSC REGISTER? The Statutory Guidance provides (paragraph 3.3) that a person would exercise significant influence or control under the 4th PSC condition if they are significantly involved in the management and direction of the company, an example being: A person, who is not a member of the board of directors, but regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board. According to the Statutory Guidance, therefore, the CEO in this case may well qualify as a PSC of the CLG. However, that interpretation highlights the issue for the charity in this case that its governance is not working effectively. The charity trustees would be expected to exercise their independent judgment as informed by, but not unduly influenced by, the CEO. In this case, that does not seem to be happening and the charity should review its governance. As elsewhere, there may, of course, be other PSCs, depending upon the circumstances.

11 7 A CHARITABLE TRUST HAS A MINIMUM OF 4 AND MAXIMUM OF 8 TRUSTEES. A GOVERNMENT MINISTER AND A LOCAL AUTHORITY EACH HAS THE POWER UNDER THE TRUST DEED TO APPOINT ONE TRUSTEE; OTHER TRUSTEES ARE APPOINTED BY THE TRUSTEES. THE CHARITABLE TRUST HAS A TRADING COMPANY, WHOSE SHARES ARE HELD BY A NOMINEE FOR THE CHARITY. WHAT GOES IN THE PSC REGISTER OF THE TRADING COMPANY? 3 Trustee Trustee Trustee Trustee Trustee Charitable trust Power to appoint trustees Nominee Trading company As the Nominee holds all the shares in the trading company, in principle it satisfies the 1st PSC condition. However, it is not a PSC because you look through a nominee to the person(s) for whom the shares are held. In this case, looking through takes us to the trust, where the trustees satisfy the 1st PSC condition, holding jointly (on behalf of their charity) all (ie more than 25%) of the shares in the company. As there is a trust involved, a further condition (the 5th condition) has to be considered: Does anyone have the right to exercise, or actually exercises, significant influence or control over the activities of the trust? The Statutory Guidance (paragraph 5.5) provides that a person has the right to exercise significant influence or control over a trust or firm if that person has the right to direct or influence the running of the activities of the trust or firm. It gives as an example of such a person, someone having a Right to appoint or remove any of the trustees or partners, except through application to the courts, or as a result of a breach of fiduciary duty by the trustees. Charity law would not consider that a person with power to appoint only one of many trustees of a charitable trust has the right to direct or influence the running of the activities of that trust, not least because charitable trusts usually act by majority of the trustees, not unanimously. However, the Statutory Guidance makes no distinction and suggests that, for the purposes of the PSC regime, such a person should be treated as a PSC. According to the Statutory Guidance, therefore, the following would be PSCs: the government minister; the local authority (which is treated as a PSC under the legislation); and the trustees themselves. Note that this is only one aspect it is also necessary to work through the other conditions to identify whether there is anyone else holding relevant shares or rights indirectly or otherwise with significant influence or control over the company who should be entered in the PSC register. Some other observations: the 5th condition applies equally to an unincorporated association as it does to a trust, so the same analysis would apply if the charity in the example was a charitable unincorporated association, rather than a trust; another example given in the Statutory Guidance for someone with significant influence or control over a trust or firm (including an unincorporated association) is someone with the right to amend the trust or partnership deed (which, for these purposes, would include the rules of an unincorporated association). April 2016

12 April 2016 INFORMATION Many charities have express powers to amend their constitutions and charity trustees of an unincorporated charity have a power, under s280 Charities Act 2011, to modify its powers or procedures. The Statutory Guidance suggests, therefore, that charity trustees may be PSCs of an underlying company almost by default. Indications from BIS on the point suggests that that is not necessarily the intention, but it is as well to bear it in mind. In practice, the point may be academic, as the charity trustees will often be PSCs for another reason, eg as indirect holders of an underlying company s shares. This publication is not meant as a substitute for advice on particular issues and action should not be taken on the basis of the information in this document alone. This firm is not authorised by the Financial Conduct Authority (the FCA). However, we are included on the register maintained by the FCA ( so that we can offer a limited range of investment services (including insurance mediation activities) because we are authorised and regulated by the Solicitors Regulation Authority (the SRA). We can provide these services if they are an incidental part of the professional services we have been engaged to provide. Mechanisms for complaints and redress if something goes wrong are provided through the SRA and the Legal Ombudsman. Bircham Dyson Bell LLP processes your personal data in connection with the operation and marketing of a legal practice and will occasionally send you information relating to the firm. If you would prefer not to receive this information or would like us to amend your contact details and/or mailing preferences, please notify us by databasecoordinator@bdb-law.co.uk. Bircham Dyson Bell LLP is a member of Lexwork International, an association of independent law firms. Printed on sustainable paper. FIND US ON