February Legal Alert
New law: Limited companies must have new statutory PSC register from April
Limited companies have started making the necessary enquiries of their members to ensure they are ready to enter accurate and complete information in a new, mandatory statutory register of Persons with Significant Control (PSCs) from April.
New company law requires every UK private company, and most UK public companies, to create a new statutory register of Persons with Significant Control from 6 April 2016. Failure to do so is a criminal offence.
A company's PSC register is open to the public, provided inspection is for a proper purpose. From 30 June 2016, companies will also have to file information from their PSC register at Companies House on a regular basis.
The rationale behind the new rules is that publicising details about individuals who ultimately control or influence a UK company reduces the probability that they are using their companies for tax evasion, money-laundering or other wrongful activities.
A PSC is anyone who:
- owns or controls, directly or indirectly, more than 25 per cent of the company's shares or voting rights
- has power, directly or indirectly, to appoint a majority of the directors of the company, or
- can exercise 'significant influence or control' over the company
An individual is also a PSC if they can exercise significant influence or control over the policies or activities of any trust or firm whose trustees or partners would, if they were individuals, meet any of the above conditions.
If control is exercised directly by an individual, a company will enter the PSC in its register. However, if significant control is exercised through a legal entity (or a chain of legal entities), the company sometimes has to record one of the legal entities in its PSC register, rather than the individual.
By law, companies must take reasonable steps to find out if they have any PSCs and to identify them. They must give notice to each person (or legal entity) they know or have reasonable cause to believe should be recorded in the PSC register. Companies may also give notice to others who may know someone is a PSC, or know someone who does.
Given the deadline of April, many companies have started taking these steps now.
For a company with only a few members, who hold shares or voting rights directly, it will be easy to identify any PSCs. For companies with more complex ownership structures – for example, where shares are held in family or other trusts, by external investors or joint venturers - identifying PSCs may be more difficult.
Companies should also check whether any individual - whether inside or outside the company – has any rights to influence, control or veto the activities or decisions of their board or members, or specific actions or decisions such as appointing new directors. If the circumstances are unusual, the individual could be a PSC. This may mean reviewing the company's constitution, and shareholder or other agreements which may contain such rights.
Virtually identical rules are also being introduced in relation to UK Limited Liability Partnerships. These will come into force on the same date.
- Companies should start making the necessary enquiries of their members to ensure they are ready to enter accurate, complete information in their PSC register from 6 April.
Case law: Employers' rights to read employees' electronic communications
Employers may monitor employees' private communications at work only if it achieves a legitimate aim, is limited in scope and is proportionate, following a ruling from the European Court of Human Rights.
An employer in Romania had a strict computer and communications policy which prohibited employees from using work email and other communications systems for private purposes.
The employer asked an employee to set up a Yahoo Messenger account for communicating with customers. The employer monitored the account to make sure customers were being looked after properly and discovered that the employee was using it to communicate with his brother and fiancée during working hours. It dismissed him for breaching its policy and the Romanian courts upheld his dismissal.
The employee brought a claim in the European Court of Human Rights (ECHR) alleging that the Romanian courts had not addressed the issue of a breach of his human rights. He argued that the employer had, by monitoring his private communications, breached his right to privacy under Article 8 of the Human Rights Act (everyone has the right to respect for his private and family life, his home and his correspondence). He also argued that the monitoring was not a proportionate means of achieving a legitimate aim. For these reasons the Romanian court should have ruled his dismissal was void.
The ECHR found that whilst human rights law gave employees a reasonable expectation of privacy at work, this right was subject to an employer's legitimate objective of managing its resources effectively. Therefore, an employer could, if the circumstances justified it, be entitled to monitor employees' emails provided this was limited in scope and a proportionate means of achieving its legitimate objective.
The ECHR agreed with the Romanian court that in this case the employer had struck the right balance in its dealings with its employee, even though his private life and correspondence had been engaged, because:
- The employer's policy absolute prohibition of private communications was unambiguous and clear
- It was not unreasonable for an employer to check that its employees were working during working hours, including by monitoring their electronic communications
- The employer had accessed the employee's account to monitor his work-related messages, rather than to check for personal messages
- When it discovered personal messages, the employer did not reveal the contents or identities of the recipients, or look at anything else, such as other documents or data, on the employee's computer
- The results of the monitoring were only used in the context of disciplinary proceedings for breach of the employer's policy
Overall, these factors meant that the scope of the employer's monitoring in these circumstances was sufficiently limited in scope, and proportionate.
Parts of the press have claimed this case gave employers an unlimited right to read employees' electronic communications but this is not so. The case merely reinforces the existing legal principle in the UK that employers can monitor private communications provided the monitoring is limited in scope and is a proportionate means of achieving a legitimate aim – ie it strikes the right balance between an employee's general right to privacy and an employer's right to ensure its communication systems are not being abused.
- An employer wishing to monitor an employee's private communications should:
- Ensure monitoring is necessary to protect its interests
- Ensure its policies clearly state:
- Which communications can be monitored, and when
- Who can carry out monitoring, and how it takes place, ensuring it is limited and proportionate
Case ref: Bărbulescu v. Romania (application no. 61496/08)
New guidance: Acas publishes guidance on legal highs in the workplace
Employers will welcome a new Acas guide on dealing with legal highs in the workplace.
'Legal highs' are generally substances which are not themselves illegal, but which mimic the effects of illegal drugs. They are often sold as products that are not obviously for human consumption, such as bath salts or incense.
This guide helps employers assess the potential impact of legal highs in the workplace, and gives advice on how to address the issue in alcohol and drug policies, and how to deal with employees under the influence of legal highs at work.
Case law: Director in dispute who secretly recorded conversations with third parties had to disclose them to the other side
A managing director who secretly recorded conversations with two business people for the purpose of using them in a legal dispute against their former employer, has been ordered by the High Court to disclose the recordings to the former employer.
The managing director of a company involved in a legal dispute with another business met with two former employees of that business. He told them the meeting was to discuss doing business with them in their new roles but his real purpose was to milk them for information about their former employer. He recorded their conversation secretly and made transcripts.
The other business found out about the recordings because they were mentioned in an email disclosed by mistake. It said the recordings and transcripts of the conversation should be disclosed to them by the company.
The company argued that the conversation was privileged, and the recordings/transcripts did not have to be disclosed, because they were created to gather evidence to support its legal claim – in the same way that the record of a solicitor's interview with a potential witness in a court case was privileged.
The High Court said that the test of whether the recordings and transcripts were protected was whether, looked at objectively, the 'dominant purpose' of the conversation being recorded was to conduct litigation. The test was an objective one, taking into account the circumstances, including evidence of the intentions of those involved in the conversations.
The Court ruled that as the two former employees did not know of the dispute, and thought they were at the meeting to discuss business opportunities, the dominant purpose test had not been met. The managing director's deception distinguished this situation from that of a solicitor taking a witness statement. The conversation was not therefore privileged and the recordings and transcripts should be disclosed.
- Parties in a legal dispute gathering information from third parties to use against the other side should state expressly that they are doing so, for the dominant purpose of conducting litigation, or risk having to disclose that information to the other side
Case ref: Property Alliance Group Ltd v Royal Bank of Scotland Plc  EWHC 3341
New law: Employers budget for new national living wage from 1 April 2016
Employers are assessing the impact of, and planning for the new national living wage of £7.20 per hour for employees aged 25 or more, from 1 April 2016.
Other age groups continue to be paid the national minimum wage.
- Employers should consider the impact on their profitability, and whether and how to implement cost savings, such as different working hours or redundancy
Case law: Dismissed director penalised as 'bad leaver' under company's articles, despite successful claim against company
Companies disciplining a director for gross misconduct may have their actions upheld in court provided they act in a fair and unbiased way. This is so, even if the director successfully claims 'unfair prejudice', and the courts can value the director's shares as if 'bad leaver' provisions in the company's articles applied.
A disciplinary investigation found that a director and majority shareholder of a UK holding company, who was also the CEO of one of its subsidiaries, knew the subsidiary was bribing a director of a US customer in return for ongoing business. The director was dismissed for gross misconduct.
The director and his fellow board members were involved in an internal dispute, and the director went to court, claiming that his fellow board members had conducted the UK companies' affairs in a way which was 'unfairly prejudicial' to him in his capacity as a shareholder of the company. If a shareholder successfully claims unfair prejudice a court will commonly require the other shareholders to buy out his shares at their market value.
One of the grounds for alleging unfair prejudice was that the other directors had a personal interest in the outcome of the disciplinary process. However, the Court ruled that there was no unfair prejudice on these grounds. Although his fellow directors benefited from his dismissal, the Court said the investigation and subsequent dismissal were carried out in a fair and unbiased way. While his dismissal as a director did prejudice him as a shareholder, it was not unfair.
However, the Court ruled that other actions by the directors did amount to unfair prejudice. Even though the Court upheld the director's unfair prejudice claim, it did not order the other shareholders to buy him out at the shares' market value. Instead, it ruled that his dismissal for gross misconduct meant he was within the definition of a 'bad leaver' under the holding company's articles. 'Bad leavers' had to relinquish their shares in the company for their face value. The Court therefore ordered that the director receive only the face value of his shares - around £18m less than he could have expected had he been paid their market value.
- Companies investigating and disciplining directors or employees against a background of an internal dispute can have their actions upheld in court provided they act in a fair and unbiased way, even if the outcome benefits them
- Directors dismissed for gross misconduct can find their shares are valued much lower than open market value under 'bad leaver' provisions, even if they have successfully claimed unfair prejudice against the company
Case ref: Gray & Ors, Re Braid Group (Holdings) Ltd  ScotCS CSOH_146
Case law: Instruction to employee to speak English at work not discriminatory, if justified by circumstances
Employers should ensure that instructions to employees to speak in English at work are justified by the circumstances, and are not linked to their race or national origin, a ruling makes clear.
A Russian-born employee worked in an animal laboratory. She kept leaving her work station and making mobile phone calls in Russian. Her employer became concerned she might be involved with animal rights activists and told her not to speak Russian at work. She claimed this was direct discrimination and harassment on grounds of her race or national origin.
The employer justified its policy by saying English-speaking managers needed to be able to understand employees' conversations for security reasons. The Employment Appeal Tribunal (EAT) agreed that the policy had not been imposed because of the employee's race or national origin, but because of the nature of the work she did. This meant it was not direct discrimination. Furthermore, there was no evidence that the policy had caused her harassment.
The EAT said it was possible that banning use of a foreign language at work could amount to discrimination. However, in the circumstances of this case any other employee speaking a foreign language would also have been told to speak only English at work.
It rejected the employee's claim of an 'intrinsic link' between the employer's action and her national origin. The EAT said the employer's reason showed there was no specific link between the instruction and the employee's national origin.
- Employers should ensure that instructions to employees to speak in English at work are justified by the circumstances of their employment, and not linked to an employee's race or national origin
Case ref: Kelly v Covance Laboratories Ltd  UKEAT 0186_15_2010
New law: Homeowners start planning for significant new inheritance tax rules
Homeowners potentially liable to inheritance tax (IHT) need to plan whether and how to take full advantage of upcoming changes to the IHT rules due in April 2017, which could significantly reduce the IHT payable on death.
If your net assets on death are worth more than the IHT 'nil rate band' – currently £325k – IHT is payable on the excess over that sum at a rate of 40 % (subject to exemptions and reliefs).
No IHT is payable on anything you leave to your spouse or civil partner when you die. However, if you leave everything to your spouse or civil partner this means you have not 'used up' your nil rate band. Under the IHT rules, in those circumstances any unused part of your nil rate band can be added to your spouse or civil partner's own nil rate band when it comes to calculating IHT on their death.
The Chancellor of the Exchequer has announced an important way to further reduce your IHT liability. From 6 April 2017, there will be a new 'residence nil rate band' (RNRB) under which a significant part of the value of your residence will be exempt from any IHT charge, provided:
- You leave your residence to your 'direct descendants'
- Your estate is £2m or less
Initially, the RNRB limit will be set at £100k – rising by £25k per year, up to a maximum of £175k in 2020/2021. For example, if you die on 7 April 2017 and leave your residence to your children, no inheritance tax will be payable on the first £100k of its value.
If you do not use up all or any of your new RNRB the unused part can – like the existing nil rate band - be used to reduce IHT payable by your spouse or civil partner when they die. They can add it to their own RNRB if they leave their residence to direct descendants.
A direct descendant includes children and grandchildren (including step- or adopted children), and their spouses, civil partners, widows or widowers provided they have not remarried. The new relief will also apply to certain types of family trust holding residential property.
The Government has yet to define 'residence' for these purposes but a property you have never lived in will not qualify. Properties that you lived in but later let out may still qualify. If you own more than one residence your executors can choose which one the RNRB applies to. However, the RNRB cannot be spread over more than one property so, if you have two residences and both are worth less than £175k you will inevitably lose part of your RNRB.
If the net value of your total estate exceeds £2m (before taking advantage of IHT exemptions and reliefs), the RNRB will decrease by £1 for every £2 by which it exceeds that sum.
If you leave your residence to your direct descendants, you can only claim the RNRB up to its actual value – you will lose the remaining part of the RNRB. However, if you have downsized and your previous residence was worth more than your current residence (or you sold a former residence and do not now own a residence), your executors will be able to go back for a specified period, and calculate how much RNRB is available by reference to the value of your previous residence.
The Government has not announced how far back you will be able to go, but it is unlikely to be before 8 July 2015 when the new RNRB was first announced.
- Homeowners should consider whether to make a new Will to take advantage of the new RNRB to reduce IHT payable on death, particularly if they plan to:
- Let their home
- No longer have a home (eg because they plan to rent or live with relatives or friends), or
- Leave their residence to anyone other than direct descendants or spouses/civil partners
- Those with estates worth more than £2m may wish to consider making lifetime gifts to reduce the size of their estate
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