People of Significant Control – Part 2
Further to our recent article, Persons of Significant Control – Part 1, this part 2 of the series shall consider the PSC conditions 1, 2 and 3 in more detail.
Condition 1 - directly or indirectly holds more than 25% of shares.
This condition is only applicable to entities which have a share capital. If it is considered that this condition may be applicable, it is important to note that all issued shares (regardless of class) must be taken into account to determine 25% of the total. If any shares are held by a nominee or nominees, the shares should be treated as being held by the person for whom the nominee is acting rather than the nominee. Also, if 2 or more persons hold shares jointly then all joint holders should be listed in respect of the number of shares held jointly. The Register of Members is the main document to consider in relation to this first condition. Depending upon the entity it may be easy to determine who holds more than 25% of the shares but, if there are a number of shareholders and different classes of shares, the position may be more complex and require further examination.
Condition 2 - directly or indirectly holds more than 25% of the voting rights.
Although there will be occasions where the same persons or entities meet both conditions 1 and 2, this will not always be the case. The main documentation to review when considering this condition is the Articles of Association, Shareholders Agreement (or LLP Agreement) and the Register of Members. If different classes of shares have been issued, they may not all carry the same voting rights therefore this has to be taken into account when determining who may hold more than 25% of the voting rights. Confirmation of such voting entitlement will usually be covered by the Articles of Association or Shareholders Agreement (or LLP Agreement).
Condition 3 - directly or indirectly holds the right to appoint or remove the majority of directors.
This may well be linked to shareholding and/or voting rights but constitutes a condition of its own. The Articles of Association and Shareholders Agreement (or LLP Agreement) will need to be considered to determine whether there is any person or entity who meets this condition. Again, different classes of shares may have different rights in this regard. Certain job roles may also carry increased rights and responsibilities which may include influence or control over who sits on the Board of Directors therefore this also needs to be considered.
It is possible (and very common) for a PSC to fulfil more than one condition therefore, do not stop at condition 1 if this is satisfied, consider all others that may apply.
Various documents have been mentioned which should be considered to assist in determining PSCs. Whilst a Register of Members is a requirement for all companies and LLPs, as is the Articles of Association for incorporated companies, not all entities will have a Shareholders Agreement or LLP Agreement. Whilst these documents are recommended they are not a requirement therefore you may well have to investigate matters and ask questions about shareholdings and voting rights from the directors, shareholders or members.
Hopefully this has provided you with some further insight into PSC conditions 1, 2 and 3 but if you do have any queries, please do not hesitate to contact Kirstin Ejsmont at kirstin@mackinnons.com. The third and final part in this series will follow shortly and will focus on PSC conditions 4 and 5.
