Company Law Reform Bill [HL]

These are important provisions and I hope that noble Lords will forgive me if I dwell on them at a little length. I very much understand the concern of the Law Society that it is desirable for there to be clarity. However, we do not want to provide loopholes in this area; nor do we want to provide unnecessary rigidity. Clause 526 is essentially based on the existing law. I know there are differing views, but I believe that it strikes the right balance. Amendments Nos. A10, A15 and A19 relate to replacing the word ““calculated”” with ““intended”” every time it appears in the various exemptions setting out what is not to be regarded as an offer to the public. The interpretation of statute is of course a matter for the courts, but perhaps I can explain our legislative intention. We consider that the word ““calculated”” in this context should bear its ordinary and natural meaning. The Oxford English Dictionary defines ““calculated to”” as ““designed or suitable, intended””. So there is not a huge difference between us, but I am advised that the better word for these purposes is ““calculated””. The phrase,"““properly be regarded, in all the circumstances, as . . . not being calculated to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer””," imposes an objective test. If it came to court, an objective assessment would be required of whether the motivation or purpose behind the offer was to make the shares or debentures available to persons other than those receiving the offer. The courts are required to take into account the circumstances of the offer and the identity of the persons making and receiving it. Its effect is that, in determining whether an offer is to be regarded as not made to the public, one has to consider what can properly be regarded as the calculated results of the offer itself. It is not a question of how likely or probable it was that the shares would become available to other persons; nor is it a question of whether the shares did in fact become available to other persons. Instead, the likelihood of the shares becoming available to other persons may be one of the circumstances that the court takes into account, along with anything else that the person making the offer said or did. This all goes to the evidence enabling the court to make its judgment. As we want the provision to provide an objective test of intentions, we believe that ““calculated”” is the correct word. I turn now to the amendments in respect of the insertion of the term ““as part of the offer””. Subsections (3) to (5) of Clause 526 contain a number of exemptions setting out various circumstances in which an offer will not be regarded as an offer to the public. As we understand it, the concern behind these amendments is that a company should not be held responsible for what the recipients of its shares or debentures do with them after they have received them. We agree with that, as long as it was not a part of the arrangements or understanding reached at the time the offer was made that the recipient would pass the shares or debentures on to persons falling outside the exemption. Of course, a company may offer shares with the expectation that the recipients will one day sell them to someone else, but that does not prevent the exemptions applying. It is not necessary for a company to restrict the transferability of its shares or debentures in order for these exemptions to apply. For example, where the offer is made to a member—not so that the member can take up the shares for himself but so that he can take up the shares and pass them on to someone falling outside the exemption—the exemptions should not apply. That does not mean that the recipient can never sell the shares or debentures to such persons, but it is the intentions, arrangements and understandings between the company and the recipient at the time of the offer that matter. What is important is the private character of the offer. The amendments are unnecessary as the exemptions should already be construed in that way. We are aware that the Law Society has concerns that the matter is not free from doubt. There have been very few cases, but the phrase,"““as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer””," can be traced back to Section 68 of the Companies Act 1947. The amendments seek to make the position more explicit but, in doing so, they go too far by suggesting that it is only the terms of the offer that matter. The amendments appear to widen the exemption to include any offer, as long as it is not an express or implied part of the offer that the shares or debentures are made available by the recipient to persons falling outside the exemption. The next amendment would leave out the term ““otherwise”” from Clause 526(3)(b). Under this subsection, an offer is not to be regarded as an offer to the public, even if it would otherwise be so regarded, if certain requirements are met. Subsection (3) is derived from Section 742A(2) of the Companies Act 1985. As the amendment highlights, that section does not currently include the word ““otherwise””. The absence of this word suggests that the section should be read as containing two distinct exemptions. We see no reason why they need to be distinct, and indeed it might narrow their meaning if this were so regarded. Section 742A was inserted into the Companies Act 1985 relatively recently as a consequential amendment under the Financial Services and Markets Act 2000. As a consequential amendment, it was not intended to make any substantive change to the meaning of the provision, which previously appeared in Section 60(1) of the Companies Act 1985. From the Companies Act 1947 until the change made in 2001, the word ““otherwise”” had always appeared in the provision. The circumstances set out in subsection (3) which cause an offer not to be regarded as an offer to the public are not entirely distinct. One of the circumstances in which an offer is not to be treated as an offer to the public is that it is a private concern. An offer made to a particular individual, with the intention that only he should take up and retain the shares, is one of the clearest examples of something that is purely the private concern of the person concerned. To suggest that this scenario is completely distinct from the exemption for matters of private concern might serve only to narrow that exemption. The final amendment relates to the expression ““private concern””. Subsection (3)(b) of Clause 526 explains that an offer of shares or debentures is not to be regarded as an offer to the public if the offer can properly be regarded, in all the circumstances, as being a private concern of the person receiving it and the person making it. This provision is derived from Section 742A(2)(b) of the Companies Act 1985. As the amendment highlights, that section refers to ““domestic”” concern rather than to ““private”” concern. The use of the phrase ““domestic concern”” can be traced back to Section 68 of the Companies Act 1947. Our aim in changing the word was simply to update the language used in the Bill to reflect modern usage. The phrase ““domestic concern”” was never intended to refer only to family matters. But modern dictionaries such as the Oxford English Dictionary define it in terms of,"““of the home, household or family affairs””." The phrase ““private concern””, in our view, better describes what is intended—private being, as it is, the opposite of public. Private concern encapsulates family matters but also anything else not open to the public. As was the intention back in 1947 when the reference to ““domestic concern”” first appeared, offers for example between members of the same firm, or even offers to someone in a similar line of business who might be interested, should all be capable of falling within the exclusion. It is of course all a question of degree, and a wide offer to a large number of people not known to the persons making the offer would clearly not be a domestic or private concern of the persons involved. I hope that by going into this level of detail noble Lords will understand the motivation behind the current drafting and that these amendments will not be pressed. I do not think that I have dealt specifically with the alignment of the financial services provisions with this Bill. We touched on that in an earlier amendment and I think we are going to hit it again in a subsequent amendment. Perhaps we can pick it up there. I am very happy to have another go if that is what noble Lords want.