PSC register—impact on lenders

New rules on keeping a register of persons with significant control (PSC) came into force on 6 April 2016. Joanna Belmonte, senior associate and professional support lawyer in the banking and finance team at Gateley Plc, considers its potential impact upon lenders.

What impact is the PSC register regime likely to have on existing loan documentation?

A person is a PSC in relation to a company (or LLP) if that person:

  • holds (directly or indirectly) more than 25% of its shares
  • holds more than 25% of the voting rights
  • has the right to appoint/remove a majority of directors or otherwise exercises significant influence or control over the company (or over a trust or firm which itself satisfies one of these requirements)

A legal entity (such as a company or LLP) will also have to be put on a company’s or LLP’s PSC register if it is a relevant legal entity (or RLE). Government guidance outlines what constitutes an RLE but broadly this will be the first legal entity in the company’s ownership chain which meets a PSC condition and which is itself subject to the PSC (or equivalent disclosure) regime.

Where loan documentation is fairly standard, the PSC regime is unlikely to have a significant effect. Government guidance lists ‘excepted roles’ which includes lenders—so being a lender to a company or LLP does not in itself amount to ‘significant influence or control’ and the lender will not be a PSC unless they are doing something out of the ordinary. While most loan documentation contains provisions regulating the business, these are usually to preserve value and shouldn’t amount to exercising significant influence or control over the company.

We suggest that if a lender is reviewing existing documentation anyway, it is worthwhile checking it from a PSC perspective. Where more stringent controls have been put in place (such as in distressed transactions) however, documentation should be reviewed sooner rather than later.

What additional steps do you envisage lenders and their advisers having to take when carrying out due diligence prior to entering into any new loan transactions?

Lenders will want sight of obligors’ PSC registers. Checks will be carried out at Companies House once PSC information is available (for existing companies, this will not be until they file their first confirmation statement after 30 June 2016) but this information need only be updated annually. So lenders should still review the internal PSC registers. Smaller companies in particular may not be up-to-date with the fact that they have an obligation to maintain a register even if they are still ascertaining the PSCs, nor with the statutory wording that has to be used in it.

When taking security from shareholders, lenders should check that the shareholder has provided all required PSC information so the shares are less likely to be subject to restrictions. It is this risk of restrictions being placed on shares that is perhaps the most significant to lenders.

A company may serve notice seeking information about possible PSCs on anyone who it knows, or has reasonable cause to believe knows the identity of a PSC. Failure to respond to one of these notices within one month is a criminal offence, punishable by up to two years imprisonment and/or an unlimited fine. The guidance suggests this could include serving a notice on intermediaries or advisers such as banks. There are very limited exceptions to this requirement and the exceptions do not extend to data protection considerations. So lenders need to ensure that they have mechanisms in place to respond quickly to any PSC information requests they receive and this will include having the information readily available.

Repeated failure to respond to an information request, even if the lender is not a PSC, can result in restrictions being applied to shares by the company. Restrictions can include a block on rights such as voting rights, and a freeze on the sale of those shares. If the lender’s security includes a charge over shares, this could have an impact on the lender’s ability to deal with or quickly enforce its security.

What changes do you expect the PSC register regime will bring to future standard form loan and security documents and other condition precedent documentation?

We don’t expect significant changes. Conditions precedent will probably include providing PSC information and a certified copy of the register, linked with existing requirements to deliver know-your-client documentation.

In security documents, we expect provisions relating to voting rights will be reviewed to ensure they fall within the exceptions (see below). We may see representations and undertakings regarding compliance with the PSC requirements (for companies, these now form part of the Companies Act 2006) in security and loan documentation, and possibly even a specific event of default. Many finance documents will, however, already contain general provisions regarding compliance with laws and other obligations and maintenance of assets that are wide enough to catch this.

Change of control provisions might tighten to reflect the PSC triggers, but it’s not a necessary change and we don’t expect it to take place quickly.

A big concern to lenders will be the ability to enforce security over shares without having to obtain a court order to remove restrictions placed on the shares and so some lenders may ask directors to undertake not to place restrictions on charged shares. This does not sit well with the company’s requirement to take reasonable steps to identify its PSCs so may be resisted, but a requirement for bank consent not to be unreasonably withheld may be acceptable.

What are the risks of the terms of loan documentation leading to the lender being a PSC themselves?

For most loan agreements the risks are slight. Lenders have to avoid having so much involvement in their customer’s business that they could be deemed to be a shadow director and documentation has evolved to reflect this. In distressed transactions, where a lender exercises additional controls and influence, the risk of being a PSC (or RLE) will increase the closer it gets to being deemed to being able to exercise significant influence or control over the company. There is, however, statutory guidance that lists ‘excepted roles’ and these roles include lenders. In the ordinary course, then, it is unlikely standard documentation will trigger the significant influence or control threshold and so it is unlikely the lender will be deemed to be a PSC (or RLE). There are however times when despite being an excepted role, a lender can still exercise or have the right to exercise significant influence or control over a company. The draft guidance uses the example of where the relationship contains elements that exceed the role or relationship as it is usually understood or exercised, or forms one of several opportunities that person has to exercise significant influence or control. So lenders cannot entirely rely upon the ‘excepted role’ status, particularly if involvement or the right to involvement in a customer’s business goes beyond a one off event.

Will security taken by a lender (particularly any share charge) lead to the lender being considered a PSC?

Usually, security over shares will be by way of equitable mortgage/charge so the lender (or its nominee) will not take actual ownership unless it comes to enforce (although some types of share security are arguably indirect ownership). It is the voting rights and control that lenders with security can exercise that are the most likely to result in a lender being deemed to be a PSC (or RLE).

This is because the guidance addresses the issue of share security directly. It gives exceptions for where a person has granted security over his shares. The guidance says that in those circumstances the shareholder will still be deemed to hold the shares if they retain control over the rights with exceptions for where the security holder can exercise voting rights either in the interests of the shareholder or for the purpose of preserving or realising the value of the security.

It is common to allow the shareholder to continue to exercise voting rights unless there is a default, provided the shareholder does not do so in a way that impacts on the value or enforceability of the security. Where this is the case, a lender will not usually be deemed a PSC (or RLE), because of these exceptions in the guidance for preservation or realisation of the value of the security.

If a lender does step in to exercise voting rights, it needs to think about whether it is doing so within the exceptions. If not, it may be a PSC (or RLE) and need to be noted on the company’s (or LLP’s) register. It is the lender’s duty to provide notification within one month, where it knows or reasonably ought to know that it has become a PSC (or RLE) and that it is not on the company’s PSC register and has not received notice from the company. Again, non-compliance is an offence and is punishable by imprisonment or fine.

Interviewed by Alex Heshmaty.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Filed Under: Interviews , Lending

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