Sanctions: What do they mean for listed companies in the UK in respect of their shareholders?

Changes to UK sanctions law

Following Russia’s invasion of Ukraine, there is heightened focus on sanctions, including, among other measures, asset freezes imposed on designated persons including oligarchs and senior individuals in the Russian government. 

Regulations 10-15 of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibit all UK persons from dealing with the funds of these designated persons, as well as from providing them with funds or economic resources, directly or indirectly.

The Economic Crime (Transparency and Enforcement) Bill 2022 introduces a strict civil liability regime in the UK for companies that breach sanctions legislation; there will therefore no longer be a requirement to know about, or have reasonable cause to suspect, a breach. A person in breach of the relevant prohibitions is liable to be fined the greater of £1m or 50 per cent of the estimated value of the funds to which the breach relates.

This briefing highlights one particular area of potential sanctions risk for UK listed companies that the new regime brings to the fore – the risk that UK listed companies could, simply by engaging in otherwise routine activities such as the payment of dividends, on-market share repurchases or new equity issuances, be considered, under the new civil regime, to be making funds or economic resources available to or for the benefit of sanctioned persons in violation of Regulations 12-15 of the Russia (Sanctions) (EU Exit) Regulations 2019. 

Although not considered in this briefing, sanctions and export control legislation in the UK and elsewhere may also give rise to a range of other issues (including criminal risk) for such issuers and their businesses and specific advice should be obtained.  It is also worth noting that sanctions legislation will not be the only area of concern for issuers following the recent events in Ukraine – for example, the FCA has already reminded issuers of their obligations under the UK Market Abuse Regulation and the need to continue to assess what constitutes inside information, taking into account that the invasion and responses from world governments may have altered the impact of information that is material to the issuer’s business assets, operations and prospects. Issuers with regulated businesses are reminded to be on heightened alert to ensure their systems and controls are sufficient to avoid the risk of being used to facilitate financial crime arising in relation to the recent events.

What does the new civil liability standard mean for UK issuers?

A key implication of the strict civil liability standard is that any routine activities which involve making funds or economic resources available to persons that are (directly or indirectly) interested in an issuer’s shares – including the payment of dividends, repurchases or issuance of shares – may now place issuers at risk of breaching sanctions legislation in any instance where the person ultimately receiving funds or economic resources is a sanctioned person, even where the issuer neither knew nor had reasonable cause to suspect this.

The often incomplete information that listed companies have about the underlying beneficial owners of their shares (where shares are held through nominees) amplifies this risk – carrying with it the potential for serious reputational and financial consequences.

Issuers should already be:

1. reviewing their shareholder register and checking the register against the designated lists of sanctioned persons; and
2. engaging with their broker(s) and registrar to obtain any additional information they may have as regards the beneficial owners of the issuer’s shares (in the case of nominee holders) and to ensure they have processes in place to check the identity of shareholders against designated lists of sanctioned persons.

The strict liability regime raises the question of how much more issuers need to do to understand who their underlying beneficial owners are. To date, there has been limited guidance from investor or governance bodies in this respect – the Chartered Governance Institute of the UK & Ireland has called on issuers to review their share registers and consider using notices under s.793 of the Companies Act 2006 (s.793 notices) to identify whether any shareholders are proscribed individuals. 

The identity of persons that beneficially own a listed company’s shares changes frequently. Therefore, for many, it is unlikely to be proportionate, practical or even possible to carry out detailed ongoing monitoring through the use of s.793 notices or the services provided by third party beneficial owner investigative firms. Such information will inevitably only be correct as at a particular moment in time. Issuers will need to conduct a bespoke risk-weighted assessment of the extent to which further steps need to be taken and precisely when they need to be taken. The factors relevant to this assessment include:

1. the number of shareholders on a company’s register of members (for example, certain companies will have a substantial number of retail investors and therefore a very large shareholder base);
2. the concentration of ownership of the company’s shareholders – many issuers will have a dispersed ownership structure and will therefore need to consider to what extent further investigation into underlying beneficial ownership would be proportionate, taking into account the number of holders that own shares above a certain threshold;
3. whether and to what extent an issuer’s nominee shareholders are regulated. Regulated nominees must comply with applicable sanctions legislation as well as regulatory obligations covering anti-money laundering, counter-terrorist financing and financial crime. These obligations are usually set at a higher standard than those imposed on non-financial services issuers; and
4. the size of the benefit that will be paid to shareholders.

Ultimately, the key question is whether that approach is reasonable and justifiable to the Office of Financial Sanctions Implementation (OFSI) in the event that it turns out funds or economic resources reached a designated person. The nature of the breach, how it occurred and early proactive disclosure to OFSI are relevant factors in OFSI’s decision to take action and the level of any penalty to apply. 

The fact that an issuer has taken reasonable steps to mitigate its risk (such as making the enquiries above) are likely to be countervailing factors against OFSI finding that the breach was egregious. At the same time, the definition of what is “reasonable” will depend on factors such as the breadth and stated intent of the sanctions as well as the relevant political context.  For example, in a statement accompanying the designations of seven prominent individuals on 10 March 2022, Foreign Secretary Liz Truss stated that the UK “will not stop in this mission to ramp up the pressure on the Putin regime and choke off funds to his brutal war machine”.

What practical steps should issuers consider taking?

Practical steps that can be taken by an issuer to mitigate the risks outlined above include: 

1. conducting an assessment of its shareholder base to identify shareholdings for which further information on ownership should be sought;
2. seeking any additional information available on such shareholdings from its broker(s) and registrar, subscribing to and utilising automated sanctions screening services and considering whether it is appropriate to issue s.793 notices and/or use third party beneficial owner investigative firms as part of a targeted ‘deep-dive’ exercise in relation to certain nominee shareholdings;
3. identifying and planning ahead of key events (e.g. issuances of equity, payment of dividends) and ensuring there is sufficient time between record and payment/issuance dates to accommodate necessary checks and information provision processes;
4. ensuring on-market share repurchase arrangements entered into with financial intermediaries are appropriately structured and contain relevant contractual protections in relation to the purchasing activities being undertaken by such intermediaries;
5. putting in place appropriate internal safeguards (e.g. employee training, updated policies and procedures on sanctions and AML risk, relevant financial controls, and good contemporaneous record-keeping of the steps taken and decisions made) and procedures for making timely disclosure to OFSI; and
6. where a s.793 notice has not been complied with, placing restrictions on the shares under s.794 of the Companies Act 2006 or, if applicable, similar provisions in the issuer’s articles of association.

Determining the appropriate steps to be taken will ultimately require careful consideration of the issuer’s shareholder base, its constitutional documents and its regulatory obligations. Of course, the nature of the issuer’s underlying business (and potentially its relevant geographies) will also need to be factored into the determination. Getting it wrong could result in serious financial and reputational damage for the issuer, whether as a result of OFSI enforcement action or litigation brought by shareholders who have suffered prejudice. 

If you have any specific questions, please get in touch with your usual Freshfields contact for more detailed advice.