Many solicitors enthusiastically embraced the LLP structure and will therefore be among those facing the challenge of recording and publishing who controls their firm.
This is because LLPs, like limited companies, must now maintain a public register of everyone who has significant influence or control over them, or who meets one of the other criteria which the legislation uses as a proxy for significant influence or control (PSC).
Guidance as to how the new rules are to be interpreted was published in January, so LLPs have had relatively little time to make themselves aware of their new obligations and to understand who will need to appear on their PSC register. The short implementation timetable means many LLPs will have failed to comply on 6 April, but any LLP yet to finalise their PSC register should do so as a matter of urgency. LLPs need to be ready to file information from their PSC register at Companies House from 30 June, so those LLPs that fail to get their house in order risk that failure being publicly exposed.
The new register
Any individual who meets at least one of the five conditions set out in the legislation will be caught by the regulations and must appear on the PSC register. Crucially, it is not just members of an LLP who might appear – third parties who satisfy one of the five conditions must also be shown. The legislation provides for a process of investigation and sanctions where an LLP suspects a PSC exists, but is unable to ascertain that person’s details for inclusion on the register.
Companies on the register
The register is primarily intended to capture natural persons, but a UK company which has the characteristics of a PSC is likely to be a Registrable Relevant Legal Entity (RLE) and so will appear on the PSC register. Any entity which has significant influence or control but is not an RLE, such as many foreign companies, cannot appear on the PSC register. In that situation the LLP would need to investigate whether there is anyone within the foreign company who owns a ‘majority stake’ in it and so has an indirect interest in the LLP which requires registration.
Three of the five conditions for PSC status require a person to be registered if they have rights in the LLP which meet or exceed any of three criteria. These criteria are: (i) a right to more than 25% of any surplus assets on a winding up; (ii) more than 25% of the voting rights in the LLP; and (iii) a right to appoint or remove a majority of an LLP’s management. Conditions (i) and (ii) require that a person’s interest is graded in one of three bands: more than 25% but not more than 50%; more than 50% but less than 75%; and 75% or more.
If none of those three conditions are met in relation to a person, that person might still need to appear on the PSC register if they nonetheless have the right to exercise, or actually exercise, significant influence or control over the LLP.
The fifth condition captures those persons whose significant influence or control over an LLP flows from their involvement in a firm (such as a general partnership) or a trust.
The right to share in profits is an important omission from the conditions. A person who receives all of the profits from an LLP would not by that reason alone be registrable as a PSC.
Challenges for LLPs
A challenge for both LLPs and companies is understanding what significant influence or control means. The term is not defined in the statute, but the statutory guidance does explain that control exists where a person can direct the activities of an LLP, whereas significant influence means the person can ensure the LLP generally adopts the activities which they desire. On that basis, ‘significant influence’ is closer to control than might otherwise be assumed.
The guidance, although generally helpful, inevitably fails to cover many common scenarios. For example, LLPs often divide voting rights between classes of member and a management board in ways that make it hard to judge what proportion of voting rights an individual holds.
Similarly, whether a managing partner, for example, exercises (or has the right to exercise) significant influence or control can be a thorny issue to address. Many LLPs will need to undertake a forensic review of their constitutional arrangements to see who should and should not be registered as a PSC and, even then, judgements may need to be made.
When to assess
The PSC register is intended to be updated in real-time. Maintaining the register should be less burdensome than preparing it for the first time. Nonetheless, traps for the unwary exist, so LLPs will need to adopt a robust process for identifying PSCs. Typically the PSC register will need to be updated when members join or leave an LLP and when profits are allocated at the end of year (if profits are used to determine how surplus assets are shared on a winding-up).
The new requirements mean that many LLPs will need to undertake a forensic review of their constitutional arrangements. With a drive towards greater corporate transparency, it would be wishful thinking to expect this to be the last time such an exercise will need to be carried out.
Daniel Sutherland is a partner in Fox Williams’ professional practices group