Corporate Law Update

• The UK Government introduces draft legislation to enhance corporate transparency in the UK
• The FRC Lab publishes a report on the quality and usability of structured digital reporting by companies
• ESMA publishes updated Q&A on the EU Market Abuse Regulation
• The CLLS and the Law Society respond to the Takeover Panel’s consultation on the definition of “acting in concert”
• AQSE publishes details of changes to the rules for admission to the AQSE Growth Market

Government introduces second Economic Crime Bill into Parliament

As we reported last week, the Government has introduced draft new legislation, in the form of the Economic Crime and Corporate Transparency Bill, into Parliament.

The Bill proposes to meet various Government objectives, including the following.

• Delivering reforms to the role and powers of Companies House, which follows the Government’s white paper on reforming the register. (For more information on that white paper, see our previous Corporate Law Update.)
• Introducing reforms to limited partnership law to prevent the abuse of limited partnerships.
• Creating additional powers to seize and recover suspected criminal cryptoassets and introducing modifications to the UK’s existing anti-money laundering framework.

The Bill is at an early stage and is scheduled for a second reading in the House of Commons on 13 October 2022. Below, we set out in greater detail some of the principal changes the Bill would make to the UK’s companies and limited partnerships frameworks and the UK’s register of overseas entities.

The role of Companies House

The new Bill would reframe the role of the three Registrars of Companies (who operate through Companies House) from one of record-keeper to, essentially, one of gatekeeper. In doing so, the Bill would create four statutory “objectives” for the Registrars.

• To ensure that anyone who is required to deliver a document to the Registrars does so.
• To ensure that documents delivered to the Registrars are complete and accurate.
• To minimise the risk of records kept by the Registrars misleading the public.
• To minimise the extent to which companies and others carry out or facilitate unlawful activities.

To this end, the Bill introduces a number of transparency provisions designed to enhance or introduce new disclosure requirements.

Identity verification

This was one of the Government’s principal commitments in its white paper and is one of the most substantial new requirements that would be introduced by the Bill. The Bill would introduce a requirement for directors and persons with significant control (PSCs) to be identity-verified.

• An individual would be prohibited from acting as a director of a UK company unless their identity is verified. However, any acts the individual undertakes as a director would not be affected.
• Persons who wish to form a new company would need to ensure the identity of each proposed director is verified first.
• The Government would also be able to require existing companies to verify the identity of their original directors on incorporation by the time their annual next confirmation statement is due.
• Persons who wish to form a new company would have the option to verify the identity of any PSCs, but this would not be compulsory. This reflects the fact that a company will not always have power, in practice, to compel its PSC(s) to act.
• PSCs would need to remain verified. Again, a company would have the option to verify the identity of a person who becomes a PSC, but this would not be compulsory. The Bill would place the obligation to verify on PSCs themselves, rather than companies, again recognising that companies may not be able to ensure verification takes place.
• If a company has not verified its PSCs, the Government would have the power to order the PSC to arrange for their identity to be verified.
• If the person controlling a company is a legal entity, it will also need to appoint an individual as its “registered officer” and ensure their identity is verified.
• Finally, the Bill contains provisions requiring persons who deliver documents to Companies House to have their identity verified.

Identity verification would work in one of two ways:

• The individual’s identity would be verified using a process provided by Companies House.
• The individual’s identity would be verified by an “authorised corporate service provider”. This is a person who is required to carry out anti-money laundering checks under the UK’s money-laundering regulations and who has registered at Companies House. The Bill also gives the Government power to allow foreign corporate service providers to register.

Company and business names

The Bill would introduce a range of new measures to prevent the misuse or abuse of registered company names in the UK. Measures include the following.

• Restrictions on company names. Companies would be prohibited from adopting a name that is intended to facilitate a dishonesty or deception offence, which contains computer code or which suggests that the company is connected with a foreign government or international organisation.
• Business names. It would also be illegal to carry on business under a name that suggests a connection with a foreign government or international organisation.
• Challenging a company’s name. The Bill would significantly increase the scope of the existing regime under which a person can challenge a registered company name on the basis it is confusing with a name in which they have generated goodwill. The regime would apply to names used anywhere in the world, rather than simply in the UK.
• Power to change a company’s name. The Government would be able to order a company to change its name if the name contravened any restrictions when it was registered, or if the Government had grounds at the time for objecting to the name but did not do so. This would effectively shift the burden of ensuring a name is compliant onto the company or its incorporators.
• Anti-avoidance. Finally, the Bill would introduce new anti-avoidance provisions to prevent someone who has been ordered to change a company’s name from registering a new company with the same name or carrying on business under the same name.

Directors

• Sanctioned directors. A person would not be able to act as a director of a UK company, or form or manage a UK company, if they are subject to UK sanctions (i.e. they are a “designated person”). There would be a limited exception if the person could not reasonably be expected to know they are “designated” but, given that the UK maintains a publicly accessible list of sanctioned individuals, it seems unlikely that this exception would apply often.
• Disqualified directors. A person would cease to be a director automatically on becoming disqualified from acting as a director. This differs from the current regime, where a director who continues to act despite disqualification commits a criminal offence, but under which the disqualification order does not automatically terminate the directorship.

Financial reporting

• Exemption from audit. A company that is entitled to an exemption from its annual accounts being audited would need, in its balance sheet, to identify which exemption applies and confirm that the company qualifies for that exemption.
• Micro-entities and small companies. The regime for small company accounts and reports would be slightly simplified. In future, all small companies would be required to deliver their directors’ report to Companies House, and all micro-entities would be able (but not obliged) to do so.
• Abridged accounts. The regime for filing abridged accounts would be abolished.

Other changes affecting companies

• Forming a new company. Persons who form a new company would need to confirm that they are forming the company for lawful purposes. They would also need to confirm that neither they nor the company’s proposed directors or PSCs are disqualified in the UK from acting as a company director.
• Company addresses. Companies would be required to ensure their registered office is always located at an “appropriate address”. Broadly speaking, this means somewhere a person can expect to deliver documents to the company so that they come to the attention of someone acting on the company’s behalf, and where the company can acknowledge delivery.
• Company email addresses. For the first time, companies would be required to maintain a registered statutory email address. The email address would be used only for the Government or Companies House to communicate with the company and would not be visible on the public register.
• Shareholder information. The Bill would also abolish the ability for a company to keep its register of members centrally at Companies House. (In practice, very few companies actually do this.) Companies would also be required, as a one-off, to include full details of all their members in the next annual confirmation statement they file after the Bill comes into effect.
• Other statutory registers. Companies would no longer keep internal registers of their directors, directors’ residential addresses or secretaries, nor an internal PSC register. Instead, all of this information would be kept centrally at Companies House.
• Power to reject documents. Companies House would gain a new power to reject documents delivered to it if they appear inconsistent with other information on the register and to remove information from the register. This has long been a persistent bugbear for companies and advisers, as the Registrar’s powers to correct the register are currently patchy and inadequate.
• Financial penalties. Companies House would gain new powers to impose financial penalties – effectively, civil fines – for contravention of a range of obligations in the Companies Act 2006.

Limited partnerships

The Bill also contains reforms to the UK’s limited partnerships regime, again designed to ensure the integrity of information at Companies House and to prevent limited partnerships from being abused for criminal purposes. Limited partnerships (not to be confused with limited liability partnerships, or LLPs) are a common vehicle of choice for institutional private fund structures.

The Bill would make the following principal changes.

• Registration. The Bill appears to contemplate that limited partnerships can be formed and take effect before they are registered at Companies House. (At present, it is unclear whether a limited partnership can exist before it has been registered.)
• Registered office. A limited partnership would be required to keep a formal registered office where documents can be served on it (rather than, as at present, simply stating its “principal place of business”). As with companies, the registered office would need to be sited at an “appropriate address” (see above).
• Registered email address. Similarly, and as for companies, a limited partnership would be required to register an email address with Companies House for the purpose of receiving communications from Companies House or the Government.
• Restrictions on general partners. The Bill would restrict who can act as a general partner of a limited partnership. A person who has been disqualified from acting as a director of a UK company will not be able to act as a general partner. A general partner that is a legal entity would be required to appoint an individual as its “registered officer” and to provide a “named contact” for each of its officers that is a legal entity.
• Notification of general partners. If a person becomes a general partner of a limited partnership, the general partners would need to notify Companies House. Until this is done, the new general partner would be prohibited from taking part in the management of the limited partnership.
• Service addresses. Companies House would gain the power to forcibly change a general partner’s address for serving documents if it has sent communications to that address and they have gone unanswered for a period of time.
• Confirmation statement. Limited partnerships would be required to deliver an annual confirmation statement to Companies House, much as companies are required to do at present.
• Financial statements. The Bill would allow the Government to prescribe circumstances in which HM Revenue & Customs (HMRC) can require a limited partnership to prepare audited accounts and deliver them to HMRC. Currently, a limited partnership is required to prepare accounts only if all its general partners are limited companies or are unlimited companies all of whose members are limited companies. In other words, depending on how this power is used, it could require a limited partnership whose general partners are individuals or limited liability partnerships (LLPs) to prepare accounts, although they would not need to file them at Companies House.
• Dissolution. Limited partnerships would no longer be dissolved on the bankruptcy of a limited partner, but they would dissolve automatically if they cease to have at least one general partner and at least one limited partner. If a limited partnership dissolves with no general partners, the limited partners would be required to appoint a third party (or ask the court to do so) to wind its affairs up.
• Revival. The Bill would introduce new powers to “revive” a limited partnership in certain circumstances in much the same way as restoring a dissolved company.
• Deregistration. Finally, the Bill would introduce a new ability for the partners of a limited partnership to “deregister” the limited partnership. In essence, this would convert the partnership into an ordinary partnership and so is likely to be useful in limited circumstances.
• Delivery of documents. As with companies, the Bill would require a person who intends to deliver documents to Companies House on behalf of a limited partnership to be registered as an authorised corporate service provider (see above). This was one of the Government’s proposals in its white paper to combat economic crime and would require most filings to be made by regulated persons.
• Further powers. Finally, the Bill would give the Government a power to apply to limited partnerships any provisions of existing UK law that apply to companies or other types of corporation. This is a very broad power and it is difficult to assess the extent of the uses to which it could be put.

The Register of Overseas Entities

The Bill would also make some changes to the Economic Crime (Transparency and Enforcement) Act 2022, which (among other things) created the new Register of Overseas Entities (or “ROE”). That register contains (or will, when complete, contain) details of the beneficial owners of non-UK entities that hold certain types of land in the UK. The changes would include the following.

• Penalties. The Bill would clarify the penalties for providing misleading information.
• Disclosure of information on trusts. Currently, under the ROE regime, Companies House may disclose information provided to it on any registrable trusts only to HMRC.
  
  The Bill would amend this to allow Companies House to disclose this information to “any person for purposes connected with the exercise of any of the Registrar’s functions”, as well as to any public authority in connection with the authority exercising its functions. This potentially expands the scope for disclosing trust information submitted to Companies House quite dramatically.

• Changes to the register. The Bill would also give the Government a broad power to make changes to the ROE similar to any changes the Bill would make to the register of companies. The intention of this is presumably to ensure that all registers kept by Companies House remain broadly similar and aligned, but, as with all these delegated powers, the scope of its potential use is still unclear.

FRC publishes report on structured digital reporting

The Financial Reporting Council (FRC) Lab has published a new report on improving the quality and usability of structured digital reporting.

Under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR), issuers with securities admitted to a UK regulated market are required to prepare and file their annual financial report in electronic format, marked up in iXBRL using the taxonomy set out in the United Kingdom Single Electronic Reporting Format (UKSEF).

The report notes that structured digital reporting has improved, with companies ironing out issues by using the FCA’s test facility, improving the design of reports and removing “concealed tags”, filing early and publishing their report on their website.

The Lab also notes areas for potential improvement. These include the naming and structure of the file(s) sent to the National Storage Mechanism (NSM), deeper management and board engagement, providing a validated report with an inline viewer, and more refined use of tags and anchors.

ESMA publishes two updates to its Market Abuse Regulation Q&A

The European Securities and Markets Authority (ESMA) has published an updated Q&A document on the European Union (EU) Market Abuse Regulation (EU MAR), which sets out the EU’s market abuse regime. ESMA’s Q&A give guidance to issuers on how to comply with the EU’s market abuse regime.

Following Brexit, EU MAR no longer applies in the United Kingdom, although a modified version of it (so-called UK MAR) continues to apply in the UK and is substantially similar. ESMA’s Q&A do not form part of UK law and the UK Government has, in recent months, indicated a strong intention to move away from the EU’s interpretation of law that originates in EU law.

Nonetheless, the new Q&A will be useful to issuers with securities admitted to a market within the European Economic Area (EEA), as well as to UK issuers that are looking to understand their obligations under UK MAR.

The new Q&A cover when an issuer is required to disclose inside information as part of preparing its financial statements or first financial guidance.

CLLS and Law Society respond to Takeover Panel consultation on “acting in concert”

A joint working party of the City of London Law Society (CLLS) and the Law Society of England and Wales Company Law Committees (the JWP) has published a response to the Takeover Panel’s recent consultation on amendments to the definition of “acting in concert”.

In May 2022, the Takeover Panel published a consultation on proposed changes to the situations in which parties are “presumed” to be acting in concert in connection with an offer to which the Takeover Code (the Code) applies. For more information, see our previous Corporate Law Update.

The JWP broadly supports the proposed changes, although it expresses some concerns around changes in the approach towards funds and consortia of funds. The JWP also recommends that the Panel provide guidance on how it would apply the new presumptions in practice, particularly in relation to joint ventures and private equity portfolio companies and the concepts of “investment manager” and “investment adviser”.

The JWP also asks the Panel to consider its proposed presumption that an investor in a limited partnership (LP) or an investment fund will be acting in concert with the LP or fund. As we noted in our previous Corporate Law Update, this presumption could have a significant impact on public-to-private (P2P) transactions backed by significant investors.

The JWP notes that, unlike shareholders (even holders of non-voting shares), who may negotiate contractual control or consent rights with an investee company, limited partners are required, by law, to remain passive and uninvolved in the business of a fund in which they have invested. It recommends that the Panel be prepared to rebut this presumption in the context of passive fund investors.

The consultation closed on 23 September 2022. We await the Panel’s response statement setting out how it intends to proceed.

AQSE sets out next steps following consultation on Access and Apex admission rules

The Aquis Stock Exchange (AQSE) has published a paper setting out changes it intends to make to the admission rules for the Access and Apex segments of the AQSE Growth Market.

The changes follow a consultation which the AQSE published in August 2022.

The paper confirms the following changes in due course.

• A new standardised “additional information” section of admission documents for non-complex issuers.
• Removing the requirement to publish a growth prospectus when applying for the Apex segment.
• Changes to the eligibility criteria for admission to the Access segment, including raising the minimum market capitalisation from £700,000 to £2m.

The AQSE has not, however, decided to proceed with its proposal to require applicants to the Access segment to adopt either the QCA Corporate Governance Code or the UK Corporate Governance Code. Instead, it will deal with corporate governance through separate guidance.