Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019
(Limited Text - Ministerial Extracts only)
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Lord Henley
That the draft Regulations laid before the House on 10 January be approved.
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)
My Lords, the changes being made by this instrument relate to the Companies Act 2006 and supporting secondary legislation. In some cases, the changes will have no impact on business; they simply tidy up provisions in the legislation to reflect Brexit. Other provisions will have an impact on business. These provisions are mainly to ensure that certain EEA-based entities will be treated in the same way as other third country entities after exit day. This is an approach that has been taken in many statutory instruments that this House and the other place have considered over the last few months. These changes are made only when necessary to ensure that the UK does not breach the World Trade Organization’s most favoured nation rule upon exit.
I will set out these changes and the impact on companies, but first I would like to briefly highlight two provisions that remove access to EU-based processes and systems. The first is that this instrument revokes the Companies (Cross-Border Mergers) Regulations 2007. This allows the merger of two or more companies or partnerships based in at least two EEA member states. There have been approximately 400 cross-border mergers involving UK companies and a company in another EEA jurisdiction since 2010, around 50 a year. After exit, companies seeking a merger with another company outside of the UK will need to transfer assets and liabilities using contractual arrangements. This already happens now between UK and non-EEA companies, so many businesses will already be familiar with it.
The second provision is that after exit the UK will no longer be part of the Business Registers Interconnection System. This tool connects business registries across Europe. Much of the information that Companies House makes accessible on BRIS is openly available on the UK company register via GOV.UK. Many other member states do the same on their registers for business transparency reasons.
I turn now to how the provisions in this instrument deal with certain EEA entities and EEA—regulated markets. The main practical impacts are around filing changes. EEA companies that have registered with Companies House under the overseas companies regulations will need to provide additional information. This will align the information required from them with that required from non-EEA companies. The additional information is minor, such as the address of the registered office and the law under which a company is incorporated. The same group of companies will also be required to provide more detail in customer-facing material. This includes the location of the company’s head office, its legal form, liability status and whether it is subject to insolvency proceedings.
While these are minor administrative details, they are important for corporate transparency and very useful for the clients and customers of foreign companies with UK operations. These changes apply only to EEA companies that are already registered as overseas companies in the UK. We have provided companies with a three-month notice period to provide the additional information and Companies House will inform them of the requirements. The forms to update their details will be available on GOV.UK on exit day. Further changes affect UK companies which have an EEA corporate appointment—that is, a director or company secretary that itself is an EEA company. Any UK company with this type of appointment will need to provide Companies House with two pieces of additional information within three months of exit. This aligns the filing requirements for EEA and non-EEA corporate appointments.
Another change ensures that EEA credit reference agencies and credit and financial institutions are treated in the same way as those from third countries. After exit the registrar of Companies House will no longer be able to send protected information that they hold on directors to these companies.
I would also like to explain the definitions of the phrases “UK regulated market” and “EU regulated market” within these regulations. These definitions were inserted in the Companies Act 2006 by the Accounts and Reports (Amendment) (EU Exit) Regulations 2019 and are consistent with the definition in the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, which we debated in December last year. The definition confers preferential treatment on certain entities listed on EEA-regulated markets such as the London Stock Exchange and the Frankfurt stock exchange. In most instances we have inserted,
“UK regulated market or an EU regulated market”,
to maintain the status quo. However, in two places we have restricted the provisions to companies listed on a “UK regulated market” to avoid breaching WTO rules. The first is the exemption to the prohibition on subsidiary companies owning shares in a parent holding company. This exemption will be available only to companies that have access to UK-regulated markets. The second provides that only companies listed on a UK-regulated market will be able to benefit from some relaxations on controls on their distribution of profits. We are providing a one-year transitional period for those affected.
Overall, these amendments do no more than is necessary, are broadly technical in nature and will ensure that a clear and coherent company law framework is in place after exit. I commend these regulations to the House.
Lord Fox (LD)
My Lords, I thank the Minister for bringing this SI to the House. It is another episode in the unravelling process. I have four comments, along with one pro forma comment on consultation.
The Minister mentioned the Business Registers Interconnection System. My understanding is that that is already part of Companies House. Can the Minister assure your Lordships’ House that there is no change in the information available—in other words that the information that was available on BRIS remains available on the new Companies House system?
That takes me to my second point. There are a number of mentions of a role for the company registrar in this instrument, and a lot of them are time-limited over the three months post exit day. What level of capacity will be needed to handle what will be a surge of registration, inquiry and people wanting to know what to do? What level of information will go out to inform companies that they are required to do these things? Who will hold the buck for putting that information out there? It is not clear how companies will find out about this or whether there will be the capacity within Companies House to handle the three-month surge. I would like to know what kind of risk analysis has been done by the Government and what level of communication they are planning.
Thirdly, as the Minister set out there are a number of technical changes around cross holdings of shares between EEA and UK companies. It is not clear to me how many companies this would affect. What intelligence do the Government have on how many companies will be affected in this shareholding? Obviously, there is time for these companies to change that. Does that significantly change the shareholder profile of many companies in this country? If so, how? Does it have any effect overall on market liquidity? What kind of analysis of what this means has gone on?
The final substantive point is on cross-border mergers. The Minister mentioned those in his introduction. He did not explain what the implications are if there are cross-border mergers already under way now or at the time of exit. What regime are these cross-border mergers governed by?
All of this is regrettable, because we have a functioning system that works very well. I am co-operating in so far as I think it is important that we have some sense of where this is going in the regrettable event of exit day. My final point is this: can the Minister outline what level of consultation has gone on? Again, it looks like none. What is the justification for no consultation?
Lord Stevenson of Balmacara (Lab)
My Lords, the points made by the noble Lord, Lord Fox, and my noble friend Lord Adonis are very important and I hope that the Minister will be able to respond to them. I have a couple more questions to add that the Minister might wish to respond to when he sums up. To add to the comments made by my noble friend Lord Adonis about the consultation, will the Minister also confirm that, if the Law Society was the only body consulted, why were the CBI and the FSB and others not consulted and can he give adequate reasons for that?
Paragraph 7.22 of the Explanatory Memorandum refers to,
“permitted disclosures to credit reference agencies, credit institutions, financial institutions”,
and the current legislation giving “preferential treatment” to EEA agencies. I take the point made in the Explanatory Memorandum that there seems to be no particular reason for that, but will the Minister comment on whether that raises an issue about data protection adequacy? The Government are on record as saying that they want to ensure that movement of personal data between the UK and the EEA is uninterrupted. If a distinction is to be made in terms of access, does that not bear on adequacy? If so, will the Minister comment?
Secondly, paragraph 7.24 refers to political parties and expenditure. My understanding—I may be wrong and I look forward to the Minister’s comments—is that shareholder authorisation is required for donations to political parties, organisations and candidates by any companies established in the UK to ensure that their intentions in relation to those activities are transparent. I take the point that, if we are crashing out of the EU and becoming an independent body, there is a question about the relevance of payments made to political bodies operating in the EU, but that does not take the trick in relation to transparency. Surely, shareholders of UK companies should know whether their companies are making payments to political parties whether or not they are in the UK, particularly if they are operating in the EU. I would have thought that was of interest to shareholders.
I am not in any sense saying that there is anything wrong with what the Government are doing, but it would be helpful if the Minister could explain their rationale. If it is a transparency measure, it is not relevant to exclude payments made to political parties and organisations for referendums and other things, wherever they take place, simply because we are no longer in the EU. That information would be of value to shareholders. I look forward to the Minister’s response.
Lord Henley
My Lords, I thank all three noble Lords for their contributions. I was not surprised that there was comment about the consultation. I repeat that, as we made clear in the Explanatory Memorandum, we were unable formally to consult on the provisions in the statutory instrument. But as my honourable friend Kelly Tolhurst said in the other place:
“On consultation, as I outlined, we have consulted, worked with and used the expertise of Companies House to ensure that we are making the best provisions to enable UK companies to implement the regulations that we require for them to be legal if we leave the European Union without a deal”.—[Official Report, Commons, Delegated Legislation Committee, 4/2/19; col. 8.]
We extensively engaged with Companies House—I think it is the right place, initially—on the changes that will impact EEA and UK businesses. In addition, impacted businesses—I will get on to numbers in due course—were notified of many of the changes in this instrument through the publication of the Structuring Your Business If There’s No Brexit Deal technical notice published in October, including filing changes, the route of access to BRIS and the revocation of the cross-border merger regime.
The noble Lord, Lord Adonis, seems to think that we did not consult the CBI, the FSB and other similar bodies. I shall give him an assurance that applies not just to this order but to a range of other orders and orders that will cover other departments. The CBI, the FSB and others—I could go through a whole list of them—are in the department on a weekly basis seeing the Secretary of State. The noble Lord will find that they are also in the department on a regular basis seeing officials and making officials aware of their concerns. I can give a cast-iron guarantee that any concerns they have will have been noted and we will have been made aware of them. As I said, this applies not just to this order but to a range of orders. We are the Business Department. My right honourable friend the Secretary of State has made it clear that his door is always open to representative organisations, just as I made clear last week when dealing with the intellectual property regulations how recently I saw, for example, the ABPI and the BIA. Irrespective of Brexit or whatever, it is important to us to have regulations. The noble Lord, Lord Adonis, is an old hand and has been a Minister. He will have done that in the various departments in which he served, and he knows that those engagements go on with great regularity.
I shall now start working through the various points and questions that the noble Lord, Lord Fox, put. I shall start with his concerns about BRIS. It will continue to be open to scrutiny by all non-UK interests after exit. In addition, most EEA registries are open and can be accessed through the relevant websites in the EEA states, but that will have to be a matter for where the company is based. GOV.UK lists those websites for the EEA and the rest of the world. There are no changes in the information available.
The noble Lord then asked how many would be affected and whether Companies House has the capacity to deal with these matters. I can assure him that we are in constant touch with Companies House and it assures us that all is well. The impact will be small. For example, there are only five companies in scope of the change around intermediaries being a member of their holding companies and we found no companies in scope of the change to investment in companies’ distribution of profits. Going a bit further, in relation to the filing changes, we reckon there are about 1,900 companies in scope of the changes which will have three months to update their information. Again, I am assured that there are no problems in that area.
The third point made by the noble Lord was about technical changes in relation to cross holding. He asked what analysis we have done. We have made only two changes, which relate to intermediaries dealing in securities being a member of their parent holding company and how investment companies can distribute profits. The regulations will ensure that, after exit, only intermediaries that are members of or have access to a UK-regulated market will benefit from this exemption, and certain investment companies will no longer benefit from some relaxations on controls of their distribution of profits unless they are listed on the UK market.
The noble Lord’s final point was on cross-border mergers. I have a note on that which has been temporarily misplaced. I apologise to the noble Lord; I might have to write to him on that.
I turn to the concerns relating to political parties raised by the noble Lord, Lord Stevenson. The regulations amend Part 14 of the Companies Act, which sets out the shareholder authorisation required for a company’s donations to political parties, organisations or candidates for electoral office. Under the current legislation, that reflects that the UK is part of an integrated European political system. In practice, that means that the same authorisations are required whether the political expenditure relates to the UK or other member states. After exit, these authorisations will apply only to donations and expenditure relating to UK-based political parties, organisations and candidates for electoral office. We are making these changes because, after exit, it will no longer be appropriate for the UK to set shareholder authorisations on donations outside the UK, as the UK will no longer form part of the wider EU political system.
Lord Stevenson of Balmacara
It was very helpful of the Minister to read out what is already in the Explanatory Memorandum. However, that was not my point; I was asking why the Government are making the change. If the regulations are there in the first place for reasons of transparency of political contributions, it does not really matter where they are.
Lord Henley
As I said, we have to get the statute book in the right place in the event of no deal, and therefore that small change had to be made. I do not think that I need go any further than that, unless I have misunderstood the noble Lord. I will look carefully at what he has said and will possibly write to him.
The final point that I wanted to deal with related to cross-border mergers. The noble Lord, Lord Fox, asked what happens to mergers that are in progress now. Mergers between UK and EEA companies may not be recognised by the destination member state after exit. We informed stakeholders of the change via the Structuring Your Business If There’s No Brexit Deal technical notice, which was published in October and to which I referred earlier. In that, we told them what they ought to do and what advice the impacted companies ought to take.
I believe that I have answered all the points. I will write to the noble Lord, Lord Stevenson, if I have misunderstood him.