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Lord Sharman: My Lords, I am grateful for that very full reply from the Minister, and for his acknowledgement that the amendments he mentioned will be looked at. I hope that the Government will be bringing forward their own amendments to deal with those issues.
In my mind, the issue is still unresolved. I would like to read carefully what the Minister has said and then take some advice on it, but it seems that we have a conflict between the Law Society and the Government, and I would like to reflect further on that.
Lord McKenzie of Luton: My Lords, before the noble Lord sits down, can we agree that there may be some discussion about what is the appropriate wording to produce what we intend to be the law? Will the noble Lord accept that the current law requires an objective test, and that the Government's position is that that is what we want to maintain? Does he also accept that going down the route of a subjective test is a change from the current position?
Lord Sharman: Yes, my Lords, I do. The only issue between us is precisely the one he mentioned up front; that is, the question of whether the words reflect what we are seeking to achieve. In the opinion of the Law Society that is not the case. I will look at what he said, and I will probably discuss it with the Law Society before I decide whether I wish to push the thing any further. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 399 to 403 not moved.]
Lord Razzall moved Amendment No. 404:
"(8) An offer is not regarded as an offer to the public if—
(a) it is made to fewer than 100 persons,
(b) it is made on terms allowing the person to whom it is made to renounce his rights, which may only be renounced in favour of a person connected with the company or another person to whom the offer is made, and
(c) it cannot properly be regarded, in all circumstances, as being intended to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer or persons not already connected with the company.
(9) The Secretary of State may by regulations specify other conditions applicable to an offer which, to the extent satisfied, would result in an offer not being deemed to be an offer to the public for the purposes of this section 526.
(10) Any such regulations, as set out in subsection (9), shall be subject to affirmative resolution procedure."
The noble Lord said: My Lords, this is another amendment to Clause 530, which defines what is meant by an offer to the public with regard to the prohibition of public offers by a private company. The starting point for this amendment is the point I made
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in Grand Committee; that the current interplay of the various regulations creates uncertainty concerning the number of individuals to whom an offer can be made by a private company. I could count in large numbers of filing cabinets the letters I have seen from firms of lawyers which, when asked whether a particular offer can be made by a private company, go on to describe regulations for three pages, but end up with the position still uncertain.
The purpose of this amendment is to clarify the position that an offer is not regarded as an offer to the public if it is made to fewer than 100 people by a private company, or under the other conditions set out in that amendment. When this amendment was discussed in Grand Committee, the Minister said:
"I stress again to the noble Lord that there is no number which is allowed".—[Official Report 15/3/06; col. GC 478.]
"We do not consider that private companies should be offering their shares to strangers".—[Official Report 15/3/06; col. GC 472.]
I will let the noble Lord, Lord McKenzie, into a secret: it is entirely common practice in the City for private companies seeking seedcorn or development capital to do so from outside investors or private equity funds, without being obliged to register as public companies. Indeed, his answer would mean that an offer of shares to even two people unconnected to the company could be treated as an offer to the public—a view that goes beyond any understanding of either the existing law or what the law should be.
The second argument of the noble Lord, Lord McKenzie, was that in cases of doubt a company could easily re-register as a public company. I can do no better than refer the noble Lord to the final report of the Company Law Review, which said:
"We believe that private companies should not feel obliged to take the unnecessary precaution of registering as a public company, with the tighter regulation that this entails, simply because the existing provisions lack clarity".
There are significant disadvantages for companies with a small number of shareholders in having to re-register as public companies. It certainly goes beyond current practice in the City and elsewhere.
The final point I would like to make is that the Company Law Review went on to recommend the retention of the basic prohibition against private companies offering shares to the public, but with a power to prescribe detailed exceptions to the prohibition by statutory instrument. It referred to the definitions in the old Public Office of Securities Regulations. The second purpose of this amendment is to provide for an enabling power along those lines, which could then allow further consultation and consideration before regulations are brought in. I hope that, with the assistance of the Law Society and others, I have dealt with the reasons why the noble Lord, Lord McKenzie, rejected this amendment in Grand Committee and I hope he will reconsider. I beg to move.
Lord McKenzie of Luton: My Lords, this amendment seeks to add a further exemption to the public offer prohibition. It is also provides for a power
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to prescribe further exemptions. Clause 530 defines the meaning of an offer to the public and provides for a number of exemptions to the general prohibition on private companies' offers to the public. The principle behind these exemptions is that an offer is not considered to be a public offer where there is a sufficient connection or relationship between the company and the persons to whom the securities are being offered.
Subsection (3) ensures that offers made to particular identified individuals are not treated as offers to the public, provided the shares are not offered to that person in order to be passed on to others. Nor will it be an offer to the public if the offer is otherwise a private concern of the person receiving it and the person making it. This exemption will be particularly relevant for private companies seeking seedcorn or development capital from outside investors. I should make it clear that we do not see these provisions as preventing that in any way. We are very much aware that it is an important means of raising finance.
Subsection (4) provides an exemption for offers made to persons already connected with the company. This recognises the ways in which private companies may grow organically. Subsection (5) provides a similar exemption for offers for securities to be held under an employees' share scheme.
4.30 pm
I emphasise that it is the connection or relationship to the company that is the crucial issue. Within the 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. So, for example, private companies may seek capital from an outside investor such as a business angel without necessarily breaching the prohibition. An offer may be permissible even if it is made to a very large number of people, perhaps hundreds of people, but we have no intention of preventing the many lawful ways in which private companies currently raise finance and attract investors.
The amendment would allow the offer to be made to up to 99 persons. These might be individuals, companies or financial institutions. They might hold the securities for themselves or they might take up the offer on behalf of others. They might, for example, hold them as trustees for a group of people. So an offer to 99 persons might in fact involve a much larger group of people. We would have no objection to this if the matter could still properly be regarded as a private concern of those involved. But the amendment imposes no such requirement; it would undermine the whole principle that a private company should not offer its shares to strangers or to the unconnected general public. The prohibition, which is a key distinction between public and private companies, would be so easy to get round that it would become irrelevant.
If companies wish to seek new investors from the general public, they should become a public company in order to do so. That would bring them within the regulation appropriate for a company with a generally
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wider shareholder base. The deregulation for private companies contained in the Bill makes it even more important that private companies do not make offers to the public. Deregulation for private companies is possible because the arrangements between the company and its members can be regarded as an essentially private matter. However, members of the public joining a company are more likely to need the increased protections that the additional regulation of public companies brings—for example, the right to an annual general meeting.
In attempting to describe every circumstance in which an offer is or is not to be regarded as an offer to the public, we would risk either dramatically widening the exemption or inadvertently excluding something which currently would not be regarded as an offer to the public. We would risk imposing an unduly rigid or restrictive distinction, thereby making the exemptions more limited and the legislation more restrictive. Alternatively, as with this amendment, we would risk making the exemptions so wide that they would no longer act as an effective distinction between private and public companies. We feel it is important not to introduce substantive changes to such long-standing provisions that might create fresh uncertainties. It is not our intention to make the provisions in the clause more restrictive or significantly more relaxed than the equivalent provisions in the Companies Act 1985.
We are seeking to preserve the current law on what is an offer to the public and not to prevent anything that is lawful now. There is flexibility in the current law which allows all the circumstances of an offer to the public to be taken into account, as well as the identities of the persons making and receiving it. In our view, the current law strikes the right balance. Given that we are not intending to make regulations on this issue, it would send out the wrong signals to include a power for the Secretary of State to make new exemptions.
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