The UBO register: mandatory share transfer following a change of control

The deadline for registration of Ultimate Beneficial Owners (UBOs) in the UBO register expired on March 27, 2022. Since then, all organizations required to register must have their UBOs registered in the UBO register. The registration requirement seeks to prevent financial-economic crime. One consequence of the new UBO legislation is that it is possible to find out who the ultimate stakeholders of an organization are through the (public) UBO register. Among other things, every natural person with an (indirect) shareholding of more than 25% must be registered. This information makes it easier than before to find out whether there has been a so-called "change of control" within a company.

This can have major consequences for legal entity shareholders (including holding and management companies) that are bound by change of control provisions. Following a change of control of that legal entity-shareholder, the legal entity-shareholder may have to offer its shares to the other shareholders under the articles of association or a shareholder agreement, usually at a steep discount.

What is a change of control determination?

Not infrequently, parties who are going to cooperate in a partnership are themselves companies, each with their own shareholder(s). So, in fact, in that situation there are several packages of shares:

(i) shares in the cooperating company; and
(ii) shares in the legal entity-shareholders entitled to the former shares.

The corporate structure then looks schematically as follows:

Block grant scheme

The free transferability of the shares in the joint venture company (referred to above as the "joint venture") is usually excluded in a blocking arrangement in the joint venture's articles of association (referred to above as "Level A"). However, shares in the corporate shareholders are often not covered by such a statutory blocking arrangement. A share transfer at that level (above: 'Level B') may also indirectly result in a change of control in the joint venture. Indeed, after the share transfer, control of the legal entity-shareholder is exercised by new persons.

In other words, de facto control changes, but at a higher level. The partner in the joint venture could thus be indirectly forced - despite the blocking arrangement at level A - to have to share control in the joint venture with a non-targeted party. Practice has a solution for this: the so-called change of control provision.

Offer duty

The change of control in a legal entity-shareholder leads, if a change of control provision has been agreed upon, to the activation of an offering obligation. This means that the legal entity-shareholder whose control has changed must offer its shares to its fellow shareholder(s). In many cases at a (hefty) discount, as a result of which that shareholder does not receive the market value of his shares. The question arises as to when there is a change of control.

The concept of change of control from the SER merger rules is generally used. This is the case, for example, if more than 50% of the shares in a company are transferred. Previously, it was often difficult to determine whether such a transfer had taken place, because it was not easy to determine the percentage of shares held if a company had several shareholders. Indeed, if several shareholders in a company held shares, it was not public who these were and how many shares they held. Only sole shareholders (shareholders holding 100% of the shares) were registered in a public register; if a company had more than one shareholder, registration was not required.

So that has changed since organizations must register their UBOs in the UBO Registry.

What are the implications of the UBO registration requirement?

Previously, therefore, a shareholder often had no insight into the control relationships of fellow shareholders and had difficulty finding out whether these relationships had changed. The UBO register makes that easier. In many situations it is now relatively easy to find out whether there has been a change of control.

The following UBO data are publicly available:

• your first and last name;
• month and year of birth;
• nationality;
• country of residence;
• The importance and extent of a UBO's interest in an organization.

The latter information in particular is decisive. Any shareholder holding an equity interest of more than 25% must be included in the UBO register. This means that it is also possible to find out whether the shareholder in question has transferred his shareholding. In addition, it is no longer possible to issue a number of shares to a second shareholder and thereby avoid entry in a public register. Where previously only the sole shareholder could be traced by means of a public register, now every shareholder with a shareholding of more than 25% can be traced.

What data is not visible?

Thus, the UBO register can reveal a change of control. Unfortunately, the UBO register does not offer a solution in every case. This is because the UBO register only shows the underlying natural person shareholders who are UBOs of a company at the time of inspection. It is not (yet) possible to view a history of UBOs in order to determine whether there has been a change of control in the past . For this purpose, the UBO register must still be monitored manually from time to time.

In addition, only natural persons are registered (subject to exceptions). A share transfer between legal entities with the same UBO therefore has no effect on the UBO registration, while a change of control provision may be activated.

Finally, shareholders with a shareholding of less than 25% are generally not required to register. Therefore, a change of control because several (minority) shareholders jointly transfer their shares cannot be traced through the UBO register either.

Do you intend to transfer shares in a corporation? Then make sure that this does not trigger a change of control provision. On the other hand, it is important to keep an eye on whether the same situation occurs with the other party. In addition, make sure your UBO registration is accurate and complete. Failure to comply with the registration obligation qualifies as an economic offence and can have major consequences. Do you have questions about a change of control provision or your UBO registration? Please contact us using the form below.