This is the second of our blogs on the PSC (persons of significant control) register. The first, shared from our Talking Business blog took a general look at the PSC register requirements. In this and our next post, we will be looking in more detail at the impact of the PSC register requirements on lenders and, in particular:
- whether holding security over shares makes a lender a PSC;
- whether covenants in a loan document make a lender a PSC;
- how a lender should react to PSC information requests and notice requirements; and
- the impact from a KYC and due diligence perspective.
An entity is a PSC in relation to a company if that entity holds (directly or indirectly) more than 25% of a company’s shares, more than 25% of the voting rights in a company, has the right to appoint/remove a majority of directors or otherwise exercises significant influence or control over the company. It doesn’t take a great leap to realise that this could have an impact for banks taking share charges or placing controls on the company’s actions by way of covenants and undertakings in finance documents.
Usually, in England and Wales, where a lender takes security over shares it will not actually own the shares, nor will it place ownership in a nominee company unless it actually comes to enforce the security. Whilst there is an argument that security could be deemed to be indirect ownership of the shares the Government guidance on PSCs actually looks more closely at where the control lies. In particular the extent to which the ability to exercise rights attached to the shares has passed to the lender.
It is usually more common now that a lender allows the shareholder to continue to exercise voting rights unless there is an event of default, provided that the shareholder does not exercise those rights in a way that could significantly impact on the value or enforceability of the lender’s security. Where this is the case, a lender will not, usually be deemed a PSC. This is because the guidance states there is an exception if:
- the shareholder retains control over the rights;
- the shareholder retains control except where the lender exercises rights for the purpose of “preserving or realising the value of the security”; or
- the lender controls the rights but, other than to exercise them to preserve or realise the value of security, must exercise them in the interest of the shareholder.
If, however, a lender does step in to exercise voting rights, it needs to think carefully about whether it is doing so in a way that fits with the above exceptions. If not, it may be deemed to be a PSC and so need to be noted on the company’s PSC register.
Where the lender is not a PSC but holds a share charge, it still needs to ensure that the shareholder complies with their obligations as a PSC otherwise the shares could become “restricted” and the lender may struggle to enforce or preserve its security. We’ll look at restrictions in more detail in our next blog post.
Significant influence or control
As we have mentioned though, a lender could also be deemed to be a PSC if it exercises significant influence or control over the company. The guidance does not provide a full list of what constitutes “significant influence or control” but it does offer some examples. These include where a lender has absolute decision or veto rights over decisions relating to the running of the company.
So what about common covenants in loan agreements which provide, for example, restrictions on changes to the borrower’s business? Surely it’s arguable this could be tantamount to “significant influence and control”? In addition to rights under the loan agreement a lender may also have rights attaching to warrants (i.e. under a shareholder’s agreement to which they are a party). These rights need to be considered in conjunction with any rights under the loan agreement to assess whether they trigger the need for registration as a PSC.
There is comfort for lenders here. Under draft statutory guidance for companies and LLPs, certain roles are “excepted roles” meaning they do not, on their own, amount to significant influence or control. The list of excepted roles includes lenders. So in the ordinary course, a lender with a genuine commercial relationship with its customer will not be deemed to be a PSC under the “significant influence or control” condition.
It should however be noted that there is no hard and fast rule to follow. If, for example, you exceed the role of lender as it is generally understood or exercised or have other opportunities to exercise “significant influence or control” the protection falls away.
Not a PSC
We’ve established that, although the position is still fairly uncertain, in the ordinary course a lender will not be deemed to be a PSC because of its usual commercial relationship with a corporate customer but if it starts to exercise “significant influence or control” or exercises rights beyond the preservation or enforcement of its security or other than in the interests of the shareholder, it could be deemed to be a PSC. The legislation affects existing relationships so it is not sufficient to consider only new security and loan documentation, but also that already in place.
In our next blog, we’ll look more at what it means if a lender is a PSC, how a lender should react to PSC information requests and how PSC registers may impact on KYC.
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