When acting for clients on fundraisings or M&A transactions, we regularly come across companies with absent or poorly maintained registers of members.
Dealing with this issue can be an unwelcome (and expensive) deal distraction, particularly as a well-advised investor/buyer is unlikely to proceed until the issue is resolved and they have comfort that the registers are in place and fully up to date.
What is a Register of Members and why is it important?
Simply put, for companies limited by shares (the most common form of company), a register of members is a record, held at the company’s registered office (or SAIL address), listing all of its shareholders and detailing, amongst other things:
- each shareholder’s residential address;
- the number and class of shares held by each shareholder;
- the date that the shares were transferred or allotted; and
- details as to when a person became or ceased to be a shareholder of that company.
The register will show all shareholders (past and present), meaning that there is a record of all shareholdings since incorporation.
The Register at Companies House (identifying shareholders and legal title)
There is often a misconception that the Companies House register is the only register that a company needs to maintain and / or that it can be relied on to identify the shareholders of a company from time to time. However, whilst it’s important for companies to make necessary filings at Companies House, the register held at Companies House is not an up to date source of a company’s shareholders.
For example, notwithstanding the fact that the annual Confirmation Statement filed at Companies House must disclose changes to the company’s shareholders since its last annual Confirmation Date, this cannot be relied upon to reveal the shareholders of a company at any particular time. This is because it is an annual snapshot only and is not updated throughout the year.
Furthermore, the information at Companies House does not provide definitive evidence of legal title to shares. Only the register of members held at a companies registered office (or SAIL address) is prima facie evidence of legal title, and therefore paramount to evidence of the ownership of shares.
Sanctions for non-compliance
If clarity of title wasn’t reason enough to ensure the directors of companies hold and maintain an accurate register of members, it is also a legal obligation under the Companies Act 2006. Failure to do so may be an offence and result in a fine for the Company and its officers in default.
It is worth pointing out that, since 30th June 2016, companies have been able to elect to keep their registers at Companies House (known as using the Central Register). However, doing so does not relieve any of the administrative burden associated with maintaining statutory registers, as Companies House must be notified of any relevant changes.
What if the company hasn’t kept a register of members?
If you are reading this and thinking that your company hasn’t kept a register of members – you are not alone. Failure to maintain a register of members (or any statutory registers for that matter) is not an uncommon situation.
Usually, this is due to the directors’ lack of knowledge or understanding surrounding the company’s statutory obligations, and recognition of the issue often arises when the company is preparing to carry out a corporate activity (such as a sale of the company, issue of further shares or a buy back).
If your company has failed to maintain a register of members, we can often resolve this issue by reconstituting the register of members. To do this, we review the company’s historic records such as previous stock transfer forms, board minutes, and Companies House filings to accurately build up a picture of the history of the company.
What if the company has a register of members but it is wrong?
On the other hand, some companies do keep a register of members, but not accurately, with the importance of the accuracy of the register being underestimated by its directors. Again, mistakes or omissions in register sometimes only come to light during a corporate activity – just when it matters most.
Minor mistakes, such as typos or spelling mistakes, can be dealt with fairly easily. These can simply be corrected by the company, provided that any such amendments are agreed to by the member in question and do not affect the share rights of any other member.
More serious mistakes can be problematic. Directors often believe that the register of members can be easily amended, or that pages of the register can be simply ripped out and re-drafted.
In reality, more serious mistakes in (or omissions to) the register of members require the consent of the Court to rectify the register via a Court application. This will be particularly relevant if it’s advisable for the directors to seek the protection of the court (i.e. to mitigate the risk of claims by third parties alleging prejudice arising from the rectifications).
Clearly seeking a court order is not something that business owners will want to be faced with amid the sale of their business but we have significant experience in advising in these situations and the alternatives available.
What can I do to ensure my company is compliant?
Prevention is often better than a cure. For your company to be and remain compliant (and to avoid any pitfalls when the time comes for the sale of your business) make sure you:
- Locate your register of members and ensure that it is up to date and kept up to date.
- Take advice on having the register of members (and other statutory registers) reconstituted if the company does not have any.
- Ensure that when Companies House filings are made, you consider whether the register of members also needs to be updated. A transaction as simple as a share transfer between existing shareholders or a re-classification of shares would still require the register of members to be updated.
- Consider engaging a company secretarial expert. We offer company secretarial administration services, whereby, for an annual fee, we can hold and maintain your statutory registers, and ensure that registers are subsequently kept up to date alongside making Companies House filings.
If you have any questions or would like further information on registers of members, please do not hesitate to contact our Corporate and Commercial team, who will be happy to help.