Corporate Law Update

• A director of a holding company became a de facto director of its subsidiary when he became involved in its day-to-day management
• The Government publishes proposed legislation for its new “failure to prevent economic crime” offence
• The European Parliament has approved reforms to the EU’s regime for disclosing beneficial ownership of EU legal entities and trusts
• The European Commission is consulting on extensions to its sustainable investment taxonomy

Director of holding company was de facto director of subsidiary

The High Court has held that a director of a holding company became a de facto director of its subsidiary, with all the liability of a director, when he became significantly involved in the subsidiary’s affairs.

Aston Risk Management Ltd v Jones and others [2023] EWHC 603 (Ch) concerned a company (the subsidiary) whose business was providing audiology services.

In 2014, the subsidiary and its owners brought in two new investors. The investment structure that was implemented involved the following arrangements.

• A new holding company was incorporated, which acquired all the shares in the subsidiary.
• The holding company had two directors: CJ and LJ.
• The subsidiary had (at all relevant times) two directors: CJ and ML.
• The shareholders of the holding company entered into a shareholders’ agreement regulating how the holding company and the subsidiary would conduct their business. Broadly speaking, the agreement required all decisions to be taken by a majority vote of the holding company’s board, giving each of CJ and LJ an effective veto right over operational matters.

Despite not having been appointed a director of the subsidiary, LJ became increasingly involved in the subsidiary’s business and day-to-day affairs, convening and holding management meetings (usually without ML present and sometimes without CJ present), carrying out negotiations on behalf of the subsidiary and formally instructing legal advisers on behalf of the subsidiary.

In due course, the subsidiary entered administration and claims were brought against its directors for breach of duty. The question arose whether LJ was a “de facto director” of the subsidiary.

The court found that he was. His significant involvement in the subsidiary’s affairs was consistent only with him being part of the subsidiary’s corporate governance structure, if not the key and principal element of it. He had assumed functions of the company that could only properly be discharged by a director. As a result, he was to be treated as a director of the subsidiary.

The judgment highlights the risks and potential liabilities that can arise where a person becomes intimately involved in the management of a company.

You can read more about the case in our separate in-depth piece.

Government publishes details of proposed offence of failure to prevent economic crime

The Government has published a draft amendment to the Economic Crime and Corporate Transparency Bill which would introduce its long-promised new offence of failing to prevent economic crime.

The new offence would be modelled substantially on the existing offence of failure to prevent bribery (in section 7 of the Bribery Act 2010), with which most commercial organisations are by now familiar.

Under the new offence, a corporate body or partnership (a relevant body) would automatically commit a criminal offence if any of its associates commits a “fraud offence” with the intention of benefitting the relevant body or one of the relevant body’s customers.

Employees, agents and subsidiaries would automatically qualify as associates. Anyone else who provides services for or on behalf of the relevant body would also be an associate.

The new offence would apply to relevant bodies both within and outside the UK, but only if the relevant body satisfies certain size thresholds based on its turnover, balance sheet total and number of employees within its financial year in question.

The underlying offences are listed and include various types of statutory fraud and false accounting. The Government would be able to add more offences to the list in due course, including further dishonesty offences and specific money-laundering offences.

A relevant body would have a complete defence if it had reasonable prevention procedures in place designed to prevent its associates from committing a fraud offence (or if it was reasonable for it not to have procedures in place).

The amendment (along with the Bill as a whole) is currently being examined by the House of Lords in Committee stage. Following this, it will proceed to a report stage and a third reading in the Lords, before being passed back to the House of Commons for its final stages.

European Parliament approves reforms to EU’s corporate transparency regime

The European Parliament has published an update on reforms to the European Union’s anti-money laundering, counter-terrorist financing and beneficial ownership regime.

The regime is currently set out in the EU’s Fourth Anti-Money Laundering Directive (4MLD) (as amended by its Fifth Anti-Money Laundering Directive).

Among other things 4MLD requires EU Member States to maintain registers of the beneficial owners of legal entities, trusts and trust-like arrangements established within the EU.

Information on beneficial ownership registers must be provided to relevant authorities on demand.

Information on trusts must also be available to members of the general public who can demonstrate a “legitimate interest” in obtaining the information, which (broadly speaking) means an interest linked to combatting money laundering or terrorist financing.

Previously, information on beneficial owners of legal entities had to be available to the general public without condition. However, following a recent decision of the Court of Justice of the European Union, in which it held that an unfettered right of access to beneficial ownership information breached fundamental principles of EU law, members of the public must now show a “legitimate interest” to obtain information on legal entities. See our previous in-depth piece for more detail.

In 2021, the EU announced a new package of proposals designed to replace 4MLD. These include:

• a new “single rulebook” regulation, which would apply automatically throughout the EU and would set out who qualifies as a “beneficial owner” and what information they must provide; and
• a new EU Directive (dubbed “6MLD”), which would require EU Member States to maintain beneficial ownership registers (much as they already do) and make information available to relevant authorities, entities that carry out customer due diligence and the general public.

The European Parliament has now approved the new package, but with some modifications. In relation to corporate transparency, the following are worth noting.

• The Parliament has decided to lower the threshold for beneficial ownership to more than 15% in most cases, or more than 5% for entities operating in extractive industries or which are exposed to a higher risk of money laundering or terrorist financing.
• Following the CJEU’s decision, beneficial ownership information will be available to the general public if the applicant shows a “legitimate interest” in the information. This would include journalists and the media, civil society organisations and higher education institutions. Access would be available for at least two and a half years and automatically renewed unless it is abused.

The Parliament will now enter into negotiations with the European Commission on the revised wording of the new package.

The reforms will not directly impact the UK’s own transparency regimes, namely:

• the existing persons with significant control (PSC) regime, Register of Overseas Entities and Trust Registration Service (TRS); and
• a proposed new disclosure regime relating to ownership and control of land set out in the Levelling-up and Regeneration Bill (which is currently making its way through Parliament).

Indeed, the UK Government has recently reaffirmed its position to the general public’s unfettered right of access to beneficial ownership information on UK legal entities and on non-UK legal entities that hold registrable real estate in the UK. (See our previous Corporate Law Update for more information.)

However, it will be relevant to companies, or any groups of companies with subsidiaries, that operate within the EU and is indicative of the general direction of travel in this area.

EU consults on sustainable investment taxonomy regulations

The European Commission is consulting on two new delegated acts that would supplement its existing sustainable investment taxonomy regime in the EU Taxonomy Regulation.

The Taxonomy Regulation establishes a common taxonomy for identifying whether activities are “environmentally sustainable” when deciding the level of environmental sustainability of a particular investment. It applies to certain financial market participants, issuers and public interest entities within the European Union.

The proposed two new Delegated Acts would incorporate additional taxonomy criteria for activities that contribute to the sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention, control or protection and restoration of biodiversity and ecosystems, low-carbon transport and certain other activities.

The Commission has asked for responses by 3 May 2023.