How does a company apply restrictions to a PSC’s shares?

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As part of the process of identifying and confirming the details of its PSCs, a company may send out a number of notices asking for information. In most cases, the addressee will respond in good time and the company will have everything it needs to produce a compliant Register of People with Significant Control.

Sometimes, however, the company won’t receive a reply. When that happens, you can’t just stop there – the company is still required to pursue “reasonable steps” to identify and document individual PSCs and relevant legal entities. Instead, the legislation offers a process that companies can follow, which may ultimately culminate in restrictions being placed on shares. If you do impose restrictions on shares, the person can derive no benefit from them until the restrictions have been lifted.

In this article, we explain the process leading to applying restrictions, along with free compliant templates that the company can use at each step.

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1 Send a notice requesting information

As part of the process of setting up the PSC register or when new PSCs are identified, you may send out section 790D notices. Similarly, when there’s a change to an existing PSC or RLE, the company might issue section 790E notices.

These notices all require a response within a month from the date of the notice. If the addressee fails to reply in that time, or to give to valid reason for not replying, you can move on to the next step.

You must also note on the PSC register that a notice was issued which didn’t receive a reply.

For section 790D notices, the following wording should be added to the PSC register:

The company has given a notice under section 790D of the Act which has not been complied with.

For a section 790E notice when a PSC’s details are believed to have changed, the following wording must be used:

The addressee has failed to comply with a notice given by the company under section 790E of the Act.

A further statement must be added to the PSC register if you receive a late reply. It should read:

The notice has been complied with after the time specified in the notice.

2 Issue a warning notice

After a month from the date of the notice has passed, you can then send a warning notice.

A warning notice will be suitable where the individual or legal entity who has failed to reply has a relevant interest in the company. A relevant interest is any shareholding or other rights that the person holds or controls, directly or indirectly. It doesn’t necessarily need to be an interest that makes the addressee a PSC themselves. (The addressee might, for instance, only hold a few shares, but the company has chosen to write to them to help them find out the identity of a PSC.)

A warning notice must:

  • State that you plan to issue a restrictions notice if the addressee does not, within a month of the date of the warning notice, reply to the initial section 790D or 790E notice requesting information; and
  • Be accompanied by a copy of the original section 790D or 790E notice.

We’ve created a template warning notice that you can adapt and use.

If the addressee does not reply or provide a valid reason for not replying with a month of the date of the warning notice, you can move to the next step.

Where the person who has failed to reply does not hold a relevant interest, the company is still under an obligation to pursue reasonable measures, even though the regime of warning notices and restrictions notices may not be suitable.

3 Issue a restrictions notice

After a further month, so a month from the date of the warning, the company may choose to impose restrictions on the addressee’s shares or other rights in the company.

Even at this point, after repeated failure to reply on the part of the addressee, you must consider whether imposing restrictions is the most appropriate course of action. For example:

  • You shouldn’t impose restrictions if they would have an unfair effect on third parties
  • In particular, you must consider joint shareholdings and other joint arrangements
  • You should consider whether there’s any potentially valid reason for the lack of reply. Purely logistical issues are likely not to comprise a valid reason, but (for example) an extended period of hospitalisation could be. To help support and justify its decision-making, the company should ask for evidence to support any reasons provided.

The company is not legally obliged to apply restrictions but, assuming the above considerations do not preclude it, you should seriously consider the step of applying them as part of taking “reasonable steps”. Whatever your decision, it’s sensible to document the choice made by the company and the reasons behind it.

To impose restrictions, the company should send a restrictions notice to the individual or legal entity. The restrictions notice must:

  • Inform the addressee that restrictions are in place as of the date of the notice
  • Be accompanied by copies of both the original section 790D or 790E notice and the warning notice that were sent

We’ve created a template restrictions notice that the company can adapt and use.

The company must also note on the PSC register that a restrictions notice has been issued, using the following prescribed wording:

The company has issued a restrictions notice under paragraph 1 of Schedule 1B to the Act.

The effect of applying restrictions

While a restrictions notice is in place, the effects on the person’s interest in the company (which may be any share or right held directly or indirectly) are that:

  • The interest cannot be transferred or sold. Any agreement entered into that purports to sell or transfer the interest is void;
  • No rights associated with the interest may be sold or transferred. Any agreement entered into that purports to sell any such rights is void;
  • No rights can be exercised in respect of the interest;
  • No shares may be issued in right of the interest or in pursuance of an offer made to the interest-holder; and
  • No payment may be made by the company in respect of the interest, whether in respect of capital or otherwise (unless the company is in liquidation).

Practically, the most common effects will be to prevent someone:

  • Selling their shares
  • Exercising voting rights over their shares
  • Being paid dividends in respect of their shares
  • Being issued shares they may otherwise have received

The company will need to take care – and may need to put in place additional processes – to ensure there is no breach of the restrictions. For example, the company will need to refuse any instrument that purports to transfer shares which are subject to a restrictions notice. Anyone who breaches the restrictions is guilty of an offence, another reason why the company must take care to not itself (even inadvertently) breach them, for example by making a dividend payment in respect of the restricted shares.

Imposing restrictions is not necessarily the end of the story, and the company must consider whether there are other actions it can take or lines of enquiry it can pursue as part of taking “reasonable steps”.

Lifting restrictions

Hopefully, the addressee will provide the information requested in the original section 790D or section 790E notice, and the company will then need to remove the restrictions in place. You’ll also need to lift restrictions if:

  • You discover there’s a valid reason, with reasonable supporting evidence provided, why the addressee did not comply earlier;
  • It emerges that the restriction is unfairly affecting the rights of a third party; or
  • The court orders the company to remove the restriction.

To lift restrictions, the company must issue a withdrawal notice, with the restrictions ceasing to be effective from the date of the notice. The withdrawal notice must be issued before the end of 14 days beginning on the day that the company became required to withdraw the restrictions notice (e.g. by order of the court).

Our template withdrawal notice can be adapted and used by a company for this purpose.

You must also note on the PSC register that a restrictions notice has been lifted, along with the date it is withdrawn. Where the company lifts the restriction, the following prescribed wording should be used:

The company has withdrawn the restrictions notice by giving a withdrawal notice.

If the restriction is removed as a result of a court order to that effect, a note should be placed in the PSC register that:

The court has made an order under paragraph 8 of Schedule 1B to the Act directing that a relevant interest in the company cease to be subject to restrictions.

The company may itself apply to court to sell or transfer a restricted interest. This may be useful where the restrictions upon shares are not aiding in obtaining the requested information but are also adversely affecting the operations of the company. If the court grants the application, it will typically hold the proceeds of any sale to be claimed by individual or legal entity who held the restricted interest.

Once restrictions are withdrawn

From the date of the withdrawal notice, the shares or rights may be used in the same way as before the restrictions were imposed. So, for example, the holder of shares may receive dividends, can vote and sell or transfer them and be issued new shares as before.

Inform Direct simplifies each step of keeping a PSC register. Your online PSC register will contain all the prescribed wording, and everything is included in your Confirmation Statement

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