• How US Persons Can Be Made Public by the UK Register Estate Planning
  • August 9, 2017 | Authors: William J. Kambas; Ben Simpson; Agnes Macduff
  • Law Firms: Withers LLP - London Office; Withers Bergman LLP - New Haven Office
  • US fund managers, entrepreneurs, members of a family's consolidated investment partnership, and many other US persons are often surprised by the long reach of the UK's regime for making public the identities of those who manage or control certain UK entities. Generally speaking, this could apply to any person with significant influence or control over UK companies or UK limited liability partnerships.

    Under a program introduced last year, called the UK "people with significant control" (PSC) regime, any person with significant influence or control over UK companies or UK limited liability partnerships (and also some other entities) must report certain personal information (such as name, address, and relationship to the entity, as described further below) to the entity's PSC register. This reporting requirement is wider reaching than many other disclosure regimes. The UK's PSC regime is designed to make the ownership and control of UK companies and other UK entities more transparent.

    Reporting to the PSC register has been an obligation since 4/6/2016, and was introduced in the UK's Small Business, Enterprise and Employment Act 2015 (SBEEA), which inserted new provisions into the UK's Companies Act 2006.

    Who is a PSC?

    There are two types of PSC under the UK PSC regime:

    1. Those with direct control or influence.
    2. Those with indirect control or influence.

    Direct control or influence. A person may be a PSC if he or she has the right to exercise, or actually exercises, significant influence or control over a UK company, UK limited liability partnership (UK LLP), or other UK legal entity directly.1 A person who satisfies one or more of the following five specified conditions in respect of a UK company or UK LLP is a PSC:

    1. Direct or indirect holding of more than 25% of a company's shares (or, in the case of a UK LLP, direct or indirect holding of rights over more than 25% of the surplus assets on a winding up).
    2. Direct or indirect holding of more than 25% of the voting rights.
    3. Direct or indirect holding of the right to appoint or remove a majority of a company's directors or, in the case of a UK LLP, of those involved in management.
    4. Otherwise having the right to exercise, or actually exercising, significant influence or control over the company or UK LLP.
    5. Being a person with the right to exercise, or actually exercising, significant influence or control over a trust or firm, where the trustees of the trust or the members of the firm (which is not, under the law by which it is governed, a legal person) meet any of the other specified conditions (in their capacity as such), or would do so if they were individuals.

    This final condition catches trusts and may result in not only individual trustees but some settlors, protectors, enforcers, and beneficiaries of trusts being PSCs.

    The specified conditions must be considered in turn and, to the extent that a PSC falls within either of the first two conditions, the relevant PSC register entry must include the level of his or her shareholding/entitlement to surplus assets or voting rights (i.e., greater than 25% but no more than 50%; more than 50% but less than 75%; and 75% or more).

    If a PSC satisfies any of the first three specified conditions, there is no need to consider separately whether he or she would also be caught by the fourth. It is important to note that a person may be a PSC by virtue of an indirect interest held through one or more legal entities as a result of the application of the "majority stake" test (discussed below).

    Indirect control or influence. The PSC regime requires one to consider indirect significant influence or control. A person may be identified as a PSC (as a result of an indirect interest) because either individually or together with other persons, the person involved holds a majority stake in a legal entity (whether incorporated in the UK or elsewhere). A person may also be identified (as a result of an indirect interest) because the trustees of a trust or the members of a firm hold a majority stake in a legal entity and the person has the right to exercise, or actually exercises, significant influence or control over that trust or firm. A majority stake can be held in any of the following circumstances:

    1. The person holds a majority of the voting rights in a legal entity.
    2. The person is a member of the legal entity and has the right to appoint or remove a majority of its board of directors.
    3. The person is a member of the legal entity and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights of that legal entity.
    4. The person has the right to exercise, or actually exercises, dominant influence or control over the legal entity.

    In some situations, it will be easy to evaluate whether a person (including the trustees of a trust or the members of a firm) has a majority stake. However, consideration also needs to be given as to whether two or more persons may be deemed to hold a majority stake by virtue of a joint arrangement or a joint interest. A person may be treated as being a party to a joint arrangement notwithstanding that no "arrangement" exists that has any effect in law. This is relevant to both direct and indirect significant influence or control.

    A joint arrangement is defined as an arrangement between the holders of shares (or rights) that they will exercise all or substantially all the rights conferred by the respective shares (or rights) jointly in a way that is predetermined by the arrangement. The definition of arrangement goes beyond legally binding arrangements and includes "any scheme, agreement, or understanding, whether or not it is legally enforceable, and any convention, custom, or practice of any kind." It is, therefore, wide-ranging in practice.

    Relevance to US persons

    A US person who meets any of the five specified conditions in respect of a UK company or UK LLP (as listed above) would be a PSC and would need to be disclosed as such on the UK entity's PSC register. By way of example, PSC disclosure may be required of:

    1. An entrepreneur, fund manager, family member, or other US person who is a settlor, protector, appointor, or beneficiary of a trust, the trustees of which meet one of the five specified conditions, and whose ongoing advice to the trustees is considered to be equivalent to an instruction.
    2. An entrepreneur, fund manager, family member, or other US person who has the right to appoint or remove the trustees of a trust where the trustees of that trust meet one of the five specified conditions.
    3. An entrepreneur, fund manager, family member, or other US person who has the right to revoke a trust where the trustees of that trust meet one of the five specified conditions.
    4. An entrepreneur, fund manager, family member, or other US person who has the right to direct the distribution of trust funds or assets in respect of a trust where the trustees meet one of the five specified conditions.

    When applying these rules, the following observations are relevant:

    Where the above-mentioned rights have been given to another person, the PSC regime may attribute them to the entrepreneur, fund manager, family member, or other US person if the other person exercises the rights in accordance with the entrepreneur's, fund manager's, family member's, or other US person's wishes.

    Entrepreneurs, fund managers, family members, or other US persons may find that tax authorities treat the trustees of a trust or the governing body of other fiduciary vehicles as having control, while the PSC regime attributes control to the entrepreneur, fund manager, individual family members, or other US person. This could cause tax authorities to put ownership structures under renewed scrutiny.

    Disclosures for other purposes, e.g., disclosure of interests in listed companies, may trigger disclosure of the trustees of a trust as indirect owners but would not usually trigger the disclosure of named individual entrepreneurs, fund managers, or family members as indirect owners. In contrast, the PSC regime may attribute control to the individuals behind a trust or other fiduciary vehicle. UK listed companies are mostly exempt from the PSC regime although AIM companies and Nex Exchange Growth Market companies may cease to be exempt from 6/26/2017.

    For instance, a beneficiary, settlor, protector, or appointor of a trust might be disclosed as an indirect holder of shares in a UK private company under the PSC regime if the trustees tended to act in accordance with their suggestions in a way which is suggestive of "instruction." There is arguably no need to show that the trustees have acted in breach of fiduciary duty for this to happen.

    Could managers of US LLCs be PSCs?

    On the assumption that a typical US LLC will be treated as an association taxable as a corporation for UK tax purposes (as so defined under the SBEEA), it is then necessary to examine who has the right to vote at general meetings of the LLC on all or substantially all matters in order to determine whether a person satisfies the majority stake test in respect of that LLC. The LLC's operating agreement will need to be carefully examined to evaluate the division of powers between the members and the managers and to ascertain whether the members or the managers will be treated as holding a majority of the voting rights in the LLC. Ordinarily, one would expect the members and not the managers to have a majority stake for the purposes of the PSC regime but this may not always be the case.

    Advisory boards or committees to an LLC

    An advisory board or committee to an LLC may satisfy the majority stake test in relation to that LLC by virtue of actually exercising dominant influence over the LLC even if it does not have the legal levers to give it the right to exercise dominant influence. An advisory board or committee may be treated as exercising dominant influence where the operating and financial policies of the LLC are set in accordance with the wishes of the advisory board or committee and for their benefit, regardless of whether the wishes are explicit. The members of such a board or committee might all then be PSCs of the underlying UK entity if they acted pursuant to a joint arrangement.

    How would a limited partnership be treated under the PSC regime?

    The British Venture Capital Association (BVCA), which represents the private equity industry in the UK, lobbied to ensure that limited partners in English limited partnerships were not treated as PSCs. The reason for the BVCA's concern was that, under English law, the rights of an English limited partnership are treated as being held jointly (as tenants in common) by all of the partners (i.e., both the limited partners and the general partner). On this basis, without a specific exemption being introduced to the PSC regime, the risk was that the indirect controllers of limited partners in UK limited partnerships would end up on the PSC register.

    Amendments were therefore made to the SBEEA to exempt limited partners in limited partnerships from disclosure. Limited partners in a "foreign limited partnership" will also be exempted from disclosure if the foreign limited partnership "consists of at least one person who has no, or limited, liability for the debts and obligations of the arrangement and that person does not take part in the management of the arrangement's business."

    The concept of "take part in the management" may need to be analysed under English law. A limited partnership which does not operate in accordance with its constitution and whereby limited partners do, in practice, take part in the management of the limited partnership's business (which should be unlikely given that in such a situation the limited partners would likely lose their limited partner status) would be at risk of disclosure on the UK's PSC register for underlying UK legal entities. As with an LLC, an advisory board or committee to a limited partnership may satisfy the majority stake test by virtue of actually exercising dominant influence even if it does not have the legal levers to give it the right to exercise dominant influence. An advisory board or committee may be treated as exercising dominant influence where the operating and financial policies of the limited partnership are set in accordance with the wishes of the advisory board or committee and for their benefit, whether or not the wishes are explicit.

    Treatment of foundations

    When looking at a foundation, consideration would need to be given to whether a guardian (person with oversight, much like a trust protector) or settlor effectively controls the exercise of rights held by the members of the foundation council and whether those rights are equivalent to voting rights held by shareholders or members in a company.

    If so, this may attribute the guardian or settlor with a majority stake in the foundation for the purposes of the PSC regime. Alternatively, some or all of the members of the foundation council may be party to a joint arrangement and may be PSCs of an underlying UK entity given that there is no separation of powers in a foundation such that members of the foundation council control rights equivalent to members at a general meeting of a company. Any by-laws relating to the foundation should be examined, as well as the foundation deed and any supplementary foundation deed.

    Other considerations for US investors

    US wealth planning structures often include chains of US LLCs and limited partnerships. The US rules for these do not have corresponding governmental disclosure requirements, although registered agents or agents for the service of process are typically identified and recorded at the secretary of state's office upon formation of LLCs and other business entities.

    Similarly, disclosure of those with authority is increasingly required by banks and other financial institutions for the purposes of their banking "know your customer" obligations. US federal tax filings will also require disclosure of a "tax matters partner" or a "responsible person" when filing income tax returns or applying for a tax identification number.

    As mentioned above, the PSC regime will track who has the voting control of LLCs and limited partnerships and may result in disclosure up to the individual entrepreneur, fund manager, or family member. This may be the case even if their only form of participation is membership of an advisory committee or board given that a pattern of consistently voting in the same way might be a joint arrangement which might then result in all the members of the committee or board or those who together exercise a majority of the votes being PSCs of an underlying UK entity.

    The long-standing "s793 regime" in the UK should also not be forgotten (when there is a direct or indirect holding in an English plc) because under that regime when a trust is attributed with an interest in a UK plc, all the beneficiaries (except minors) have to be disclosed.