Company Law Reform Bill [HL]

My Lords, this amendment seeks to add a further exemption to the public offer prohibition. It is also provides for a power 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. 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 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.