contents Newsletter | February 19 01 NEW GROUNDSURE REPORTS Introducing the new energy and transportation and CON29M reports from Groundsure. 02 04 ACRA FORUM - JANUARY 2019 ACRA Director, Andrew Davis, provides the latest news from the ACRA forum. 06 COMPANIES HOUSE UPDATES Changes at Companies House from checks to changes in advance of Brexit. 10 ENTREPRENEURS RELIEF - AN UPDATE The UK government recently published technical notes for businesses should the UK leave the EU without a deal next year.
DEADLOCK AND SHAREHOLDER EXIT Commonly pursued exit strategies and exit mechanisms for private limited companies. Special clauses every investor should know about.
1 ACRA FORUM - JANUARY 2019 recently attended the annual forum arranged by the Association of Company Registration Agents (ACRA), our industry body. Stanley Davis Group (or Stanley Davis Company Services as it was back then) was a founder member of ACRA when it was formed in 1975. I now continue in office as a Director and Treasurer of the organisation, and am heavily involved with the other members of the Board in fighting the industry’s corner on behalf of all the members in these difficult regulatory times.
The Registrar, Louise Smyth, then spoke about her new role at Companies House, how Companies House is now performing and about some new initiatives and projects that are taking place there (View our next article for more information).
We are being led to believe that new regulations concerning the anti-money laundering (AML) regime at Companies House are about to be announced, but Louise was unfortunately not in a position to make that announcement just yet. We will of course keep all of our clients updated.
HMRC, who talked about the risk-based approach for TCSPs (Trust and Company Service Providers) and what we should all be doing to comply with the Money Laundering Regulations 2017; 'The feeling is that together as an industry body we are stronger and can combat many of the things standing in our way more effectively and collectively rather than on our own' The Forum is always very interesting and it was good to meet with many of our competitors and discuss the matters that most concern us as an industry. Times for all registration agents and company service providers are tougher than they have ever been, in particular with the AML regulations taking up so much of our time and resources.
The feeling is that together as an industry body we are stronger and can combat many of the things standing in our way more effectively and collectively rather than on our own. The Forum this year was attended by about 50 people from across the company registration industry. The presentations came from three parties: The National Crime Agency (NCA), who talked about the regime for filing suspicious activity reports (SARs), including the need for filing them, when to file them, and what happens to them once they are filed;
The United Nations imposes financial sanctions on individuals and corporate bodies because of the nature of their activities, such as genocide and terrorism. These individuals and corporate bodies are called ‘designated persons’ (DPs). The UN sanctions are included in EU and UK law to stop DPs using “economic resources”, which include companies, for those types of activities. Companies House has announced that with effect from 12th December 2018 they will check the details of proposed directors, secretaries, members, and people with significant control for any matches to a designated person in an application to register a UK company or LLP.
They will look at; the person’s full name, address, date of birth, nationality and occupation, and the main activities of the company either from the accounts or the SIC code. If Companies House has reason to believe these details match those of a DP, then the registration will be rejected for that reason. It will be possible to reapply with evidence proving that there is no DP connection. This is different to the due diligence checks that we have to perform with every new incorporation order, under the Money Laundering Regulations 2017. As a company service provider, we are regulated by HMRC and directed, using an approach based on the risk to our business, to check the validity of the identity of all our clients and the directors and beneficial owners of the companies we form.
Companies House are not obliged to carry out the same checks as it is assumed to not be “carrying on business” but operates instead under statute. We maintain that if the UK government is serious over its intent to combat fraud and terrorist financing, this argument is illogical at best and reckless at worst.
ChangestoCompaniesHouseSystemsandForms 3 Companies House has now released notes of changes to its systems and forms that will be implemented on the 29th March, ONLY in the event of a no-deal Brexit. 1. Corporate officers From exit day, the references to and requirements for ‘EEA’ & ‘Non-EEA’ corporate officers will be modified and replaced by ‘UK registered limited companies’ and ‘Other corporate bodies and firms’: i) A company or LLP which has a limited company incorporated and registered in the UK as a corporate officer will have to provide that corporate officer’s name, registered or principal office address and its registration number.
ii) A company or LLP which has any other entity as a corporate officer will have to provide that corporate officer’s name, registered or principal office address, the legal form of the company or firm and the law by which it is governed and (if applicable) the register in which it is entered and its registration number. 2. Confirmation statement Minor modification to references to UK regulated markets in sections C1 & C3 of form CS01. 3. Cross-border mergers Cross-border mergers involving UK companies will no longer be able to take place under the EU Directive 2005/56/EC - cross-border mergers of limited liability companies.
4. Overseas companies As the UK will no longer be part of the EEA, the reporting requirements for overseas companies which open a UK establishment will become the same regardless of whether their ‘home’ country is inside or outside the EEA. The draft regulations (which are still to be debated) and a draft explanatory memorandum setting out the legislative changes for all of the above can be found here: https://www.gov.uk/eu-withdrawal-act-2018-statutoryinstruments/the-companies-limited-liability-partnerships-and-partnerships-a mendment-etc-eu-exit-regulations- 2018 5. Societas Europea (SE) From the day of exit any SE registered in the UK will be automatically converted to a United Kingdom Societas (UK Societas).
No SEs will be formed, transferred into or outside of or registered in the UK after exit day. Any converted SE can either remain as a UK Societas, converted to a PLC or wound up. The regulations and explanatory memorandum setting out the legislative changes for SEs can be found here: http://www.legislation.gov.uk/uksi/2018/1298/contents/made
5 These new conditions excluded owners of alphabet shares who have unequal dividends paid to shareholders, which meant alphabet shareholders would not be eligible for Entrepreneurs Relief. However, after considerable amounts of concern was expressed by professional bodies and industry individuals HMRC have proposed amendments to the Finance Bill 2018-2019. Specifically, the definition of a personal company on page 28. The amendment to the definition of a personal company now includes the following: 'Either or both of the following conditions are met - (i) by virtue of that holding, the individual is beneficially entitled to at least 5% of the profits available for distribution to equity holders and, on a winding up, would be beneficially entitled to at least 5% of assets so available, or (ii) in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.” This amendment means a company with alphabet shares that is disposed of and their shareholders who have an entitlement to at least 5% of the proceeds will qualify for Entrepreneurs Relief even if they do not pass test (i).
Entrepreneurs Relief – Update to Key Changes Following on from last year’s autumn budget where the Chancellor announced two key changes to Entrepreneurs Relief, which were: If you would like to discuss how the amendments to the Finance Bill will affect the new set of drafted articles that we have prepared please contact us. email: firstname.lastname@example.org Tel: 0207 554 2261 4 The qualifying holding period being extended from 1 Year to 2, effective from 6 April 2019 The qualifying shares must now entitle the holder thereof to 5% of dividend, and 5% of capital distribution, effective from 29th October 2018.
The government announced in December (2018) draft amendments to the Finance Bill 2018-2019 that will affect the entitlement of owners of alphabet shares which are different classes of shares designated with a letter.
an entitlement to at least 5% of the profits that are available for distribution and; an entitlement to at least 5% of the assets on winding up of the company. The amendments drafted by HMRC to the Finance Bill are a positive development but at the time of writing the Bill has not been passed and is currently with the House of Lords. Initially, the key changes set out in the autumn budget resulted in the definition of a personal company including two new conditions which were:
DEADLOCK AND SHAREHOLDERS EXIT STRATEGIES special clauses every Private investor should know about In this article we will be discussing the most commonly pursued exit strategies and exit mechanisms for private companies limited by shares.
We would recommend any investor review a shareholders agreement before investing in a company. For existing businesses, it always worth having an expert review of the shareholders agreement every few years to ensure it is up to date for present and potential future purpose.
Investors and company founders can find themselves at a deadlock all too often if their shareholders' agreement has not been drafted to sufficiently cover different eventualities. This is particularly important when selling all or part of the company to a new investor, or transferring the shares to a family member or employee. Whether you are an investor whose key objective is to obtain a return on the money you have invested as equity into a company, or a business owner/ founder who is succession planning, there are various clauses you can draft into a shareholders' agreement to help you achieve a timely and cost-effective exit from the business.
Drag along rights allow (usually) a majority shareholder, or investor to force the remaining shareholders to accept an offer to buy their shares from a third party and to force the holders of the remaining shares to accept such an offer at the same time and at the same price for each share. The aim is to provide liquidity and an exit route to the majority shareholder or investor. Tag along rights also known as piggyback rights enable certain shareholders (usually minority shareholders) to force other shareholders (who wish to sell their shares) to procure an offer for their shares benefiting from the rights.
The tag along rights act as protection for the minority holders in case the majority chooses not to exercise its drag along rights. Selling Shares in a Private Limited Company If you would like to speak to us about a shareholders' agreement please get in touch with our company secretarial team: 0207 554 2261 Drag and tag along clauses 6
7 The pre-emption on transfer of shares clauses, if included in the company’s articles, oblige a shareholder wishing to transfer his or her shares to inform the other shareholders of all the details of the offer made by the potential purchaser and to offer his or her shares for sale to the remaining shareholders, who will have a priority to buy the offered shares. If the existing shareholders decline to purchase the shares, the shares in question may be offered to the third party potential purchasers. For Advice on Shareholders' Agreements and Exit Strategies Please Contact Our Legal Manager Mel Jeczelewska Email: email@example.com Tel: 0207 554 2273 Put and call options grant a right (but not an obligation) for a potential buyer, or a potential seller to acquire, or sell shares at a specified price (or a price to be calculated in accordance with a preagreed formula).
The option is generally exercisable during a specified period. For example, if A has a call option enforceable against B, A can require B to sell B’s shares to him.
A put option provides a safety net for a shareholder by guaranteeing that his or her shares can be sold at a set price for a limited period of time. Buyoutbyfellowshareholders,orthecompany Share buyback. To enhance share liquidity and to provide an exit route for shareholders, the company's articles may provide for preventing the shareholder from selling his shares to a third party (at least in the first instance) and specifying that, if the remaining shareholders do not want to purchase the shares from the shareholder seeking to exit, the company can repurchase the shares itself. Surrender of shares If shares are partly paid, the company may forfeit such shares or accept those shares to be surrendered in lieu in accordance with the company’s articles and for failure to pay any sum payable in respect of the share.
Gifting Shares Where a shareholder wishes to exit the company, but there is no buyer for its shares, it may be appropriate for a shareholder to return its shares to the company for no consideration that is, gifting the shares back to the company. A gift of shares would have to be approved by the board. Unless the company that has received the gifted shares intends to transfer them to a third party, normally, shares gifted to a company will be cancelled. 7
7 Irreconcilable conflict over the management of the company It is often tax efficient to transfer assets between spouses or civil partners to take advantage of the other spouse's or civil partner's marginal tax rate.
To take advantage of such tax savings, permitted transfers of shares provisions should be considered, which will allow a shareholder to transfer his shares to a restricted group of individuals without the need to go through the pre-emption requirements on transfer of shares. This is typically restricted to close relations (for example, a spouse, civil partner, children and grandchildren), or to the trustees of a family trust.
Permitted transfers should not be confused with compulsory transfers. The latter are designed to protect the remaining shareholders where specified events happen to a shareholder, for example, the death of a shareholder, bankruptcy, cessation of office (e.g. a company’s director), cessation of employment, or a shareholder breaching the shareholders’ agreement. For Advice on Shareholders' Agreements and Exit Strategies Please Contact Our Legal Manager Mel Jeczelewska Email: firstname.lastname@example.org Tel: 0207 554 2273 Permitted transfers of shares to designated persons such as family members In practice, many of the above-mentioned issues are not addressed in the agreements that are concluded at the outset of setting up a small business.
Experienced investors will invariably seek a sensible precaution rather than an optimistic way in which to start a business. Where a conflict arises over the management of a company and neither party has a majority of votes, carefully designed deadlock provisions will provide resolutions for such situations. The deadlock clauses set out the rules for referring the dispute to an outside expert (for example the company’s lawyer, or accountant), or one of the parties to either dispose of their shares, or that the company terminates entirely. Such clauses are normally included in shareholders’ agreements.
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