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Baroness Farrington of Ribbleton: My Lords, I beg to move that consideration on Report be now adjourned.
Moved accordingly, and, on Question, Motion agreed to.
House adjourned at one minute to eleven o'clock.
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Wednesday, 15 March 2006.
Grand Committee
The Committee met at fifteen minutes to four of the clock
[The Deputy Chairman of Committees (LORD HASKEL) in the Chair.]
Company Law Reform Bill
(Ninth Day)
The Deputy Chairman of Committees (Lord Haskel): First, I inform the Committee that there is a revised groupings list on lavender paper. I must announce that if there is a Division in the Chamber while we are sitting, the Committee will adjourn for 10 minutes as soon as the Division Bell rings. This is day 9 of the Committee; I congratulate noble Lords on their stamina.
Clause 526 [Meaning of "offer to the public"]:
Lord Hodgson of Astley Abbotts moved Amendment No. A14:
The noble Lord said: I thank the Chairman for congratulating us on our stamina; we are only just getting going.
This amendment in part touches on the issues raised by the noble Lord, Lord Sharman, in the previous group, which we discussed yesterday evening, led by Amendment No. A10. We have taken a slightly different approach, which is to strike out the whole of Clause 526(4) on a probing basis. We do so because we argue that the clause needs to be redrafted if it is to achieve what we believe the Government want to achieve. First, the exemptions in this subsection and subsection (5) would not include the directors of the company if they were not also employees, as they are neither,
under subsection (4)(a), nor eligible to participate in an "employees' share scheme" as defined in Section 743 of the Companies Act 1985, which is not being repealed.
There is a further problem. If the company's articles permit certain transfers to non-members—for example, intra-group, or to family members and trusts—can the requirement that the offer cannot properly be regarded,
"as being calculated to result . . . in securities of the company becoming available to persons not already connected with the company",
be satisfied? One issue is that closely held companies with pre-emption rights disapply these with regard to family trusts as a means to maintain family ownership by bridging the generation gap. Trusts may be set up for one reason or another and the pre-emption rights are disapplied as far as those are concerned.
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What is the meaning of "calculated"? The Minister was very helpful about that in our discussions last night, when he said:
"The Oxford English Dictionary defines 'calculated to' as 'designed or suitable, intended'".—[Official Report, 14/3/06; col. GC462.]
There is not a huge difference between us, so we will not advance this much further. Our question is whether there needs to be an intent on the part of an existing member to retain the shares, which the company has to have warranted to it, or whether the fact that the articles include committed transfer provisions is sufficient to satisfy the "calculated" test, which is feasible since the shares are offered subject to the articles of association. Moving on from "calculated", what about the definition of "connected" in the family trusts example that I have used? That is important, as these circumstances are prevalent in the case of family and closely held companies.
A third and final argument exists if the articles contain standard pre-emption rights on transfer. If the offer round is not taken up, the shares can go to third parties. Obviously, to protect the rights of a vendor shareholder, the articles will often permit external transfers if internal transfers cannot be fulfilled; otherwise the vendor would effectively be locked in because of the nature of the articles. Again, does this satisfy the "calculated" test, or is it a subjective test at the time of the share issue? This does not sit with the concept of the absolute presumption introduced in Clause 525, which we discussed earlier in the group of amendments beginning with Amendment No. A1. These are practical issues which have been raised with us by City practitioners. It would be helpful if the Minister could explain further the practical implications of the operation of Clause 526(4). On a probing basis, we seek to remove it for the time being. I beg to move.
Lord McKenzie of Luton: Like subsection (3), this subsection is derived from Section 742A of the Companies Act 1985. It creates an exemption for offers to persons already connected with the company. This recognises the way in which private companies may grow organically. It makes it clear that offers to family members are not to be regarded as offers to the public. Such offers are unlikely to be public offers in any event, but the subsection creates an exemption for offers to members of the company, employees and debenture holders. We believe that directors will be persons connected with the company if they are members or employees. I would have thought that that would routinely be the case, as in existing law. These could amount to a very large number of people, but nevertheless this would not be treated as an offer to the public, provided that the particular requirements are met.
In order to make an offer to persons already connected with the company using the exemption in subsection (4), two particular requirements must be met. The first is that, if the offer is made on terms allowing the person to whom it is made to renounce
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their rights, those rights may only be renounced in favour of another person so connected. This refers to where an offer is made, giving someone the right to take up shares or debentures, but allowing that right to be transferred to another person. That is not just about, as indicated in the discussion that we had yesterday, preventing there being rights to transfer the shares; it is also a question of what consent was planned at the time the offer was made.
This right may be valuable if it is a right to an allotment of shares or an issue of debentures at a discount to their current value. But subsection (4) is an exemption for offers made to persons already connected with the company, and so if the right to take up the offer is transferable, it should be transferable only to someone else who is already connected with the company. Section 742A of the Companies Act 1985 currently imposes the same requirement.
The second requirement is that the offer cannot properly be regarded, in all the circumstances, as being calculated—this amendment seeks to probe the definition of "calculated"—to result, directly or indirectly, in securities of the company becoming available to persons not already connected with the company. We see that as an objective test. It replaces the provisions of Section 742A of the Companies Act, which treated an offer to persons connected with the company as being a domestic concern of the persons making and receiving it, unless the contrary was proved. "Connected", as I tried to outline in some detail yesterday, is an objective test, and I refer the noble Lord to Hansard. I hoped to deal with the matter as clearly as I was able. The purpose is to ensure that the exemption is not misused to make shares available to persons falling outside the exemption. We therefore believe that the subsection is necessary, and I hope that the noble Lord will not press his amendment. If I have not dealt with each of the points that he raised, perhaps he will prompt me again and I will endeavour to do so.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister. He was able to clear up most of my points. There were two that he did not address, but it may be necessary for us to have an exchange of correspondence on those, as they are quite detailed. The first was family trusts. He talked about family members, which was clear, but a trust is of its very nature independent of a company. It will have independent trustees and it may be used for tax planning purposes. Would that be a "connected" company?
Secondly, if there were pre-emption rights and the shares were offered around but were not taken up because the existing shareholders did not want to take them up, is the person therefore locked in, or can he go outside as the articles permit? Or, at that moment, is he then making an offer to the public? If that is the case, the shareholder in a private company is at a disadvantage, if the only people who are permitted to buy the shares are those who already hold them or who are connected with those who hold them already. That
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is unlikely to maximise his price. If he was not to maximise the price, they would have been taken up in the first place.
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