In April 2016 the UK government introduced the requirement that UK companies and LLPs must maintain a register of “people with significant control” as part of a move to tackle a perceived lack of transparency over who owns and controls UK entities. And for some fund managers, with both UK portfolio companies and UK-based management entities, putting together these PSC registers required a significant amount of work. Unfortunately further changes to the PSC regime came into force on 26 June 2017 as part of the implementation of the Fourth Money Laundering Directive (MLD4), although these changes were anticipated at the time the requirement for PSC registers was introduced.
The key changes affecting fund managers are:
- from 24 July 2017, Scottish Limited Partnerships (LPs) will need to file PSC information at Companies House, and
- from 26 June 2017, any changes in PSC information (for any entity) must be made to the register within 14 days and a form must be submitted to Companies House as notification of such change within another 14 days.
Scottish LPs are widely used in the funds industry, whether as fund of funds vehicles, general partners of fund partnerships (GPLPs), or vehicles to pool and stream carried interest and co-investment contributions. When the requirement to have a PSC register arrived in 2016, Scottish LPs were not required to maintain a register, and therefore could not be registered on any other entity’s register as a so-called “Relevant Legal Entity” (RLE).
Following the implementation of MLD4, this is no longer the case, and Scottish LPs are treated in much the same way as UK companies and LLPs for PSC purposes, the key difference being they will not be required to maintain a formal register but will need to file PSC information at Companies House.
The primary effect of this is that all existing Scottish LPs will need to identify individuals with direct or indirect control and file details of these people at Companies House. Newly formed Scottish LPs will need to provide these details on registration. However, a secondary result is that for fund managers who use Scottish LPs as GPLPs, the details they supplied to their UK portfolio companies last year will now be out of date. Many UK portfolio companies will have looked through any non-UK holding companies, English limited partnership fund vehicles and GPLPs, and registered the general partner of the GPLP, (assuming it is a UK company or LLP), and usually the fund manager as well (often as a shareholder in the ultimate GP), as the RLE. If this is the case, they will now have to change their registers to list the GPLPs as the RLE.
In terms of who the PSCs are in relation to Scottish LPs it is most likely that this will consist of the general partner and the investment manager, if appointed. It may also need to consist of any limited partner that holds an interest greater than 25%, and if the limited partner is not capable of being registered (i.e., because they are not an individual or a UK entity subject to the PSC rules) then the fund manager will need to make enquiries as to who sits behind that limited partner. The PSC legislation in 2016 was clear that limited partners in UK limited partnerships are not registrable on the registers of UK companies and LLPs sitting underneath the limited partnership (unless they are taking part in the management of the partnership) but this does not apply to the PSC information of Scottish LPs themselves. Therefore, if Scottish LPs are used as carried interest and co-investment vehicles, the limited partners in these vehicles may need to be registered if they hold an interest greater than 25%.
In addition, as MLD4 is an EU directive, fund managers that invest in (or through) companies in other European jurisdictions are likely to start receiving requests from their European portfolio companies, who will have to comply with similar transparency obligations. However, as MLD4 provides considerable flexibility in its interpretation, there may be significant variation across the EU in how these new requirements are implemented. This would mean that the legal analysis as to exactly who needs to be registered may vary from jurisdiction to jurisdiction, creating further administrative headaches for legal and compliance departments of fund managers.