Summary
On 9 December 2020, the Department for Business, Energy and Industrial Strategy (“BEIS”), as part of a package of measures aimed at improving corporate transparency, published a consultation inviting views on the Government’s proposed plans to implement the ban on corporate directors and corporate members (the “2020 Consultation”). In this article, we consider the proposals presented in the 2020 Consultation.
A corporate director or a corporate member of a limited liability partnership
A corporate director or a corporate member of a limited liability partnership is a ‘non-natural’ person (that is, it is a body corporate, such as private limited company, or other legal entity).
A corporate director or corporate member is not uncommon in the context of an asset manager, fund or corporate services provider.
Background
Following a discussion paper on transparency and trust in 2013, the Small Business, Enterprise and Employment Act 2015 (“SBEEA”) was enacted, among other things, to amend the Companies Act 2006 to prohibit the appointment of corporate directors. The Government was of the view that it would be beneficial to bring the UK in line with Germany and the United States of America (where corporate directors are prohibited) and that it would help to improve corporate governance.
Five years later the applicable statutory provisions in SBEEA have yet to be brought into legal effect.
SBEEA provided scope to define exceptions so that companies may, in prescribed circumstances, continue to appoint corporate directors (it being acknowledged by the Government that corporate directors are useful to some parts of the UK economy).
Two consultations were undertaken in 2014 and 2015 in relation to these exceptions.
The consultation in 2014 sought views on the exclusion of certain types of companies, such as those with shares admitted to trade on regulated and prescribed markets. The responses raised concerns that an ever-expanding list of exempt companies would be confusing and difficult to operate.
This led to the consultation in 2015, which sought views on a principles-based exception, namely, that a corporate director could only be appointed if:
- all the directors of the corporate director were natural persons; and
- the jurisdiction in which the corporate director is established has a requirement for certain details of its natural directors to be included on a publicly maintained accessible register.
The responses to the 2015 consultation were generally of the view that a principles-based exception would achieve the right balance, in terms of delivering enhanced transparency whilst preserving the legitimate benefits of corporate appointments (for example, reduced administration costs and access to expert advice and multiple signatories).
The Consultation
In the 2020 Consultation, the Government states that it intends to bring forward regulations which create a principles-based exception, alongside the commencement of the prohibition on corporate directors.
The principles-based exception
In its current form, the Government envisages, as a starting point, that a company can be appointed as a director if:
- all of its directors are natural persons; and
- those natural person directors are, prior to the corporate director appointment, subject to the Companies House identity verification process (which the Government only recently announced it intended to introduce in order to further strengthen corporate governance and transparency in the UK).
Overseas corporate directors
The 2020 Consultation proposes that both UK companies and overseas companies are subject to the same requirements. Under this proposal, companies seeking to appoint overseas corporate directors would be required to provide Companies House with evidence that the overseas entity has only natural persons as its directors and that their identities have been verified.
Compliance and reporting
It is envisaged that the regulations will be structured in a way to safeguard the integrity of the natural person principle, insofar as both the potential appointor company and the appointee company are UK registered companies. The worked example used in the 2020 Consultation states that, “if UK company C appoints a UK company D as director, any attempt by D to appoint a corporate director would be unlawful and, therefore, ineffective.” This safeguard would apply both “up” and “down” the chain of directorships.
As a further safeguard, and to provide for relationships involving non-UK registered companies, Company C will be required to take all reasonable steps to assure itself that Company D has (and continues to have) no corporate directors. Company C will be required to confirm this position in their confirmation statement filed at Companies House annually.
Under the principles set out in the 2020 Consultation, the existing offences in section 167 of the Companies Act 2006 will be applied to the company’s obligation to notify the Registrar of Companies of changes of directorships. This includes any director which ceases to be a director at the end of the transitional period for failing to meet the conditions for remaining as a director.
Extension of the corporate director principles
The 2020 Consultation also seeks views on the potential extension of the corporate director principles to limited liability partnerships and limited partnerships (although it is acknowledged that primary legislation would be required to extent the same to limited partnerships), and how the identity verification would operate in those contexts.
It is proposed that the designated members of a limited liability partnership and the general partner of a limited partnership should be subject to identity verification and should be required to only have natural person directors, who will themselves by required to undertake identity verification.
Next steps
Responses to the 2020 Consultation are due by 3 February 2021, following which the Government will issue a response.
Comment
The 2020 Consultation was launched as part of the Government’s package of measures aimed at improving corporate governance and transparency. Given the previous consultations, the Government has a clear aim of trying to achieve a pragmatic balance between legitimate and smoke-screen use of corporate directors. Whilst it has been five years since SBEEA was introduced, the 2020 Consultation will serve as a timely reminder that the Government are trying to crack down on corporate director veils. Should the Government’s proposals be implemented, it will likely start the ball rolling on a series of other measures designed to promote corporate transparency and to increase Companies House’s role in helping to tackle economic crime by improving the reliability of the information available online about companies. Of course, this assumes that additional funding will be made available for Companies House.
Companies and limited liability partnerships should consider whether:
- it is appropriate to prepare and submit responses to the questions set out in the 2020 Consultation;
- their existing or future corporate directors or corporate members might need to be replaced if the proposals set out in the 2020 Consultation are implemented; and
- the removal of a corporate director or corporate member would have any other consequences, such as the need to amend a company’s articles of association and/or shareholders agreement, or the need to amend a limited liability partnership agreement, or the need to avoid a technical breach of a banking or commercial agreement.
Rosenblatt can help
We have a wealth of experience across diverse sectors and closely collaborate with institutions, large and small companies (both public and private), start-ups and individual entrepreneurs. We advise on all aspects of corporate governance and M&A and private equity transactions.
Contact us
Should you have any questions or wish to discuss or to submit responses to the questions set out in the 2020 Consultation, please contact your usual contact at Rosenblatt.
