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Lord McKenzie of Luton: In relation to the pre-emption rights, the answer should be that so long as the existence of the ability to sell outside in due course if those pre-emption rights were not taken up was not an integral part of what was planned when the offer was made, it should be okay under the definition that it cannot properly be regarded in all circumstances as "calculated to result". Obviously, if that was part of the thinking at the time, that would be a different matter. That is why the objective test has to be applied. If I am advised that I need to say more on that I will write to the noble Lord. On the issue of trusts, under subsection (6)(e) a person who is connected with the company includes a trustee when they are acting in their capacity as such in relation to a trust of which the principal beneficiary is any of the persons named elsewhere in that subsection. That would cover the position of a trustee.

Lord Hodgson of Astley Abbotts: I am grateful for that last answer, which was very clear. The first answer is encouraging. Clearly, if one is a major holder of shares in a company, one may find oneself in a position where, when one sets out, it is unlikely that the existing shareholders will have the capacity to absorb or take up the whole of one's shareholding. That may present a problem. The Minister was able to give me at least two-thirds of a loaf, and on that basis I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. A15 and A16 not moved.]

Lord Razzall moved Amendment No. A17:

Page 251, line 11, leave out from "is" to end of line 12 and insert "made to fewer than 100 persons"

The noble Lord said: We have clearly moved to a different type of amendment. Just looking at the absence of eager auditors in the Public Gallery, we can see that the interest of company law practitioners is regarded as less important by the public than questions of auditor liability, which were discussed yesterday. As the noble Baroness, Lady Noakes, would indicate, such is life.

4 pm

We now come to a series of amendments on issues that affect a number of practitioners in the corporate world, both merchant bankers and company lawyers. There has always been an issue among company law practitioners and corporate financiers about the exact number of individuals to whom an offer can be made without its being treated as being made to the public.

The purpose of Amendment No. A17, in my name and that of my noble friend Lord Sharman, is to use this legislation to clarify the position so that there can be some alignment of the various legislative positions governing the offer of securities to the public. In practical terms, this is a real issue when people are raising money. The various legislative requirements
 
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are imprecise on exactly how many people an offer document can be sent to without that constituting an offer to the public. We on the Liberal Democrat Benches think that it would be a pity if the opportunity were not taken to clarify that position; that is the purpose of the amendment. I beg to move.

Lord Hodgson of Astley Abbotts: My name is not attached to this amendment but, wearing my past practitioner's hat, I think that there is a great deal of merit in having a definition in the Bill. I grew up with lawyers saying, "About 50 is the number you can use". But, if you asked, "Is 49 all right?" they would reply, "Well, it depends". If you asked, "Would 51 put me in the clink?" they would reply, "Oh", with an intake of breath. At a very practical level, this is an important part of providing funding for the junior end of British industry, because this is where business angels and all sorts of people get involved. There is an argument for trying to achieve a number on which people can rest with safety. The present uncertainty benefits no one except, possibly, the noble Lord, Lord Razzall, professionally in the subsequent cases that flow from it.

Lord McKenzie of Luton: I start by reiterating a point on which we touched yesterday. Certainty can be achieved in these matters by having a public rather than a private company. I imagine that, if in doubt, the noble Lord would advise his clients to do that.

Lord Razzall: If they can afford it.

Lord McKenzie of Luton: Of course, but if they are concerned about uncertainty, that is one solution. However, I shall try to help on other matters as well.

We touched in an earlier amendment on the possible interplay with financial services legislation, but perhaps I can go into further detail on how we see the connection. Let me start by explaining why we have not aligned the meaning of "offer to the public" with financial services legislation. The Company Law Review considered the case for aligning the company law prohibition on offers to the public by private companies with the concepts used under financial services law. It was initially in favour of fully aligning both sets of legislation to avoid confusion. However, in its final report, it stated:

"Closer examination of the nature and purpose of these two different sets of legislation revealed that this would undermine the distinction between public and private companies and create more problems than it solved. Thus we do not propose the full alignment of the prohibition on private companies offering their shares to the public".

It went on to recommend that the prohibition on private companies offering their shares to the public should remain, with a power for the Secretary of State to prescribe detailed exceptions to the prohibition by statutory instrument, and that those exceptions should draw on what were then the POS regulations to the greatest extent possible. Going back in time, the financial services provisions were of course originally taken from the Companies Acts and then adapted for
 
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financial services purposes; they have now been adapted further in the light of European requirements in respect of securities law.

In financial services law, these provisions are used in relation to the marketing of securities, whereas in this Bill we are looking at what it means for the nature of the company. This has led to understandable differences. The structure of the exceptions under the Financial Services and Markets Act—which I think is where the 100 comes from—is very different from the provisions in the Companies Act. For example, the exceptions under Part 6 of the Financial Services and Markets Act 2000 relating to the requirements to produce a prospectus are concerned with the size of the offer or the persons to whom it is made. They do not look at whether it is calculated to result in shares becoming available to the public, or whether it is made with a view to there being an offer to the public.

Many of the exceptions are widely drawn when compared with the vast majority of private companies. For example, a prospectus is not required if the total price for the shares being offered does not exceed €100,000, or if the offer is made to fewer than 100 persons. That might, for example, be 100 merchant banks. It is clear that such large exemptions, when viewed from the perspective of what a company can do, would have a significant effect on the public offer prohibition.

In contrast, under the companies legislation, what is important is whether there is a sufficient connection between the private company and the people to whom the securities are being offered, of the kinds recognised by subsections (4) and (5). Subsection (4) creates an exemption for offers to persons already connected with the company. That recognises the way in which private companies may grow organically. Within these requirements, the current definition has the flexibility to take into account the circumstances of the offer and the identity of the persons making and receiving it. It is our view that this flexibility should be preserved.

For example, an offer to some 23,000 members of a credit union has been held in Australia not to be an offer to the public, whereas it has also been said that an offer even to just two persons might be an offer to the public, depending on the circumstances. As we have already discussed, we do not consider that private companies should be offering their shares to strangers or to the unconnected general public, even if it is just 100 of them. The amendment does not acknowledge the flexibility of the current law and would significantly erode the public/private distinction.

However, we very much recognise that there is a need to ensure that any differences which emerge between the terms used for different purposes are justified. I can assure noble Lords that we very much intend in this context to keep an eye on the interrelationship with securities law as it develops. Therefore, I am not able to give certainty on a maximum/minimum number of people, because it
 
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depends on the circumstances and the nexus of a particular group with the company as it stands at the moment.

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