How to determine ownership and control? AlphaLAW

Intro

For an EU obliged entity, it is not always evident who has direct or indirect control over the client’s business. However, EU obliged entities must ensure that they do not make economic resources available (directly or indirectly) to a person or entity that is subject to EU restrictive measures by dealing with an entity that is controlled or owned by such a person or entity.

Additionally, funds and economic resources belonging to, owned, held, or controlled by a person or entity who is subject to EU restrictive measures shall be frozen.

The Council of the European Union has given guidance on the interpretation of ownership and control in the EU Best Practices for the effective implementation of restrictive measures. Furthermore, the Commission has published guidance and extensive FAQs (over 500) covering a broad range of topics and continues to update them, in order to assist stakeholders on how to apply the sanctions packages.

Ownership

In accordance with paragraph 62 of the EU best practices, the criterion to be taken into account when assessing whether a legal person or entity is owned by another person or entity is the possession of more than 50% of the proprietary rights of an entity or having a majority interest in it. If this criterion is satisfied, it is considered that the legal person or entity is owned by another person or entity.

Aggregate ownership

The Commission has provided guidance in the FAQs on how to take aggregate ownership into account.

If two or more listed persons are each minority shareholders of a non-listed entity, but their aggregate ownership amounts to more than 50% of that entity, should that entity be considered as owned by listed persons?

One should take into account the entity’s aggregate ownership. For example, if one listed person owns 30% of the entity and another listed person owns 25%, the entity should be considered owned by the listed persons.

The Commission has also provided guidance on how to account for changes in ownership and organizational structures.

If, before the listing took effect, the assets of a listed person were transferred to a non-listed third person (e.g., a family member), do the assets still need to be frozen?

Article 2(1) of Council Regulation (EU) No 269/2014 does not apply retroactively. However, it does require the freezing of all assets currently belonging to, owned by, or controlled by listed persons. If, at the time of the assessment, there are reasonable grounds to believe that certain assets “belong to” or are “controlled by” the listed person, even if they are nominally owned by someone else, then these assets must be frozen under Article 2(1). It does not matter when the assets were transferred.

Control

With regard to the assessment, the criteria exemplified by the Commission in the past in the context of “control” were non-exhaustive. In situations involving third persons (and possible family ties), other elements could also be taken into account, such as:

the closeness of business and family ties between the listed person and the third person;
the professional independence of the third person now owning the assets;
previous gifts given to the third person, and how they compare to the transaction in question;
the frequency/regularity of previous gifts to the third person;
the content of formal agreements between the listed person and the third person;
the nature of the assets (e.g., whether these are shares in a company owned or controlled by the listed person).

The EU Best Practices states the following regarding the control criteria:

P.63: The criteria to be taken into account when assessing whether a legal person or entity is controlled by another person or entity, alone or pursuant to an agreement with another shareholder or other third party, could include, inter alia:

(a) having the right or exercising the power to appoint or remove a majority of the members of the administrative, management, or supervisory body of such legal person or entity;
(b) having been appointed solely as a result of the exercise of one’s voting rights, a majority of the members of the administrative, management, or supervisory bodies of a legal person or entity who have held office during the present and previous financial year;
(c) controlling alone, pursuant to an agreement with other shareholders in or members of a legal person or entity, a majority of shareholders’ or members’ voting rights in that legal person or entity;
(d) having the right to exercise a dominant influence over a legal person or entity, pursuant to an agreement entered into with that legal person or entity, or to a provision in its Memorandum or Articles of Association, where the law governing that legal person or entity permits its being subject to such agreement or provision;
(e) having the power to exercise the right to exercise a dominant influence referred to in point (d), without being the holder of that right;
(f) having the right to use all or part of the assets of a legal person or entity;
(g) managing the business of a legal person or entity on a unified basis, while publishing consolidated accounts;
(h) sharing jointly and severally the financial liabilities of a legal person or entity, or guaranteeing them.

P.64: If any of these criteria are satisfied, it is considered that the legal person or entity is controlled by another person or entity, unless the contrary can be established on a case-by-case basis.

P.65: The fulfillment of the above criteria of ownership or control may be refuted on a case-by-case basis.

The Commission has also given its view on the control criteria. In the Commission notice of 1.9.2017, the Commission has stated the following:

When assessing whether a legal person or entity is controlled by another person or entity, alone or pursuant to an agreement with another shareholder or other third party, it is necessary to carry out a factual assessment of all the organizational, structural, and economic links between the two undertakings/entities.

The determining factor is whether the listed entity is able to and effectively asserts a decisive influence over the conduct of the other entity in question. Whilst a significant shareholding is one factor that may suggest control, there is no minimum threshold. Even a minority shareholding may be sufficient if it is allied to rights greater than those normally granted to minority shareholders and if “consistent legal or economic indicia” show that the listed entity is in fact influencing the other entity.

The indicia of decisive influence include:

a. the power to appoint or remove a majority of the members of the administrative, management, or supervisory body of such legal person or entity;
b. using all or part of the assets of a legal person or entity;
c. sharing jointly and severally the financial liabilities of a legal person or entity, or guaranteeing them;
d. having influence as regards corporate strategy, operational policy, business plans, investment, capacity, provision of finance, human resources, and legal matters;
e. putting in place or maintaining mechanisms to monitor the commercial conduct of the legal person or entity;
f. other indicia such as sharing a business address or using the same name, which could cause third parties to have the impression that the two entities are in fact part of the same undertaking.

Beneficial ownership

The Anti-Money Laundering legislation uses the term “ultimate beneficial owner” (UBO). In determining who controls the business partner, knowing the ultimate beneficial owner can be useful. Read more in the article What is the “ultimate beneficial owner” and why does it matter?