The need to be cautious with corporate control requirements

Changes of corporate control at any company come with many terms and conditions, and there are plenty of regulatory hurdles to clear, due diligence to be conducted, i’s to dot and t’s to cross. 

But in heavily regulated industries such as betting and gaming, there are even more compliance and even more legal reporting duties under the Gambling Commission (GC).

Recently, there is one particular task we have become particularly concerned about: the requirement to inform the GC about changes in corporate control that are triggered by things, such as investment and buying shares, is one that can often be missed. 

Unfortunately, the potential repercussions if this procedure is not followed correctly could be very damaging. 

The rules you need to know

On 7 March, the GC published updated guidance on changes of corporate control for both public and private companies.

The primary reason the GC has these checks in place is to identify the beneficial owners who may profit from or who may exercise control over a gambling business, and to monitor sources of new funding that a licensee has generated. 

The ultimate aim of the GC is to ensure that new controllers are suitable and competent from the perspective of the licensing objectives. 

The parameters of a change of corporate control application are similar to the conditions of gaining licence approval under an operating licence application. The gaming industry is heavily regulated, and all stakeholders are subject to scrutiny, with the ultimate aim of protecting the industry as much as possible. 

Under the terms of Section 102 of the Gambling Act 2005, a company must notify the GC when a person or entity becomes a new controller of the company. 

A person or entity is considered a controller if they hold: 

• 10% or more of the shares in a licensed operator or in a parent undertaking of a licensed operator
• 10% or more of the voting power in a licensed operator or a parent undertaking of a licensed operator
• shares or voting power in a licensed operator or a parent undertaking of a licensed operator, that, as a result of which, the person will be able to exercise significant influence over the management of a licensed operator

It should also be noted that, when a person or entity obtains a 3% share in a licensee, this will trigger a key event notification at the GC. 

When a person or entity reaches the 10% threshold or above, the company must either surrender the operating licence or apply to the GC for approval of the new controller(s) so the licence can continue to have effect. 

This application also comes with a fee and the timescales for approval of a change of corporate control can vary greatly depending on the complexity of the new ownership structure if any information required by the GC is missing on considering an application, the GC has only two options: permit the operating licence to continue to have effect or to revoke the licence. 

The risk to an operator of getting this wrong or missing the statutory deadlines for notifying the GC is therefore huge.

A reporting event to the GC can be triggered by a transfer in share or voting power, or as a result of new investment. It may also be triggered through group restructurings, where a new intermediary holding entity is introduced even though the ultimate beneficial owners remain the same or similar.

Events triggering a change of corporate control that are often missed include the death of an owner, with shares transferring to a beneficiary, or the retirement of an owner with their shares transferring to other existing owners that increases their relative percentage above the threshold. 

Understandably, GC reporting requirements are not usually a priority in the case of a death, but due to the legislative requirements and the related risk to the operating licence, licensees do need to be aware. 

The important deadlines

A change of corporate control must be reported as a key event as soon as reasonably practicable, and in any event, within five working days of the licensee becoming aware of the event’s occurrence. 

They must either surrender the licence or apply for the licence to continue to have an effect within five weeks of the change occurring. 

For the risk-averse and well-prepared, Section 103 of the Gambling Act 2005 makes it possible to submit a change of corporate control application in advance of a person becoming a controller. 

In doing so an operator can obtain approval in principle and will effectively only need to notify the GC once the change takes place, subject to there being no material changes to the deal.

The supporting evidence

It is important that operators and investors come into the process aware of what they may be required to disclose to secure GC approval of a new controller. 

By way of a brief snapshot, this will include the identity of ultimate beneficial owners with 3% or more interest and detailed evidence of the source of funds.

If an entity has provided £50,000 (or the equivalent in foreign currency) or more of the funding for the acquisition or ongoing investment, the GC will require information on the source of funds. 

Entities using their own money to fund investment will need to provide information on when they were created or incorporated, and which jurisdiction they are registered in. 

Determining what the GC needs to notified of can be a particularly complex issue when it comes to trusts or investment vehicles that involve blind investment pools managed by general partners. 

Best course of action

This is an important issue which, in our experience, operators are sometimes unaware of; we cannot stress enough that they must ensure they fully understand these regulations. 

Without wishing to put too much fear into the reader, failure to adhere to these regulations could potentially lead to an operator’s licence being revoked. That illustrates just how seriously the GC takes these rules. 

Sadly, it is common for a company to fail to realise they have triggered a reporting event, and they would not need us to tell them how frustrating it would be to lose their licence over a piece of paperwork that simply slipped through the cracks.

Our advice to clients would be to get ahead of the game and ensure they are fully aware of what is required ahead of such a transaction completing. The obligation to comply with these regulations fall on the licensee, but they must also make sure the investor is aware of this requirement.  

A licensee can put in place measures to mitigate the risks, for example setting up internal controls to monitor share fluctuations so that the business becomes aware when a change of control has occurred, carrying out due diligence on investors and – hopefully without scaring them away – informing them of the reporting requirements and checks likely to be carried out by the GC.

This may seem like a laborious task and will add to the various other duties that have to be carried out regarding an acquisition of shares. But in reality, it’s simply another compliance check.

There is no reason for these measures to cause a headache, and so long as compliance teams are on top of them from an early stage, this will not be a problem. 

Being unaware of the rules will never be a legitimate defence for breaking them, so as a word of warning, do not miss this requirement.