UK Companies and LLPs must record details of their beneficial ownership and file the details with Companies House. The information must be kept up to date.
Companies – who are the PSCs?
A PSC is an individual who meets one or more of the following Conditions:
An individual who holds directly or indirectly more than 25% of shares in the company.
An individual who holds directly or indirectly more than 25% of voting rights in the company.
An individual who holds the right to appoint or remove the majority of the board of directors of the company.
If an individual does not meet one of Conditions (i) to (iii) they could still be a PSC if:
That individual has the right to exercise, or actually exercises, significant influence or control over the company.
Where a trust or firm would satisfy one of the Conditions (i) to (iv) if they were an individual:
Any individual holding the right to exercise, or actually exercising, significant influence or control over the activities of that trust or firm will be a PSC (see below for further guidance on LLPs and trusts).
What does significant influence or control mean?
The statutory guidance is not definitive; it gives a non-exhaustive list of examples. This includes where a person has absolute rights over decisions relating to the running of the company’s business (e.g. adopting/amending the company’s business plan or appointing/removing a CEO). This could include veto rights such as blocking the ability for the company to have additional borrowings. Veto rights which protect minority interests (e.g. the dilution of share rights) are unlikely, on their own, to constitute ‘significant influence or control’.
What happens when a trust holds shares in a UK company?
The guidance on Condition (v) stipulates that the right to exercise significant influence or control over a trust (regardless of whether this is actually exercised or not) will be present where a person has the ability to direct or influence the activities of a trust, including but not limited to the following examples:
The right to appoint or remove trustees.
The right to direct the distribution of funds or assets.
The right to direct investment decisions in respect of the trust fund.
The right to amend the trust deed.
The right to revoke or terminate a trust.
Condition (v) may catch individuals, other than the trustees, who need to report. For example, the Settlor may have the power to appoint trustees during his or her lifetime.
As trustees hold shares in a company jointly, each of them is deemed to hold the total number of shares or rights held by all of them. If, for example, a trust holds 30% of the shares in a company, each trustee must be entered on the PSC register as they meet Condition (i).
What happens when companies hold shares in a UK company?
Where shares are owned by a company, that company could be required to register on the PSC register as a Relevant Legal Entity (RLE) if:
It is capable of satisfying one of the PSC Conditions.
It is required to keep a PSC register itself or is listed on a regulated market in the UK, the EEA (other than the UK) or on specified markets in Switzerland, the USA, Japan and Israel.
An RLE is registrable in relation to the shares it holds if it is the first legal entity on the company’s ownership chain.
If an individual does not meet one of Conditions (i) to (iii) they could still be a PSC if:
They have the right to exercise, or actually exercises, significant influence or control.
Where a trust or firm would satisfy one of the Conditions (i) to (iv) if they were an individual:
Any individual with a right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm will be a PSC.
Determining which, if any, of the above Conditions apply requires a thorough review of the LLP agreement and any other documents relevant to rights over surplus assets. The guidance on the meaning of ‘significant influence or control’ for LLPs is similar to the company guidance but points to the ability to amend the LLP agreement and to members who hold strategic assets or who have key relationships important to the running of the business as being indicators of significant influence or control.
What do you need to do?
Companies and LLPs will need to provide the information on their register to Companies House within 14 days of making a change to their own register. The PSC register at Companies House is publicly accessible.
Companies and LLPs will need to make their own PSC register available for inspection on request at the registered office or provide copies on request.
What happens if you don’t?
Failure to provide accurate information on the PSC register and failure to comply with notices requiring someone to provide information are criminal offences and may result in a fine and or a prison sentence of up to two years.
Common errors
Here are two of the most common errors made in relation to the PSC register:
Trustees cannot meet Condition (v) as this applies to people other than trustees. Trustees will be PSCs by virtue of Conditions (i) to (iii).
Offshore companies should not be registered on the PSC register as they do not fulfil the RLE criteria.
The Covid-19 pandemic created a perfect storm for the hotels sector and, despite ever improving signs of recovery, the resulting devastation will take time and innovation to repair. Unprecedented economic life-support provided by the UK government over the last two years has kept the gathering clouds at bay, but there could well be casualties in 2022 and beyond. This was the conclusion of a roundtable discussion hosted by Forsters on 10 November 2021.
At the event, featuring members of Forsters’ hotels group and industry guests, participants reflected on the catastrophic impact of Covid-19. While the decimation of business travel, perhaps for the longer term, and only a limited return of leisure tourism are cause for concern, there is optimism about the rise of the staycation in some locations.
The roundtable recognised the difficulties created by a scarcity of hotel workers that has led to withdrawn or trimmed services like reduced restaurant opening times and restricted menus. Add in construction and refurbishment cost increases, energy price hikes, a supply chain crisis, and the threat of rising interest rates and inflation, and it is easy to understand widespread anxiety and pessimism. At the same time, landlords and tenants are having to negotiate and resolve disputes over rent arrears, while lenders are no longer able to provide the same level of compassionate funding that was handed out during the early days of the pandemic.
A path out of the crisis: innovation and diversification
Like many other industries, the hotels sector has been forced to innovate and the pandemic has accelerated this process. Business models are being radically adapted for long-term change. Henrik Muehle, General Manager of Flemings, a 5-star deluxe hotel in Mayfair, says that innovation is a natural consequence of the challenging climate. He says that hotels have to remain operational with reduced staff, a symptom of a workforce exodus during the pandemic and perhaps exacerbated by Brexit. Mr Muehle reveals that Flemings has identified a number of solutions, including moving to tasting menus in its high end restaurant Ormer, enabling it to maintain superior standards with fewer chefs. In fact, profit margins have actually increased.
Naomi Trinh, a Partner in the Corporate team and a member of the Hotels group at Forsters, has witnessed a wave of diversification spreading through the industry, such as the accelerated growth of aparthotels as many customers seek a different experience. For some, relying on restaurants and room service for days on end is not always appealing and the freedom and peace of mind provided by having one’s own living space during these times is seeing an increase in demand.
Roundtable participants also highlighted the growth of self check-in, through apps and webbased portals, requiring fewer receptionists to welcome guests. There is the option of reducing room cleaning for longer-term guests, towel and bed linen changes, tapping into customers’ growing concerns for climate change and broader environment, social and governance (ESG) priorities. The turn-down service, for example, is one that can easily be eliminated without substantially impacting the guest’s experience, although whether these are appropriate solutions will depend on where the hotel sits in the market.
This ability to respond to the unprecedented challenges posed by the Covid crisis has heartened our roundtable attendees. Melvin Gold, a specialist hotel consultant at Melvin Gold Consulting, comments: “We have more hotel rooms in this city [London] than any other in Europe. So the question is, how long will it take us to get back there? All of these other things are building blocks along that road. But fundamentally, I’m an optimist in the long term.”
And there are signs of recovery on the horizon. The roundtable participants point to the influx of American tourists as travel restrictions have been lifted. Sarah Pass, a Consultant in Forsters’ Commercial Real Estate group, suggests that several hotel clients have seen a surge in bookings thanks in part to the return of US travellers.
A defined career path: addressing labour shortages
An increase in bookings following the relaxation of social distancing measures and travel restrictions, is naturally welcome news for the hotel industry. But as hotel guests begin to drift back through the front doors, it is not easy to instantly staff up to cater to every requirement. The exodus of hotel workers during the Covid pandemic has become a grave concern. It has proven especially difficult to attract them back. Some have blamed this on Brexit, but was there really a Brexodus? Melvin Gold points to high levels of employment in the UK and notes that staff shortages also appear to be a feature of the market elsewhere across Europe and other parts of the world.
Henrik Muehle does not entirely agree though, indicating that shared accommodation in London, where many of his staff are living, have lots of empty rooms. He says that applications for roles at Flemings dramatically dropped after the UK completed its departure from the European Union. Mr Muehle believes that changes in the visa application process are needed to make it easier for foreign workers to find positions in the UK hotels sector.
Making the industry more attractive to aspiring workers is now more imperative than ever. “We have to lay out a clear career path and make our sector sound attractive to those that are seeking employment or seeking opportunities,” says Melvin Gold. “I think over the long term, the industry has not been doing that effectively and the chickens have now come home to roost.”
There is an opportunity to innovate with shift patterns, attracting people that have other responsibilities or priorities at different times of the day and would benefit from perhaps an early stint to prepare or serve breakfast to hotel guests. The variety of roles and the availability of technology and processes to enable multiple shift patterns could attract more individuals to the hospitality sector.
Yet more immediately there is a concern that London and other UK destinations will lose their magnetism if fewer foreign workers results in linguistic limitations. Henrik Muehle says that Flemings has welcomed a steady pipeline of affluent Brazilian customers over the last decade, many of whom appreciate the availability of Portuguese speakers amongst the hotel’s staff. He is concerned that the well-heeled market may shift to other premier destinations, like New York or Paris, if their expectations are not met in London.
Upping the tax burden: addressing VAT and business rate increase
The VAT rise to 12.5% in October and its return to 20% in April 2022, will do nothing to ease the recovery of the hotels and hospitality industry. Despite calls from within the sector to give it more time to convalesce, the increase in VAT rates creates yet another difficulty. Although business rate discounts have been extended to the 2022/2023 financial year, the prospect of them returning to pre-pandemic levels means the longer-term outlook is even more challenging.
Our roundtable participants feel that the hotel industry has historically lacked a strong voice or representative body to engage with
government and influence policy and regulatory changes, partly due to its fragmented nature. In October 2021, UKHospitality called on the government to make the current 12.5% VAT rate permanent under its #VATsEnough campaign. So far, the campaign has not succeeded. For hotels, facing up to deferred taxes, VAT rises and the need to increase salaries to attract more workers paints a potentially gloomy future.
Available capital: pent up investor appetite but a tougher lending climate
While there are some reasons for optimism, there are still tough times ahead. A significant amount of capital is waiting in the wings to be deployed in the hospitality sector, according to Will Kirkpatrick, the Head of Hotels and Extended Stay team at Gerald Eve, the real estate advisory business. The problem though is that there is a widespread expectation that valuations will be discounted. At the same time, there is a lack of transactional data from 2020 and 2021 to support accurate pricing.
Elevated construction costs are also a deterrent for investment, says Mr Kirkpatrick, indicating that there is a high level of stock being built, but charges have gone up by 10% or more over the last two years.
Investors are circumspect about charging ahead. And foreign investors are still hindered by remaining travel restrictions, preventing them from assessing assets in person and meeting with key stakeholders.
Many financial sponsors are also waiting for distressed assets to come onto the market. Yet with recent government support and sympathetic lenders, the fallout from the pandemic has yet to become fully apparent.
Victoria Edwards, Head of Banking and Finance at Forsters, also expects to see a tougher lending climate in 2022 and beyond: “The mainstream banks have sort of disappeared, the tier one banks aren’t really there. There’s a few alternative lenders in the market, but they’re expensive. The cost of debt has gone up, but the availability of debt has gone down. And so I think it’s a challenge for any hotel operator now to refinance or to find new funding.” Despite this, Victoria has come across a few select lenders that are still keen to provide financing, even if mainstream lenders cannot remain as accommodating as they have done during the height of the pandemic.
“I believe that there is some pain coming down the road,” comments Melvin Gold, “Why would you press the button on a hotel and foreclose on a debt and put it into the market in the middle of a pandemic, with no guarantee. You’re going to get your money back? So they’ve been patient, but that doesn’t mean that there’s not a lot of pain under the waterline. And I think that we will see that at some point what happens when the tide goes out and who’s wearing or not wearing a costume?
Will Kirkpatrick agrees that the industry is being pushed into a potentially dark spot: “The problem is that a lot of companies have deferred taxes. You’ve got VAT, debt and the furlough. It is just a perfect recipe next year for lots of problems.”
Development and construction: escalating costs for hotels
The health of the sector is also determined by the capacity to build and refurbish. Investor and developer appetite is strongly influenced by the construction environment, which is facing its own challenges. The industry has commonly used fixed-price contracts for hotels and other developments, but now with labour shortages, escalating building material costs, and further problems in vital supply chains, it is proving difficult for contractors to eke out their traditionally slim profit margins. For hotel developers, this is resulting in additional costs and longer projects. The temptation to cut costs and deliver a lower quality finished product is intensifying.
This means the possibility of disputes arising between employers, developers, contractors and other stakeholders has rocketed. “I think it’s a very difficult world for contractors to make ends meet,” says Andrew Parker, a construction partner and Head of the Hotels group at Forsters. “It’s always very difficult, they were on very tight margins anyway. This particular climate makes it even more difficult.”
He has also witnessed a steady increase in cladding claims in the aftermath of the Grenfell Tower tragedy and the changing regulations, which have become a “movable feast”. Tighter rules, while clearly necessary, do add expense and also potentially reduce interest from investors and funders.
Joining the ESG movement
One form of regulation that is likely to significantly impact the hotels sector will be driven by ESG obligations and in the wake of COP26, the hotels sector cannot take its eye off the issue. On top of governments and regulators, customer behaviours are increasingly governed by ESG factors, including the impact of travel on the planet. Corporate travel has been decimated by the Covid pandemic and it is only gradually returning. While the World Travel & Tourism Council (WTTC) says that spending on business travel looks set to rise by more than 25% in 2021 and by a further 34% in 2022, it is not clear if air travel will ever reach the levels of 2019 again.
The video conferencing revolution
that took off after the Covid outbreak is now very much embedded within corporate culture, further reducing the necessity for business travel. On top of that, the public is becoming increasingly concerned by climate change, dampening down the glamour or aspirational aspects of travel. Flight shaming is now a recognised phenomenon.
Institutional investors now put ESG priorities at the forefront of their strategy and asset managers are naturally following suit with their own ESG products. Green leases and sustainability-linked loans are also increasingly prevalent in the market, a trend the hotel sector must to be attuned to.
Hotel guests themselves will also drive change as they seek to lessen their own environmental impact. Many already seek environmentally friendly products and prefer that towel and bed linen changes occur less than daily. These will become factors in how hotels market themselves to consumers in the immediate and long-term future.
Rent arrears: protections extended for tenants
More pressing perhaps is the current relationship between landlords and tenants as they continue to navigate the twists and turns of the Covid pandemic and its longer-term impact. Although business is moving back towards some form of normal, the UK government has recently introduced the new Commercial Rent Code of Practice and is progressing legislation to enact the Commercial Rent (Coronavirus) Bill that it announced on 9 November 2021. The new code and bill seek to encourage landlords and tenants to engage constructively over outstanding rent arrears. Tenants who can pay, should pay, and parties should be transparent and candid about their ability to do so.
For rent arrears relating to periods when businesses were required to close premises due to government requirements, parties who cannot resolve the issue amicably will be able to submit the matter to a swift arbitration process for resolution. “It remains to be seen whether the threat of a swift third party determination will lead to more settlements, more insolvencies or more litigation,” comments Sarah Pass.
On the rebound: a new hotels landscape
The word ‘uncertainty’ has become worn-out by the Covid crisis. Yet it is entirely applicable to the hotels industry and its unpredictable future. Nobody can truly foresee whether business travel will return to anything like 2019 levels, although it is safe to assume that a new ‘Zoom’ culture has made some journeys redundant. Equally, public engagement with environmental and sustainable factors is changing the way people approach leisure travel as they seek to limit their contribution to climate change.
The hospitality sector must respond to these market dynamics, but at the same time overcome the immense challenges posed by more limited access to financing, the prospect of higher taxes and business rates, tighter regulations, labour shortages, supply chain difficulties and higher development and construction costs. It creates a jittery environment, where disputes and tensions are more likely to surface.
The outlook is challenging, but the market’s strong fundamentals can provide the basis for a sound recovery. Inevitably the industry is going to face significant financial distress, but more positively there is capital available and investors are ready to deploy plentiful reserves. Melvin Gold believes that the prospect of a rebound is not fanciful: “We had the most successful hotel industry in Europe. And one day, we will again, because we have a tremendous tourism product. We have a great hotels sector.”
Forsters’ Hotels and Leisure team provides legal advice to a wide spectrum of hotel owners, operators and developers with a particular emphasis on luxury and boutique hotels. Please contact a member of the team for more information or if we can be of assistance.
Weathering the storm: the future for hotels – podcast
22 December 2021
Podcasts and videos
The Covid-19 pandemic created a perfect storm for the hotels sector and, despite ever improving signs of recovery, the resulting devastation will take time and innovation to repair. Unprecedented economic life-support provided by the UK government over the last two years has kept the gathering clouds at bay, but there could well be casualties in 2022 and beyond. This was the conclusion of a roundtable discussion hosted by Forsters on 10 November 2021.
Residential Property Partner, Robert Barham, has authored an article for Prime Resi entitled ‘Replacing Leasehold: Can the government persuade the market?’.
It is often said within the legal profession that more books have been written about commonhold than actual commonholds have been created and given that only some 20 commonholds were created that statement is probably true. So how can the government persuade the market to adopt commonhold?
In his article, Robert highlights the ways in which the government can act differently to guarantee a greater adoption of commonhold in the residential property market once the new version of commonhold becomes law.
The full article can be read here, behind the paywall.
For more information on commonhold property, please see our recent article or contact Forsters at [email protected].
Landmark Supreme Court Judgment leaves Google “Feeling Lucky”
22 December 2021
News
Google’s homepage still encourages internet users to search for information by clicking the “I’m Feeling Lucky” button. That phrase surely sums up the mood in the camp at Google after the Supreme Court refused to grant Mr Lloyd permission to serve a £3 billion representative claim on Google in Delaware. Google, along with other large data controllers, will be breathing a huge sigh of relief.
The decision is undoubtedly a setback for claimants, and their lawyers, in the developing field of “opt-out” data protection group claims. The alternative “bifurcated approach” suggested by the Supreme Court is outlined below, and raises many practical difficulties which could ultimately render it unviable.
However, the complex judgment does include some interesting nuggets about the judicial approach to both data protection claims and to representative actions more generally. Accordingly, while the door for such claims has not been swung open in the way that some corners (including the Information Commissioner) may have hoped, the door certainly remains ajar for future data protection group claims.
Background
The claim arises out of the so-called “Safari Workaround”, which is said to have allowed Google to bypass Safari’s cookie settings and secretly track the internet activity of millions of iPhone users. Google is alleged to have used the data it harvested from the workaround for commercial purposes without the consent or knowledge of the iPhone users.
The facts giving rise to the claim are well-documented and have led Google to pay hefty civil penalties and settle consumer actions in the US. No redress has yet been obtained on behalf of the more than 4 million iPhone users in England and Wales who claim their data was illegally stolen and commercialised. Mr Lloyd, a former director of the consumer group Which?, had hoped to rectify this. He sought to make innovative use of the representative procedure provided for by CPR 19.6 and act as the class representative for each and every iPhone user affected in England and Wales on an ‘opt-out’ basis.
The Supreme Court Judgment
A path for finding in favour of Mr Lloyd had been paved by Vos LJ in the Court of Appeal. Google successfully appealed to the Supreme Court, who held that:
Damages for breaches of section 13 of Data Protection Act 1998 (“DPA”) for “loss of control” of data could not be awarded unless there was proof that the relevant breach had caused material financial damage or distress. The Supreme Court held that it would not be appropriate to award damages for an infringement of the right in and of itself (as is permitted in claims arising from the tort of misuse of private information) because this would be contrary to the construction of the DPA 1998, and also because of material differences between the two regimes; and
It was not appropriate for Mr Lloyd to pursue the claim using the representative procedure under CPR 19.6. This is because the claim, as formulated, would require an individual assessment of damages on a claimant by claimant basis, thus taking it outside the scope of CPR 19.6. Each iPhone user would have suffered different losses depending on the amount of data harvested by Google and the nature of that data (i.e. whether it was particularly sensitive or private). Even if the claimants were entitled to user damages akin to those awarded in misuse of private information claims (i.e. damages calculated by reference to a notional licence fee payable to each claimant by Google), these user damages would also need to be calculated on a claimant by claimant basis. The court rejected Mr Lloyd’s argument that each claimant should be awarded ‘lowest common denominator’ damages of £750 because, even if such user damages were permitted (which the court denied), the damage set out in the claimant’s pleadings would not pass the de minimis threshold.
The Bifurcated Approach
In the judgment, the court acknowledged the various shortcomings of the representative regime under CPR 19.6, and expressed its preference for these shortcomings to be addressed by parliament. In the intervening period pending any such legislative reform, the Court suggested that Mr Lloyd’s claim (and its equivalents) should be pursued using a bifurcated approach. Under the bifurcated approach, Mr Lloyd should first issue proceedings to establish liability on the part of Google, following which individual claimants could issue secondary proceedings to determine their individual damages.
While it is commendable that the court attempted to provide Mr Lloyd with the alternative bifurcated solution, there are many practical difficulties which may render the approach unfeasible. For example, such an approach is likely to be unattractive to litigation funders, without whom most group claims would not get off the ground. Funders would be required to commit their capital for a longer period of time (i.e. for two sets of proceedings rather than one) in circumstances where they would not receive a direct return from the first proceedings, even if successful.
Further, in claims like Lloyd v Google, where the collective loss is substantial but the individual loss small, separate secondary claims to assess individual loss are unlikely to be cost-effective. While it is theoretically possible that such secondary claims could be pursued on an “opt-out” basis (assuming the claimants can be split into sufficiently large classes), the court raised an open question about the recoverability of litigation funding premiums in “opt-out” class actions given that individual claimants would not have consented to the funding terms.
Potential Opportunities?
Notwithstanding the difficulties highlighted above, the judgment does not mean that all group claims for breaches of data protection are now dead in the water.
The claim in Lloyd v Google relates to the law set out in the DPA 1998. That law is no longer in force, and the court specifically declined to be drawn on whether the claim would stand under the DPA 2018 and GDPR (noting that, unlike the DPA 1998, article 82 of the GDPR permits compensation for non-material damage).
In addition, while the claimants in this case did not seek to bring a claim under the tort of misuse of private information (presumably because of the requirement to establish a legitimate expectation of privacy, which may have been difficult given the varied browsing history of the class), it is not inconceivable that such an “opt-out” group claim could arise under different circumstances. For example, in circumstances where there is a sufficiently large group of individuals who have been the victims of a data breach relating to data which is undoubtedly private (e.g. medical records). In this regard, it is notable that the court declined to uphold Google’s argument that Mr Lloyd, as self-appointed class representative, could not seek damages on a “lowest common denominator basis” as he did not have authority to waive major parts of any individual claimants damages. The court’s position on this is interesting because it provides a potential work-around to the individual assessment of damages problem which proved to be a significant stumbling block for Mr Lloyd.
Finally, it is worth noting that Mr Lloyd’s claim may not have stumbled on the individual assessment of damages point had it concerned anti-competitive behaviour and been heard before the Competition Appeal Tribunal (“CAT”). The CAT has the power to award damages to groups on an aggregate basis, and does not have to involve itself directly in the mechanics of how such damages are shared (provided it is satisfied that the chosen mechanism is “just”). This being so, had the claim been framed as an abuse by Google of its dominant position, the outcome may have been very different. This is certainly food for thought for future claimants, and may well lead to renewed calls for the CAT regime to be rolled out to all sectors.
Caroline Harbord is a Senior Associate and Nick Owen an Associate in the Commercial Disputes team here at Forsters LLP.
Helen Marsh quoted in the Daily Telegraph on competitive purchases
21 December 2021
Views
Residential Property Partner, Helen Marsh, has been quoted in the Daily Telegraph article, ‘Ten ways to win in the cut-throat property market’.
With property stock at a considerable low, buyers are facing vast competition to get their offer accepted. As a result, buyers must begin to think outside the box to set themselves apart from others.
One such method, is the way to approach leasehold extensions. If you are buying a leasehold property and the lease requires extending, you need to have owned the property for two years. Typically, buyers would demand the seller extends the lease, but given the market competition, that is not a luxury the buyer can afford.
Helen recommends, that keen buyers should take the lease as it is and “then ask the seller to serve the lease extension notice in their own name and, at completion, assign the benefit of that notice to the buyer”.
The full article can be read here, behind the paywall.
The Entrepreneur’s Exit – Avoiding the Legal Pitfalls
21 December 2021
News
The post-COVID bounce back in M&A deals has led a lot of entrepreneurs to consider selling their businesses. Business owners are aware that today’s extremely healthy M&A market will not continue indefinitely and that the window of opportunity will soon begin to close.
This paper looks at the most common legal pitfalls encountered by entrepreneurs selling their businesses, as seen by the Corporate and Private Wealth teams at Forsters. These teams have decades of experience in advising entrepreneurs on business exits. They know the steps every entrepreneur needs to take to get a business in the best legal shape for an exit, as well as what they need to do to manage the tax bill on their gains and maximise the wealth they secure for their families.
Get your business paperwork in order – bidders worry they will be buying problems
A business with its paperwork in order reassures potential bidders – they will see it as lower-risk and more likely to result in a quick, clean transaction. The Corporate team at Forsters often advises entrepreneurs on how best to clean up their paperwork and make their businesses as attractive as possible. The five big issues they see most often are:
Renegotiate business debts if necessary – don’t leave it to the buyer
Not having long-term control over the cost of debt of a target business can be an issue that puts off potential acquirers. Any loan renegotiations that need to take place should be concluded before you open the business’s books to a bidder. Failing to deal with the problem risks them walking away or lowering their bid.
Extend the business’s property leases if they are running out – it makes the business more attractive to an acquirer
A potential acquirer will likely be uncomfortable if a lease on a key property used by the business – an office, factory or retail site – is coming up for renewal shortly after the purchase. Having certainty over future costs is valuable, as is avoiding the disruption of relocating the business. It is well worth getting renegotiations with landlords underway a year ahead of your projected exit point.
Formalise any ‘gentlemen’s agreements’ with staff, suppliers and customers
Another common issue that acquirers dislike is if a business has failed to formalise the agreements it has with its key staff, suppliers and customers. Far too many businesses still operate on long-forgotten ‘gentlemen’s agreements’ with key staff. Senior team members who have been with the business for many years may not have formal contracts in place, creating a risk that they could quickly walk away from the business following an acquisition. Bidders will want to see that senior staff are contractually incentivised to stay with the business for at least 12 months and have oversight of the costs, including their pensions, bonuses, profit shares and any other remuneration.
The same goes for contracts with important customers – it is common to find formal arrangements that expired long ago and have continued on an informal basis. This creates the potential for key clients to be lost without notice periods, impacting turnover without warning.
This risk can impact a valuation or a bidder’s willingness to move forward with a purchase. If this is the case in your business, rectify it before starting the sale process.
Update the shareholder register to avoid costly disputes
Another common issue, especially for startups in industries like technology, is the granting of equity to key staff. While this can be an excellent way to retain important contributors to business growth, if it is done informally and the shareholder register is not properly updated, it can trigger costly and avoidable disputes. If these informal grants of equity were made several years earlier, recollections of the details often differ between the parties and misunderstandings can become litigation when an offer is made for the business. Sit down with those key staff members as early as possible, formalise their stake in the business and update the shareholder register.
Make sure any IP the business holds is protected by patents and trademarks
More and more businesses are seeing the value of the intellectual property they hold make up a significant percentage of their valuation, but this IP only has real value if it is protected by patents and trademarks. Entrepreneurs have seen potential bidders walk away from negotiations after finding that IP the business relies upon is not protected, risking devaluing their investment in the future.
Taking advice from an intellectual property lawyer is vitally important if your business has proprietary systems or owns market-facing brands that form part of its value.
Deal with any difficult ‘legacy issues’ the business has
Bidders are always on the lookout for anything they might deem to be ‘skeletons in the closet’ for a business. During a business’s early years, entrepreneurs often file issues away under ‘to be dealt with later’. The Corporate team at Forsters say examples of this kind of issue that entrepreneurs may have to deal with before they try to sell their businesses include:
Ensure the business used furlough properly – and deal with it if there are any problems
In the early days of the pandemic, there was plenty of confusion around the furlough scheme and a lot of businesses made claims that later turned out to be in error. HMRC is now hunting down businesses that owe money because of incorrect furlough claims. It is far better to deal with these issues proactively rather than waiting in hope that HMRC misses it. There are likely to be significant penalties for businesses that made claims HMRC deems to have been ‘fraudulent’ and there will be little sympathy for those who did not come forward to report it voluntarily. Acquirers will not be keen to purchase a business with a risk of this kind.
Unwind any ‘problematic’ transactions from the company’s history
It’s not particularly unusual for businesses to have long-buried compliance issues dating back to their early days as a startup. When the books are turned over to a potential bidder, those issues have a tendency to come back to the surface. If, for example, a director purchased a car for personal use through the business, it can be a significant red flag to an acquirer that there are other governance problems. Any business owner with issues of this kind would be well advised to unwind any of these transactions before they put an M&A deal at risk.
Prepare your heirs inheritance by getting your taxes in order
A key driver for many entrepreneurs to build a business in the first place is the desire to provide wealth and comfort to their families. A key part of being able to do this successfully is to prepare your personal tax situation to maximise your gains – and by extension, their gains – from selling your business. The Private Wealth team at Forsters say that the two big issues for entrepreneurs to be aware of here are:
Don’t gift your children cash from the sale – you may overpay tax, and you will miss the chance to protect the money (e.g. from divorce)
It is common for entrepreneurs to want to pass on some of the capital generated by the sale of a business to their children. Taking advice on the most tax-efficient way to do this is important. Completing the sale then gifting your children cash is rarely the best way. Capital Gains Tax savings can be made if shares are given to children before the sale.
Also, shares in a business typically qualify for Business Property Relief (BPR) from inheritance tax, which means that before the sale there is a unique opportunity to transfer assets into trust for the children. After the sale, a gift of cash into trust would suffer an immediate 20% inheritance tax charge. Having assets in trust can ensure that the children receive benefits only as and when they are ready, and can provide protection on divorce. An outright gift of cash offers no such protection.
Be careful about leaving too much cash in the business – your heirs will end up paying too much IHT
As mentioned, one of the key tax reliefs available for entrepreneurs passing on shares to their children is Business Property Relief (BPR). But if there is too much cash in the business, the relief may be limited.
Make sure there is a solid rationale for the business holding cash, such as a planned programme of capital investment. Ensure this is documented and that your heirs stick to the plan.
Think about how to manage your own capital gains tax bill
Capital Gains Tax can act as a significant deterrent to entrepreneurialism. Even the Government recognises this, having put in place tax reliefs like Business Asset Disposal Relief (formerly Entrepreneurs Relief) to encourage investment in business growth. The Private Wealth team at Forsters say that this relief is not the only way for entrepreneurs to reduce their CGT bills when they exit a business.
Planning to move abroad after selling your business? Consider doing it before that to reduce your CGT bill
Many entrepreneurs plan a relaxing retirement overseas once they have exited their business. However, few consider the possibility of moving overseas before the sale of their business, which can offer significant tax advantages. If you become resident outside the UK for tax purposes for six years, you may not be liable to UK CGT on the sale of your business during that time. If it works for your personal circumstances, it may be worth accelerating your permanent move out of the UK to save yourself what is likely to be a very substantial tax bill.
Becoming a serial entrepreneur? Business Asset Rollover Relief can defer your CGT bill while you grow your wealth
Business Asset Rollover Relief (BARR) allows an entrepreneur to defer the payment of a CGT bill by investing their capital gain into a new business. The CGT bill from the first business sale doesn’t become payable until the second business is sold. That can be very powerful – if your second business is successful, your personal wealth may make the CGT bill from the first business relatively insignificant.
Conclusion
For an entrepreneur, making the most of the post-COVID bounce back in the M&A market is possible so long as you take the right advice. Just as when building the business in the first place, preparation is important. Your business didn’t become successful by chance – it became successful through careful planning and wise decision making. Apply the same approach to your exit and you give yourself the best chance of a smooth transaction and an optimal price.
The Corporate and Private Wealth teams at Forsters are here to advise entrepreneurs on every aspect of their business journey, from startup to growth and exit.
From growing a business to starting a family or handing over control of that business to the next generation, every individual has their own goals to aspire to. Our Private Wealth lawyers advise our clients throughout this family life cycle, providing the legal advice required for specific transactions such as purchasing a home or selling a business, whilst also advising on the long-term opportunities for succession and estate planning.
The nuances of preparing a family business for sale/investment
17 December 2021
Views
Stuart Hatcher, Partner, and Lianne Baker, Knowledge Development Lawyer, both of our Corporate team, have written for eprivateclient on the nuances of preparing a family business for sale/investment.
One of the big challenges for a family business is reaching the point where it’s determined that the right thing to do is to sell the business.
Clearly, many family businesses aren’t in the market to sell and are true multi-generational dynasties, but others may find that the time has come to move on.
The decision to sell can be extremely difficult but once this hurdle has been overcome, an equally formidable problem is who to sell the business to and it is this last issue which many family businesses will not ever have considered.
Sometimes the starting point for such businesses may be the relatively simple task of deciding who they wouldn’t want to sell to – for example, a sale to a competitor or private equity may not feel the right “fit” (although for many, either of these can be a solution that works) or there are legacy aspirations with the ideal buyer having like-minded views about the long-term vision for the business.
Such aims are leading to an upsurge in the number of family businesses being sold to family offices and other private wealth funds, who are increasingly seen as alternative investors and buyers in the market.
As advisers, one of the questions we are often asked, particularly when a client is interested in non-traditional buyers such as family offices, is “how do we find the right buyer?” On that basis, we thought that it might be helpful to set out some of the factors and considerations that we think are important to take into account when making this decision: A. Identify the alternative buyers and sources of funds. Unlike the more traditional private equity industry and trade buyers, there isn’t an easy way to access and find family offices and wealth funds, primarily because there isn’t a real directory of family offices available and many are private by their very nature so will not advertise publicly. You will therefore need to speak to your advisers who have expertise in this space and as a result, have a good network and can access these types of entities. It’s important to use advisers who are experienced in the family office and private wealth sector and can make use of their connections to make the right introductions and ask pertinent questions regarding interest levels.
B. Remember to tell the story and explain the vision of the business, and emphasise the long-term opportunity. While private equity exit timelines will usually target five to seven years for a return, most family offices and wealth funds don’t have the same imperative to prove track records of return and are happy to hold businesses they like for the long(er) term.
C. Don’t be shy about highlighting the ESG credentials of the business. In our experience, many family businesses don’t appreciate that they are already ahead of the game on ESG. Often, such businesses have been around for a long time and as a consequence, have already thought about their long-term impact, which, in turn, has caused them to consider the business’ long-term sustainability. Too often in other sectors, the focus point is aimed at the figures, business growth (both historic and future) and market trends. However, buyers are increasingly desirous of understanding a wider range of metrics beyond the mere “numbers”. We are finding that many family businesses inherently cover the “S” in ESG without realising, contributing much to the wider community as part of their values and culture. It is all too easy to discount the merits of this and perhaps undersell this element as part of a sales package (it may seem glib, but often the name of the family and the standing in the community means that this is a major focus of a family business).
In our view it has never been a more open environment to sell a business to different, “non-traditional” interested buyers, but against that it has also never been as complicated to navigate and find the right buyer. However, with time and the right advisers, finding the right buyer is in no way an insurmountable challenge. It has also probably never been more apparent that many family businesses are already ahead of the game in some areas of particular interest to buyers, such as ESG, and this can facilitate the process of finding the right buyer, provided that the business’ ESG credentials are highlighted and form a key element of the sales process (rather than assuming that it is just “part of the business” or not something that an investor would be interested in).
Private Client Partners provide a UK tax update at the Family Balance Sheet Event
17 December 2021
Views
Forsters hosted two Family Balance Sheet events on 1 and 8 December with Stanhope Capital.
This event was designed to update UK families and their advisers each year on the performance and outlook for the most popular asset classes held on their overall balance sheets.
Each year the key characteristics of each asset class are examined together with its capacity to protect against inflation, its liquidity and execution costs and the UK taxation implications. This year the threat of continuing inflation is at the forefront of families’ concerns.
At this annual event a specialist in each asset class reviewed recent performance and the outlook for returns. Forsters’ Private Client Partners, Catherine Hill and Jeremy Robertson, provided a UK tax update.
The event can be watched in full below, Forsters presentation begins at (1:30).
The residential property developer tax (RPDT) will be levied at 4% on property development companies with annual profits in excess of £25m.
The tax is planned to operate for ten years – with an estimated £200-250m expected to be raised annually.
The term ‘residential’ for RPDT purposes is broad.
No deduction is allowed for any interest.
The autumn Budget on 27 October 2021 included the important announcement that the residential property developer tax (RPDT) will be levied at 4% on companies or groups of companies undertaking UK residential property development with annual profits in excess of £25m. It is expected to operate for only ten years, although keen historians might note that income tax, when first introduced on 9 January 1799 by William Pitt the Younger, was ‘a temporary measure’ and had a reassuringly low rate of just under 1% on annual incomes of £60 a year (about £7,000 according to the Bank of England’s inflation calculator to 2020) although increasing on a graduating scale for higher incomes.
The policy objective of this new tax is clearly that there are: ‘significant costs associated with the removal of unsafe cladding’ and so ‘the government believes it is right to seek a fair contribution from the largest developers in the residential property development sector to help fund it,’ according to HMRC’s policy paper published on 27 October 2021. The anticipated tax receipts, certified by the Office for Budget Responsibility, are shown in the table in RPDT receipts.
Since I last wrote about this new tax (‘Learning from the past’, Taxation, 10 June 2021, page 17), the draft legislation has been published (see Finance (No 2) Bill 2021-22, clauses 32 to 52) and a number of important points have been clarified.
Who will RPDT apply to?
The RPDT will apply to companies and groups of companies only. So, a group of individuals forming a limited liability partnership or a 1907 limited partnership with a general partner company entitled to only 1% of the profits, would fall outside the new tax.
The company has to be within the charge to UK corporation tax. This means that a company incorporated in the UK, or a company incorporated elsewhere in the world which is centrally managed and controlled in the UK, or which, for example, trades in the UK through a permanent establishment, will each be subject to RPDT if it undertakes ‘residential property development activities’ (residential property developer activities) and will be classified as a ‘residential property developer’.
A residential property developer (or a related company) must have (or have had) an interest in land in the UK and the activities must relate to the development of residential property on, or in connection with, that land. While the definition of relevant activities is non-exhaustive and includes, for example, designing, constructing/adapting, marketing or managing, tying residential property developer activities to having an interest in land means that the independent – nonrelated company – architect, builder, agent and property manager will not be subject to this tax. Most of the time it should be relatively clear whether the property manager is related to the land owner as advisers are very familiar with the ‘group’ concept, although there are nonetheless some nasty bear traps, but it should be remembered that, in the context of RPDT, a relevant joint venture arrangement can be triggered by as little as a 10% shareholding.
The definition of interest in land has several useful exclusions which mean that neither a lending bank with security for its debt, or a builder which has a temporary licence to occupy the premises – to do the construction/conversion – will be within the scope of RPDT.
As useful as these exclusions are, the most important part of the definition of a qualifying interest in land for these purposes is that the interest must form part of the developer’s (or a related company’s) trading stock – typically an interest that is disposed of in the ordinary course of the trade of development. This means that those who develop land for investment, ie build to rent (BTR), are not within the reach of RPDT. Although this clarification is a huge improvement on the initial rules, caution will still be required as the boundary between trading and investing is not as clear cut as it could be. In addition, there is the further vexed issue of appropriation to trading stock that will have to be considered, as well as the question of warranties and indemnities which will be sought when buying or investing in the shares in a BTR company.
2021 to 2022
2022 to 2023
2023 to 2024
2024 to 2025
2025 to 2026
2026 to 2027
–
+200
+215
+225
+235
+250
What is ‘residential’?
The term ‘residential’ for RPDT purposes is wider than may be thought. As such, a further word of caution is required here, as developers in forward funding contracts may well have held an interest in the development property as trading stock and so will be within the RPDT scope (subject of course to their profit levels).
Even if the developer bought the land as a transfer of a going concern (TOGC), for example an office block which it then sells with vacant possession to the funding bank, that land may nonetheless be residential, as ‘residential’ – a chameleon term meaning different things for different taxes – for RPDT purposes. This has an extended meaning, for example ‘land in respect of which planning permission is being sought or has been granted so that it, or a building on, interest in or right over it,’ will be classified as a dwelling or gardens or grounds of a dwelling, according to the proposed paragraph 37(1)(d) of the draft legislation in Finance (No 2) Bill.
It would be easy to glance quickly at the dwelling exclusions for RPDT and assume that they are similar to either the stamp duty land tax rules or the original draft of the RPDT rules, but there are some subtle differences or changes, including the addition of the following two categories – which one suspects are pandemic-related:
residential accommodation for members of the emergency services or persons working in a hospital; and
temporary sheltered accommodation.
Amendments have also been made to the student accommodation exclusion. In my previous article, I referred to the difficulty of defining ‘student accommodation’ so it is interesting to note that the draft legislation drops ‘purpose built’ and instead concentrates on a building designed, adapted or being construed for use as student accommodation where:
the majority of the occupants will be undertaking a course of education (this to include school pupils); and
it is reasonable to expect that such persons will occupy for at least 165 days a year.
In a post-lockdown world, expected occupation is a sensible rule to be embedded up-front in the legislation, although public school terms may need to lengthen.
I had previously been concerned that ‘purpose-designed supported housing with communal facilities providing accommodation with care’ might not have been broad enough to capture the new wave of elderly care homes, but the revised wording of ‘a home or other institution providing residential accommodation with personal care for persons in need of personal care because of old age’ seems more restrictive and providers in this space may need to take bespoke advice.
How much – calculating profit
The draft legislation sets out detailed and prescriptive ways of calculating chargeable profits. As the requirement is now exact amounts attributable to the RPDT activities rather than apportionments as originally suggested, these will necessitate great attention to detail. The most noteworthy computational rule is that no deduction is allowed for any interest (or other debits pursuant to either the loan relationship or derivative contract rules), although admittedly (and fairly), neither are any such credits. But, the loss of interest deductions together with climbing interest rates is going to be a significant factor.
Group relief and internally generated losses may be accessed to the extent that they also relate to RPDT-able activities.
Key events
In a nutshell, here are the key points about the RPDT:
When? April 2022.
Why? To pay for cladding rectification.
How (much)? 4% over £25m profit.
Where? Potentially everywhere. It does not matter where a company is incorporated, it will be liable to UK RPDT if it develops residential land in the UK.
What should businesses likely to be affected by PRDT do next? They should recalculate their business plans, make sure they are compliant and not adopt any ‘rinky-dink’ tax planning because this tax carries with it (in my view) an element of corporate social responsibility having been borne out of the tragedy of Grenfell.
What else may happen?
It is understood that Michael Gove recently suggested that suppliers of products that were installed on Grenfell Tower and similar buildings could be subject to some form of levy. Could we therefore see another form of tax to deal with the cost of repairing cladding? This seems a distinct possibility as Michael Gove confirmed earlier this month that the government will ‘pause’ plans to make leaseholders pay to make cladding safe, questioning why they have to pay ‘at all’.
With many people living in unsafe properties which have devalued and are inherently risky, it is perhaps not surprising that the government seems to favour hypothecated taxes. Ultimately, such taxes promise transparency, accountability and public support. And let’s not forget that we already have a precedent – after all, income tax started in the UK as a bespoke tax to cover the cost of the Napoleonic wars.
What can be done when a property owner is unwilling to cooperate with necessary repairs? Liberty Chappel answers a reader’s question in The Times
14 December 2021
Views
“Is there nothing we can do if we cannot appeal to his better nature?”
Liberty Chappel, Senior Associate in our Property Litigation team, answers a reader’s question in the Home section of the Sunday Times asking what can be done when a neighbouring property owner appears unwilling to cooperate with necessary repairs.
In her response, Liberty explains that when neighbours share something as fundamental as a roof, the obligations are often recorded by a covenant on the freehold title of each property and it will depend on the wording of the covenant as to whether it is binding on anyone other than the original contracting parties.
She highlights that if no express obligation exists, the position would be that each neighbour is responsible for the part of the roof immediately above their property. However, where wholesale replacement of the roof would be most cost effective, further steps can be taken to try to secure a consensus.
Read the answer in full, here, behind the paywall.
I recently read an article written by a solicitor-turned-barrister which set me thinking about transactions which turn bad. As a transactional lawyer, I am well aware that on occasions, relations between parties sour and disputes arise, so how can parties reduce the risk of time-consuming and costly litigation at the outset?
First, be aware that no matter how good relations are when negotiating and first entering into a transaction, things change. Financial difficulties, tough targets or new personnel, for example, can cause strain and a great relationship now might not always stand the test of time.
Second, instruct lawyers to advise you and document your deal. Agreeing terms on the back of an envelope may save you time and money in the short-term but when things go wrong, it’s very difficult to evidence your original intentions and the terms agreed. Which brings me onto the next point…
Third, don’t throw away potential evidence; physical evidence will often hold more weight in court than a witness statement. A key point in the article I mentioned earlier, it is particularly relevant at the current time when many businesses are downsizing office space and going paperless. Whether you’ve done a property deal and have copies of old plans and photographs of the site or have entered into a loan with security and have finance records and share certificates, don’t be tempted to reduce clutter on the basis they’re no longer needed; they may well be if a deal or term of a deal is called into question.
And finally, as my litigation colleagues would say, don’t wait until the final hour to call in the lawyers if a dispute seems likely. Taking legal advice, for example at an early stage of a disagreement or as soon as you realise a payment cannot be met, can often resolve the issue speedily and amicably.
This note reflects our opinion and views as of 7 December 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
James Brockhurst to speak at upcoming webinar on Crypto Lending
13 December 2021
News
Private Client Senior Associate, James Brockhurst, has been invited to speak at a webinar hosted by CoinDesk entitled ‘Crypto Lending as the Leading Alternative Investment for HNWI’.
The webinar will take a deep dive into the market structure of crypto lending and its growth trend heading into 2022, adoption by family offices in the US vs EU, and the complex hurdles posed by regulations and lack of infrastructure in both markets.
James will be joined by Chris Harmse, Managing Director of BVNK, Nick Martitsch of Compound Labs and Nick Lord of Blue Pool Communications.
The event will take place at 5pm GMT on 16 December. If you wish to attend, please register here.
London Calling? – Government Proposes Corporate Re-Domiciliation to the UK
8 December 2021
News
The UK government announced in its Autumn Budget that it is considering putting in place a new regime to allow overseas-incorporated companies to re-domicile to the UK and has published a consultation to this effect (the “Consultation“). If the plans go ahead, foreign companies will be able to change their place of incorporation to the UK while retaining their legal identity. The intention is to “strengthen the UK’s position as a global business hub” by bringing the UK into line with various other jurisdictions, such as Canada, Singapore and Australia, which already permit re-domiciliation.
Why allow corporate re-domiciliation?
Currently, the UK does not allow corporate re-domiciliation and any overseas business which wishes to have a UK entity must incorporate a UK entity from scratch and amalgamate it into its group structure. This can be costly and time-consuming and is likely to have significant tax consequences, although a simpler strategy of moving the tax residence of the non-UK entity could be adopted – if the desired commercial benefit can be achieved by this stratagem.
The new regime would allow a foreign body corporate to relocate and change its place of incorporation to the UK, so maintaining operational continuity and, according to the Consultation, in general being able to retain its “corporate history, management structure, assets, intellectual and other property rights, contracts, and regulatory approvals”. As would be expected, any entity which re-domiciles to the UK would need to comply with UK legislation, regulations and corporate governance standards in the same way as any other UK-incorporated entity. One cannot help but draw comparisons with the European Court of Justice’s (the “ECJ“) decision in the 2012 VALE case in which an Italian established company sought to convert to a Hungarian established company. Italian law permitted such a conversion, but Hungarian law only allowed Hungarian established companies to convert. The ECJ held that provided that an EU member state (the “Recipient“) had a conversion procedure in place, it could not prevent a company established in another member state from converting into a Recipient company. The proposed UK re-domiciliation regime will essentially be the UK’s conversion procedure albeit with no limitation being placed on the origins of the converting company.
There is, at present, no suggestion that re-domiciliation between the UK nations, e.g. from England and Wales to Scotland, will be a possibility.
Prior to our leaving the EU, similar regimes were available in the UK in the form of European Companies (Societas Europaea) (“SE“) and pursuant to the EU Cross-Border Merger Directive (the “CBMD“):
An SE is a European public limited company and can be incorporated in any EU member state. The idea behind SEs is that businesses with entities across several EU member states can be unified and that transfer across member states is easier, with no requirement to incorporate a new legal entity in the transferee state.
The intention behind the CBMD was to simplify the merging of companies across EU member states. The UK does not have a merger regime (instead companies seeking to “merge” have to transfer the shares or assets and business from the transferor company to the transferee company following which the transferor company can be wound up), but this regime enabled UK companies to merge with companies from different EU member states using a far more straightforward process.
Since the end of the Brexit transition period, neither of these options are now available within the UK (whether a company wishes to transfer into or out of the jurisdiction). The newly proposed UK corporate re-domiciliation regime arguably seeks to achieve a similar outcome on a global scale.
What does the Consultation cover?
The Consultation seeks respondents’ views on the advantages of, and demands for, such a re-domiciliation regime, the eligibility criteria for foreign entities to re-domicile (including solvency requirements) and the tax consequences of establishing such a regime.
The Consultation also requests opinions on an outward re-domiciliation regime whereby UK-incorporated companies could relocate to other jurisdictions. Although several jurisdictions allow this two-way relocation, other countries, such as Singapore, only permit an inward move. Arguably, preventing a company from re-domiciling out of the country at a later date may deter foreign companies from re-domiciling to the UK in the first place, although if it is decided that outward re-domiciliation will be permitted, care will need to be taken to ensure that re-domiciliation cannot be used for short-term gains. To this end, the Consultation asks for thoughts around an exit fee, shareholder approval requirements and settlement of any payments, disputes and overdue obligations. In addition, putting in place a minimum period of time before which an entity which has chosen to leave the UK could re-domicile back again is a distinct possibility.
Will there be conditions to re-domicile?
The Consultation seeks views on certain eligibility criteria which the government is proposing before an entity can re-domicile to the UK but makes clear that an economic substance test is not on the cards.
Any body corporate will be able to use the new regime as long as there is a comparable form in the UK, its country of incorporation allows it to re-domicile and it complies with the necessary legal requirements to transfer. There will be no sector or industry restrictions.
The directors of the body corporate will need to satisfy good standing conditions and not be subject to any legal or enforcement action against them.
Re-domiciliation of the entity must not pose any national security risk or be contrary to public interest.
The body corporate must have passed its first financial period, be solvent and able to provide certain documentation, including a report setting out the legal and economic effects of the transfer and any implications for its shareholders, creditors and key stakeholders.
Considerations for directors
Directors will need to consider the pull factors carefully, i.e. why do they need the company to be treated as being domiciled in the UK (does that mean that specific grants or tax reliefs may be accessed)? Instead, could the same result be achieved by simply moving the tax residency to the UK by appointing new UK directors and thus ensuring that central management and control (“CMC“) is in the UK? UK tax groups with their tax advantageous treatment typically do not look to the domicile of the company in determining membership of the group.
Moving the domicile to the UK is often likely to be accompanied by a change in CMC and local advice will be needed as to whether these factors will mean an exit or other tax charge in the other jurisdiction.
As ever, directors will need to weigh-up a number of perhaps competing factors when taking such a strategic decision.
Will the regime have any significant effect?
Although it’s far too early to say whether permitting re-domiciliation will have any appreciable effect on the UK’s economy and standing in the global market, such a regime will certainly need a carefully balanced application process. Maintaining the world’s trust and faith in the UK’s corporate and business sectors is paramount but could result in unwieldy and over-burdensome procedural requirements which negate the potential advantages of having such a regime in place.
As at 8 November 2021, there were 3,420 established SEs, suggesting that such a system does find advocates and is appreciated by certain businesses. That said, as at December 2015, the vast majority of SEs were registered in the Czech Republic. Recent figures are difficult to come by, but it shows that certain jurisdictions may be more inclined to utilise the regime than others.
UK take-up of the CBMD also shows significant use with 108 cross-border mergers involving a UK company announced in the year 1 November 2017 to 31 October 2018 (albeit that this was at the time when we were still unsure whether the regime would continue to be effective after 29 March 2019, when the UK was originally set to leave the EU). In the preceding year, this figure was 77.
SEs and cross-border mergers aside, other jurisdictions seem to have effected a workable process although admittedly it is difficult to find evidence or statistics as to how many entities take advantage of such regimes and actually re-locate to those countries. It will certainly be interesting to see the business world’s view once all responses to the Consultation have been received and then how the government chooses to proceed.
If you wish to read the Consultation in full or take part in the Consultation, it can be found here. Responses must be received by 7 January 2022.
Disclaimer
This note reflects our opinion and views as of 25 November 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
Forsters top-tier Residential Property team recognised at the RESI Awards
2 December 2021
News
Forsters’ top-tier Residential Property team have ended the year on a high, having been ‘Highly Commended’ for Legal/Professional Team of the Year at the RESI Awards 2021.
The news completes a successful year for the team which has included an uplift to Tier 1 in the Legal 500 UK Guide 2021, rankings in the Spear’s Property Advisors Index 2021 as recommended lawyers and a win at the Enfranchisement & Right to Manage Awards 2021 for ‘Solicitors Firm of the Year‘. The team also welcomed two new Partners, Robert Barham and Charles Miéville.
These accolades have cemented the team’s position as leading Residential Property advisers.
Forsters advises Barwood Capital on Eton House Richmond
2 December 2021
News
The Commercial Real Estate team has advised a fund of Barwood Capital on its purchase of Eton House, a 32,774 sq ft office building in the heart of Richmond, which it will repurpose to outstanding and sustainable office space.
This purchase was the first in the office sector for Barwood since 2016. Eton House will undergo a full back-to-frame refurbishment with an additional floor of office accommodation and roof terrace, targeting a BREEAM rating of Excellent. Eton House became vacant in November 2021 and was acquired from Aviva Life & Pensions UK Ltd for £12.9 million.
The Forsters’ team that advised on the transaction was led by Partner Victoria Towers, who was assisted by Senior Associate Alexandra Burnaby.
Vicki commented: “I am delighted to have led the Forsters’ team advising Barwood on this office deal. They are a great team and I am personally pleased to work with them on another deal.”
Adam Smith, Asset Management Director at Barwood Capital commented: “The pandemic has accelerated existing themes in the office sector, where well specified office space with a keen focus on ESG credentials continues to outperform. Our refurbishment strategy for this asset aims to deliver such space into a supply constrained market.”
Barwood Capital was advised by real estate investment advisors ACRE Capital Real Estate. Moorevale will act as Development Manager for the redevelopment scheme.
The deal received coverage in Business Leader and the Property Trade Press.
To read our latest on sustainability in the property sector please see our latest on our Sustainability Hub. For latest office insights please click here.
Our sustainability hub brings together our insights and legal expertise on a broad range of environmental matters that affect our clients’ business and personal affairs. This is a rapidly evolving and wide-ranging area of law and we will continue to share our insights about related legal developments on this hub.
ERMAs 2021: Forsters win Solicitors Firm of the Year
1 December 2021
News
Forsters were named ‘Solicitors Firm of the Year’ at the Enfranchisement & Right to Manage Awards 2021, organised by News on the Block.
Our Enfranchisement team, a specialist group of property litigation and residential property lawyers, has developed a formidable reputation in this niche and complex area of law. Winning this award not only endorses our expertise in this area, but highlights our ongoing commitment and ability to advise clients on all aspects of the enfranchisement regime, including lease extensions, house claims and complex collective enfranchisements.
On the win, Head of Property Litigation, Natasha Rees, commented: “We are absolutely delighted to have won this award. Our enfranchisement specialists are a group of driven and talented lawyers, who truly deserve to be recognised for their work in this sector.”
We are also thrilled to announce that Property Litigation Associate, James Carpenter, was ‘Highly Commended’ in the category of ‘Young Professional of the Year’. James’ commendation is a true testament to the talent we are fortunate to have in our next generation of our lawyers.
The news follows our recent success at the British Legal Awards, where Forsters were announced as ‘Property Team of the Year’.
For a variety of reasons, settlors may seek to have their voice heard when trustees exercise discretion, even from beyond the grave. One increasingly common way in which they do so is by appointing a protector, who will typically be granted powers of their own when the trust is settled. What steps are protectors required to take when exercising their power, particularly where they have a discretion in its exercise? 2021 has so far produced two apparently conflicting judgments exploring this issue:
In the Matter of the X Trusts [2021] SC (Bda) 72 Civ (Supreme Court of Bermuda)
In the Matter of the Piedmont Trust & Riviera Trust [2021] JRC 248 (Royal Court of Jersey).
Analysis of The Cases
Both cases concerned protectors with power to consent to, or veto, a trustee’s proposed exercise of power.
The issue is whether protectors should exercise independent discretion and make their own decision when deciding whether to consent, taking into account relevant considerations and disregarding irrelevant considerations (referred to by the Bermudian Court as “the Wider View”)? Or are protectors limited to satisfying themselves that the proposed exercise of the trustee’s power is one that a reasonable body of properly informed trustees could undertake, such that the role of a protector is essentially the same as that of the Court in a blessing application (“the Narrower View”).
In the matter of the Piedmont and Riviera Trusts [2021]
Despite noting that no assistance could be derived from any provision in the trust deed, the Jersey Court had “no hesitation” in rejecting the Narrower View.
They reasoned that a protector is often a longstanding friend or trusted advisor of the settlor, or the settlor themself. This suggested that the protector was appointed in order to exercise their own judgment, not to simply review the trustee’s decision. If the role was limited to judging issues of rationality, the settlor might as well have appointed someone with a legal qualification.
Furthermore, adopting the Narrower View would make the protector’s role almost redundant. It would add nothing to the Court’s role on a blessing application. The Court preferred the analysis that the protector was intended to fulfil a different role to the Court’s role and could therefore properly veto a trustee decision that was rational, which the Court might approve if faced with the same decision.
However, a protector’s power to consent did not equate to a duty to itself take the decision or dictate how a trustee must exercise its powers. A protector’s discretion to consent lies within a “narrower compass” than the decision-making role of a trustee. But a protector is not confined to a yes or no answer, and trustees and protectors should work together, as necessary, to identify an outcome on which they can both agree, in the interests of the beneficiaries. This requires full and open discussion. A trustee should provide all documents and information which may be reasonably necessary for the protector to properly discharge its fiduciary duties to the beneficiaries, which might include detailed reasons for the trustee’s proposed decisions.
Re The X Trusts [2021]
In stark contrast, the Supreme Court of Bermuda ultimately preferred the Narrower View, having considered the same question through the lens of construction principles.
Whilst the Court accepted that, when read literally, the protector provisions suggested a power of veto, it held that other relevant considerations must be taken into account in addition to the literal meaning. Thus the Court concluded that the Narrower View reflected the true construction. The Court considered that it was clear from the terms of the instruments that their dominant purpose was to ensure due exercise of the powers vested in the trustees.
As such, the Court concluded that, unless there is something to the contrary in the trust deed, then the usual role was not to exercise a power “jointly” with the trustees (a characterisation of the Wider View that the Jersey court did not share). Instead, it was an ancillary power that allowed the protector to act as a watchdog (the Narrower View).
In reaching its decision, the Bermudian Court had heard submissions that criticised the leap that the Wider View necessitated i.e. from the proposition that a protector is a fiduciary, to the conclusion that a protector must take its own independent view of whether and how the trustee’s power should be exercised. The Bermudian Court rejected the thesis that the Narrower View defined a protector’s role as a fundamentally limited one. It considered it to be substantial.
Conclusion
Both judgments acknowledged the scant judicial authority on the nature of a protector’s duties, particularly in the context of a requirement for a protector’s consent. It is perhaps unfortunate that although the Jersey judgment was handed down second, the case had been heard and the judgment prepared without the benefit of access to the Bermudian judgment, which was addressed in a postscript. This may explain why the two Courts adopted fundamentally different approaches: whilst the Bermudian Court approached the question as a “construction conundrum”, the Jersey Court (which, as it acknowledged, heard less detailed argument on the point) preferred a more intuitive approach and analysis that arguably promotes settlor influence.
It is also unfortunate that the cases are limited to considering consent powers of protectors that were also fiduciary. This might otherwise provide a clear basis for a distinction.
Whilst the tension remains, trusts practitioners should take a careful approach when advising settlors, trustees and/or protectors, and highlight the conflicting approaches taken by the different courts and the risks this poses. Whilst settlors may gravitate towards the Jersey forum (preferring this jurisdiction to others which would potentially reduce the role of protectors to “mere toothless tigers”), trustees, at least, may prefer the Narrower View (particularly given the reduced opportunity for deadlock).
Care should also be taken when drafting trust instruments to ensure that they best meet the settlor’s objectives and are clear about the nature of the power. As the Bermudian judgment suggests, that could make all the difference.
