Control Registers and Private Equity: Building the Bridges Within A Company

When a private equity deal is done, the strategy, the valuation and the implications for the market usually get top billing. But behind the scenes, in every deal, there is a range of essential agreements that will have been negotiated and a range of registers to be checked, not only for compliance but for the buyer to build an accurate understanding of the company. The responsibility for their accuracy lies with the company secretary, who is responsible for corporate compliance with all relevant legislation and regulations, and also with the Finance Director and, where relevant, the financial secretary of the company, as they take responsibility for accurate record-keeping for funds received and paid, as well as procurement decisions and invoicing. How can company officers best ensure that the right work has been done, and that they can rest assured there will be no adverse legal responsibilities devolving upon them, potentially long after the deal is done?

Control Registers

The key is to know the legislation and keep up-to-date with recent court cases affecting corporate obligations. Control registers are an excellent example. Tired of seeing companies run by shadow directors, the UK introduced in April 2016 the need for the majority of UK private companies – public companies already have their own disclosure regime -to maintain a register of ‘People with Significant Control’ (the PSC register). BVI and Hong Kong legislation, to cite two important corporate locations, are both definitely following suit in 2017 and 2018 respectively, with more jurisdictions no doubt to follow. The due diligence checklist of a PE buyer henceforward contained a box to tick, ‘PSC register present and up-to-date’; but checklists a good due diligence do not of themselves make, and more inquiries upon the register should, at least, be forthcoming, not least as a result of changes flowing from the implementation of the 4th EU Money Laundering Directive.

The conditions that if met bring people within the ambit of the register are clear. For an LLP, for example, directly or indirectly (via another entity, or person): rights over more than 25% of the surplus assets if the company is wound up, 25% voting rights if the company is wound up, the right to appoint or remove the majority of management, or some other general control rights. It’s the last which is the sting in the tail as it will sweep up many of the PE and lender covenants which affect corporate decision-making. The legislation requires that the company secretary must take ‘reasonable steps’ to determine who has significant control, and the PE buyer will ask whether the company has properly identified who its persons of significant control really are. No legal precedents as of 2017 yet exist testing the borders of the legislation, although the recent case of Burgess & Anor. v Lejonvarn [2016] EWHC 40 (TCC) gives some weight to arguments that the courts will interpret the term as widely as possible, even where no consideration is involved.

Company Secretary Responsibilities

The company secretary must then contact those deemed to have significant control to obtain the relevant information, fill up the PSC register accordingly and file it at Companies House. The finer aspects of what constitutes ‘reasonable steps’, whether appropriate steps to contact them, what degree of due diligence over the replies is adequate and what timescale for keeping the PSC register up-to-date the regulators will deem acceptable are all part of company secretary training, but the PE buyer will cast an eye over the process, as well as who has been caught by the provisions.

The PSC is just one example. As the financial secretary’s job entails financial secretary training must also cover the relevant registers for a PE deal. Here the emphasis is on accounting - bank, invoice, purchase, stocktaking and asset - records, which UK law requires holding for at least six years, although this period varies internationally, five in Australia but only three, generally, in the USA, complicating the task of cross-border PE buyers. The best advice is to keep for as long as possible, especially if there is even the slightest possibility of an eventual exit.

The conclusion? Prudent record-keeping is demanding of time and effort, and requires detailed training to interpret correctly, but when it comes to a deal, it is repaid in time saved and value.