The Department for Business, Energy and Industrial Strategy (BEIS) recently published a consultation on implementing a ban on the appointment of corporate directors.
The proposed ban on appointing corporate directors to the board of UK companies is not new – the statutory provision for this is contained in the Small Business, Enterprise and Employment Act 2015 (SBEEA) – but this particular provision has not yet been brought into force.
The current consultation looks at implementing this ban and, in particular, the UK Government's approach to the permitted exemptions to the general prohibition for a company to have a corporate director appointed to its board.
Why is the ban on appointing corporate directors necessary?
At the moment, a UK limited company must have at least one natural person appointed to its board of directors. Subject to that minimum requirement, it is currently permissible to also appoint corporate directors to the board. In an Impact Assessment published alongside the consultation it is estimated that around 33,000 UK companies currently have at least one corporate director appointed on their boards.
The UK Government is concerned that the use of corporate directors can "muddy the waters" around the ownership of a company. One of the key aims of the UK Government is to improve corporate transparency, particularly where there is a concern that opaque arrangements may conceal unlawful activity.
The UK Government, however, also acknowledges that there are several legitimate reasons to use corporate directors. For example, corporate directors are often legitimately used in the trustee companies of pension funds.
What is the proposed exception to the prohibition on corporate directors?
The consultation provides that the UK Government intends to create a principles based exception to the general prohibition on the appointment of corporate directors.
In its initial consultation on this issue, the government considered specific types of company which could be exempt from the general prohibition on corporate directors, for example, trustees of pension schemes or charitable companies.
However, recognising that specific exception was likely to lead to an “ever-expanding” list of excepted categories, the government has moved away from the specific exception approach in favour of a principles based approach.
The principles set out in the latest consultation are that a company can be appointed as a corporate director if, firstly, all of its directors are natural persons and, secondly, those natural persons have already been subject to the new Companies House identity verification process prior to their appointment to the board of the corporate director. As detailed in our earlier briefing note, it is anticipated that the new Companies House identify verification service will be introduced this year.
In order to facilitate the continued use of cross-border corporate structures, the government proposes that these principles will apply equally to both UK and overseas entities appointed as corporate directors, as long as evidence is provided to Companies House that an overseas entity has appointed only natural persons as its directors, and that those natural persons have had their identities verified.
Will the prohibition to appoint a corporate director apply to any other types of entity?
While the prohibition on the appointment of corporate directors will currently only apply to UK companies, the consultation provides that the UK Government is considering applying the same principles to limited liability partnerships (LLPs) and limited partnerships (LPs).
The consultation therefore seeks views on whether, if a corporate entity is appointed as either the general partner of an LP or a designated member of an LLP, that corporate entity should have only natural persons appointed as its directors who have had their identities duly verified. This will be potentially relevant to Scottish Limited Partnerships used in some funds and other investment structures.
What happens next?
The consultation will close on 3 February 2021.
Following the UK Government's review of the responses to this consultation, we anticipate that regulations will be published containing the final exception to the general prohibition on appointing corporate directors and for the prohibition contained in the SBEEA to finally come into force.
The exact timing of when these provisions will become effective is currently unclear – the proposed exception requires the new Companies House identification verification process to be operational.
For companies with corporate directors currently appointed to their boards, SBEEA provides that there will be a period of 12 months from the date on which the relevant prohibition comes into force before an existing corporate director will automatically cease to be a director (assuming that the corporate director does not fall within scope of the permitted exception to the general prohibition), so there will be time for companies to make necessary changes to their boards once the regulations have been published and the relevant provisions become law.
Companies may wish to, at this stage, consider whether any corporate directors in their group structures will fall within scope of the current proposed exemption or whether, subject to the outcome of the consultation, changes to the board may need to be made.
For tailored advice on this or another related matter, please contact Edwin Mustard, Partner in our pensions team, at edwin.mustard@shepwedd.com, Tom Swan, Partner in our corporate finance team, at tom.swan@shepwedd.com, or your usual Shepherd and Wedderburn contact.