Company Law Reform Bill [HL]

Clause 526 explains what is meant by an ““offer to the public”” for the purposes of the prohibition on public offers contained in Clause 525. It may be helpful if I give some explanation of the significance of these provisions and of our approach before turning to the specific amendment. The key distinction between public and private companies is that private companies are prohibited from offering their shares to the public. As the Company Law Review recognised, there is good reason to have tighter regulation of companies that have access to the capital markets because of their greater economic potential and greater agency problems. Where companies are closely held, it is reasonable to assume that people can know about the company. We recognise that some private companies are very large—they have generally grown organically, with their shareholder bases enlarging because of employee share schemes and the like, or offers to the family, but they cannot do so by making public offers. That means that the legislation can provide processes appropriate to the different sorts of company. Indeed, in this Bill, we have substantially further deregulated for private companies. We believe it is right in principle that if companies wish to seek new investors, however experienced, without a close connection, they should become a public company to do so. That does not mean that they need to secure a listing, but it does mean that it brings them within regulation appropriate for a company with a wider shareholder base. Regarding the definition of an ““offer to the public””, most companies will not need to consider this issue, as companies with a very small number of shareholders and no intention of raising equity funding are unlikely to come close to crossing the dividing line, but it is important for private companies which are expanding and embarking on financial transactions. Clause 526 does not comprehensively define what is meant by ““offer to the public””, but subsection (2) makes it clear that the concept includes an offer to any section of the public, however selected. Subsections (3) to (7) then cut it back by excepting specified kinds of offer. The amendment would delete subsection (2), which is derived from Section 742A(1) of the Companies Act 1985, and can be traced all the way back to Section 68 of the Companies Act 1947. The purpose of the subsection is to ensure that the offer does not have to be open to the world at large before there can be an offer to the public. That is crucial. It is not difficult to see that if you could make an offer to, say, 100 investment managers and they in turn could sell on the shares, it could be a very wide public offer. The absence of the subsection would not mean that the offer has to be made to everyone for the prohibition to apply, but it might mean that the prohibition applied only if the offer was open to anyone who chose to come in, whether the offer was directed at them or not—in other words, it was capable of being acted upon by any member of the public. In our view, the prohibition needs to be wider than that. The words to be inserted by the amendment explain that there is an offer if there is a communication to any person that presents sufficient information on the securities to be offered, and the terms on which they are offered, to enable an investor to decide to buy or subscribe for the securities in question. The amendment is taken from Section 102B of the Financial Services and Markets Act 2000, but we do not consider it apt in this context. A later amendment also borrows from the 2000 Act. On the face of it, it would seem attractive to use common definitions. We certainly need to watch to see that there is not an unnecessary difference, but the two statutes are directed at rather different things. In the case of the Financial Services and Markets Act, the concern is to ensure that potential investors are properly informed, inappropriate investments are not marketed to the unwary and the financial markets operate effectively and fairly. This is very different from the company perspective of the Bill, as I have outlined. For there to be an offer of shares or debentures to the public for the purposes of these clauses, there must be an offer. It need not be a contractual offer. Often a company will invite people to take up shares or debentures, and those responding might be making the contractual offer to take them up, which may be accepted by the company. The initial invitation should be capable of being an offer for the purposes of these clauses. What matters is not the amount of information provided by the company but whether the company is making its shares available to the public. On the other hand, perversely, the amendment would mean that an offer that did not provide sufficient information would not be an ““offer to the public””. The amendment also suggests that if the communication contains sufficient information, it will automatically be an offer to the public, even if it would not otherwise be so regarded under the current law or under the Bill. This goes too far. The final words to be inserted by the amendment explain that the communication may be made in any form and by any means. We do not consider these words to be necessary in this case. Clause 526 does not place any restrictions on the form or manner of the offer, nor is there reason to imply any. In summary, the definition put forward by this amendment would not be sufficient for the important purposes it has to serve. Given this explanation, which I accept the noble Lord may want to reflect on, I hope that he will withdraw the amendment.