Company Law Reform Bill [HL]

My Lords, the nub of the debate is whether we believe there should be an objective or subjective test, whatever wording we use to express that. The Government are clear that we should maintain, as at present, the objective test. When we discussed these amendments in Grand Committee, I explained why we do not wish to replace the word ““calculated”” with ““intended””. I maintain that ““calculated”” is the correct word for the purposes of Clause 530. 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. I am aware that the Law Society has raised the case of Norweb plc v Dixon, in which the court said that ““calculated”” means ““likely”” and does not mean ““intended””. The test imposed by the word ““calculated”” is not one of actual intention, which is what was being alleged in Norweb plc v Dixon, but nor is it purely a test of mechanical likelihood. It cannot possibly be solely a question of likelihood as, in almost all cases, it is likely that the shares will one day be transferred. The test is whether a person looking objectively at the facts would conclude that it was intended. Amending ““calculated”” to ““intended””, as the amendments propose, would make a big change to the operation of the clause. It would replace the objective test with a wholly subjective test of intention. Rather than reaching a judgment as to what a reasonable person would conclude was the intention, the courts would require proof of actual intention. It would be very easy for those behind the offer to stand up and claim that nothing of the sort was intended, and very difficult for anyone to contradict them. Actual intentions would often be extremely difficult for those not directly involved to prove, rendering many breaches virtually unenforceable. Likelihood is, of course, relevant to any objective assessment of intent, but it is by no means the sole factor or only way of establishing apparent intent. The likelihood of the shares becoming available to the public is simply one of things that might be relevant, such as what was said and done at the time. It all goes to the evidence enabling the court to make its judgment. The courts will take into account the circumstances of the offer in their entirety, not only the likelihood of the shares becoming available to other persons. ““Calculated”” is not the same as ““likely”” or ““intended””. If we wanted to mean precisely either of those things and nothing else, we agree that it would be better to say so. But we do not. The word has been quite deliberately chosen and has been used in this context for a long time. The law currently requires an objective assessment of intent. The Bill takes the same approach. I hope that the noble Lord will not press the amendment because it would change significantly the current position. Turning now to Amendment No. 399, in seeking to clarify subsection (3) the amendment risks widening it. Subsection (3) is an exemption setting out circumstances in which an offer will not be regarded as an offer to the public. In order to fall within the exemption, the offer must not be calculated to result in the shares or debentures becoming available to persons other than those receiving the offer. Of course, shares may be offered in the knowledge that they may one day be sold on. Companies do not have to impose restrictions on the transferability of their shares in order to take advantage of the exemption. But the exemption is not to be used as a means of evading the public offer prohibition by offering shares to a particular person, simply so that they can then offer them on to other people. It is a matter of the link or connection between the offer and the subsequent transfer of the shares to other persons. If there is no real link between the two, other than the fact of issuing the shares, the exemption may apply. Where there is a close connection between both events, however, of which formal agreements or mutual arrangements are probably the strongest example, the exemption should not apply. The amendment focuses too narrowly on arrangements for understandings reached as part of the offer. The perspective of the company offering the shares can also be relevant, whether or not it amounts to an arrangement or understanding shared by the recipient of the securities. The amendment restricts the circumstances the court can look at to the offer itself and arrangements or agreements made in connection with it. It may be difficult to show the existence and contents of such arrangements or understandings. It is surely preferable that the court should be able to have regard to all the circumstances, as the opening words of the exemption provide. I turn now to the other amendments to delete subsections (4)(c) and (5)(c) in Clause 530. Subsection (4) provides that an offer is not to be regarded as an offer to the public if certain requirements are met. It is an exemption for offers made to persons already connected with the company. One of the requirements is that the offer must not be calculated to result in the shares or debentures becoming available to persons already connected with the company. The exemption set out in subsection (4) is expressed rather differently in Section 742A of the Companies Act 1985, from which this exemption is derived. Our intention was to set out more clearly how the exemption operated, but in doing so we agree that subsection (4)(c) has departed from the current law. Therefore we agree that the approach of the present law should be reinstated. That is not simply a matter of deleting subsection (4)(c); it will be necessary to put back in its place the elements of the current law that the subsection was intended to replace, and it might not be straightforward to draft. The same applies to subsection (5)(c). We therefore agree to consider Amendments Nos. 400 and 402. I hope the noble Lord will withdraw Amendments Nos. 398 and will not press Amendments Nos. 399 to 403. I cannot stress strongly enough that what is proposed here would be a significant change in the law from the current position, and we do not believe that is the right way to go.