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Corporate compliance – key actions business owners need to take
As a business owner, it is important to keep on top of the various laws and regulations affecting your company. This need becomes particularly important when deciding to sell as the buyer will inevitably carry out a due diligence exercise.
In short, this means they shall investigate the business’s affairs to establish if the purchase is worthwhile. The results of the investigation may lead to the buyer negotiating the purchase price, or withdrawing from the deal altogether. It is therefore crucial that your “house is in order” prior to the sale.
Statutory records – why they are important.
One of the most important aspects to consider is the requirement to keep statutory books. These are records that every company is required to keep to protect them from potential legal issues. Statutory books act as evidence for a buyer that:
- the seller does in fact own the business being sold;
- all important decisions have been approved by the directors;
- the details of directors and people with significant influence are up to date;
- the company is generally in compliance with laws and regulations.
In the context of a business sale, the statutory books are usually the first port of call for the buyer’s lawyers to review. Incomplete or inaccurate records mean that time and expense will be required to clarify the position and rectify the records. Such an interruption to the sale process can be avoided by taking steps from an early stage to ensure compliance.
Key records for compliance.
The most common records that companies are required to keep are:
- Register of Members (Shareholders) – which contains details of the company’s shareholders and the shares they hold in the company
- Register of Directors – which contains details of the people appointed as directors
- Register of Charges – which contains details of any securities granted by the company such as a Standard Security (referred to as a Mortgage in England and Wales). Companies no longer need to keep a Register of Charges if their charges are created after 6th April 2013 as they can simply be filed at Companies House. However, if the company created charges before 6th April 2013, a Register of Charges should be kept.
- Register of People with Significant Control (PSC Register) – which contains information on any individuals or companies that have significant control over the company
- Board Minutes and Shareholder Resolutions – which contain records of any important decisions passed by the directors or the shareholders.
Register of People with Significant Control (PSC Register)
The PSC Register is often either forgotten about or misunderstood. The register contains details of any individual or corporate entity having significant influence over the company, such as shareholders, directors and senior management. In order to qualify as a PSC, the person or entity must hold:
- more than 25% of shares in the company
- more than 25% of voting rights in the company
- the right to appoint or remove the majority of the board of directors
Those who qualify as “PSC’s” are legally required to be identified by the company and registered at Companies House. Companies House is the governmental department tasked with overseeing company formation and regulation in the UK.
Legal requirements
Every company has a legal duty to ensure their PSC Register is accurate and up to date. The PSC Register aims to make companies more transparent and ensure that any decisions made by the company are made with the consent of individuals with significant control. Companies are also required to provide information about any changes to their PSC’s when they occur.
The importance of Board Minutes
Deciding to pay dividends to shareholders is also a matter which is commonly not documented by the directors of a company. This is particularly prevalent in businesses where there is only one, or a few director shareholders. It is important that the company has distributable reserves available to pay the dividends declared. Distributable reserves are essentially the profits of the company which are available for distribution to the shareholders.
The dividend will be unlawful if the company does not have distributable reserves. Board minutes are a useful way of documenting how the directors made their decision, including how they considered the finances of the company.
These are some of the matters which a buyer’s lawyer will want to review when conducting their due diligence investigation. Keeping accurate records will not only keep you compliant but also prepare your business for sale.
How RCCW can help
Our Corporate Law team have the knowledge and experience to assist you and your business, whether you are looking to sell your business or simply want to get your paperwork in order. To find out more about our services contact us here or on 01224 332400. Find out more about our corporate law services here.
