Business Secretary Vince Cable has published a discussion paper aimed at improving transparency in the ownership and control of companies and strengthening director disqualification laws. The paper, entitled “Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business”, is part of the Government’s drive towards making companies more accountable to shareholders and the public; abating public concern about illegal activities such as terrorist financing, money laundering and tax evasion; and promoting business, investor and consumer confidence in companies and their directors – echoing sentiments expressed by the Prime Minister at the recent G8 Conference.
Although the proposals are only “UK-wide”, it is hoped that others will follow the UK’s lead in making companies more transparent and unimpeachable. The proposals are bold and, if adopted, would transform the UK’s corporate landscape.
The main proposals are as follows:
Proposals on enhanced transparency of ownership and control
- The introduction of a central register recording certain details of companies’ beneficial owners, to be maintained by Companies House (with “beneficial ownership” being widely defined to include any individual with an interest in more than 25% of the shares or voting rights of the company, or who otherwise exercises control over the way that the company is run);
- Details of the beneficial ownership of companies listed on the London Stock Exchange’s Main Market are to be excluded from the central register. This is in large part because Main Market companies are already subjected to stringent disclosure requirements;
- The discussion paper seeks feedback on whether the central register should be made public or whether the information contained on the register should be restricted to certain law enforcement and tax authorities and other regulated entities;
- Simplification of the filing process for annual returns (enabling companies to combine the annual return with the filing of annual accounts);
- The introduction of a prohibition on the creation of bearer shares (i.e. shares which belong to whoever holds the physical share warrant). The government recognises that such shares reduce the transparency of ownership as legal ownership may be transferred without the need to change ownership details on the register of members. In addition to the abolition of future creation, the government proposes to set a time period in which existing bearer shares should be converted to ordinary registered shares;
- There is a proposal to disclose nominee directorships by requiring that any director who has entered into a legal arrangement which permanently hands over all responsibility for the management of a company to another individual, must disclose this fact to Companies House (failure to notify could result in automatic director disqualification), or by making it an offence for directors to divest themselves of their duties as a director by signing such legal documents; and
- Potential blanket prohibition on corporate directors (as corporate directors are often incorporated offshore in jurisdictions with minimal public reporting requirements).
Proposals on increasing trust in UK business
- Consideration of whether directors’ duties should be changed for the banking sector such that the “safety and stability” of banks take priority over the interests of shareholders;
- Consideration of ways to strengthen the regulation of directors in certain sectors by, for example (i) granting appropriate sector regulators the power to ban people from acting as a director in any sector, or (ii) by widening the factors that should be taken into account by the court when considering whether to disqualify a director or when determining the length of the disqualification period (such factors including, for example, material breaches of relevant sector regulation and/or the scale of loss suffered by creditors as a result of the directors’ actions);
- Granting liquidators the statutory right to sell or assign fraudulent and wrongful trading actions (so as to facilitate actions against culpable directors when the liquidator has insufficient funds to pursue such claims, and to encourage claims being made against directors of failed companies);
- Exploration of the possibility of providing the court with a new power to make a compensatory award to creditors (for which the malfeasant director would be liable to make a personal contribution) at the time it makes a director disqualification order;
- Proposed increase in the time limit to bring disqualification proceedings in insolvent company cases, from 2 years to 5 years;
- Offering “bounce back” education (i.e. education or training for directors against whom disqualification action is to be taken with a view to reducing the length of their disqualification period);
- Provide checks for those dealing with limited companies to confirm whether or not officers of those companies are subject to restrictions that would prevent them from running companies based outside the UK;
- Proposals to make regulations that would prevent a person who is subject to foreign restrictions from being a director of a UK company;
- Proposed amendments to current legislation to enable disqualification proceedings to be brought against any individual convicted of a criminal offence in connection with the management of an overseas company, if it appeared to be in the public interest to do so; and
- Proposals to streamline the insolvency process (by, for example, streamlining the way in which insolvency practitioners report possible misconduct by directors after a company has entered a formal insolvency procedure, and providing insolvency investigators greater powers to request relevant information from any person, including the directors they are investigating).
The paper is now open for comment until 16 September 2013, after which the Government will provide its findings and introduce enabling legislation, both primary and secondary.
Whilst the drive for greater openness is to be welcomed, if the proposals enter on to the statute books in anywhere near the form currently envisaged, it is doubtful that they will achieve their desired effect. Indeed, the proposal to introduce a central register of beneficial owners would likely see the birth of yet another unwieldy bureaucratic beast. Only those companies on London Stock Exchange’s Main Market would be exempt from the administrative nightmare. Otherwise, every company and LLP registered in the UK – approximately 2,500,000 entities – would be subjected to the painful task of annually identifying those individuals who exercise control over their company.
The proposals have also drawn criticism from those concerned with policing them. Absent some presence in the UK, all foreign companies (including US companies) and multi-layer structures designed to conceal ownership through offshore entities fall outside the net of the proposals: Without collaboration from the other G8 members (and non-members), there is little or nothing that could be done to ensure compliance by foreign companies with no presence in the UK.
As with all proposals of this kind, the devil will be in the detail of the final form legislation. The government says that it intends to introduce the reforms before the end of the current Parliament. However, by the time the results of the consultation have been considered, Parliament’s attention will most likely be focused on the 2015 General Election. That being the case, it remains to be seen whether these proposals will ever make it on to the statute books.