With this it will be convenient to discuss the following amendments: No. 501, in clause 530, page 256, line 6, leave out ‘six’ and insert ‘three’.
No. 504, in clause 530, page 256, line 10, leave out ‘it acts’ and insert ‘the directors act’.
No. 505, in clause 530, page 256, line 12, leave out ‘it undertakes’ and insert ‘the directors undertake’.
No. 502, in clause 530, page 256, line 16, leave out ‘six’ and insert ‘twelve’.
We move on to part 17, which deals with private and public companies. Chapter 1 is about the prohibition of public offers by private companies.
Section 81 of the Companies Act 1985 prohibits a private company from offering any shares or debentures to the public, and the meaning of “offer to the public” is set out in section 742A. Clause 531 continues the prohibition in section 81(1) of the 1985 Act on private companies offering their shares or debentures to the public. The prohibition refers to securities of the company defined in clause 535 as shares or debentures. It is thought that as the prohibition applies to offers of shares or debentures in allotments or in an agreement to allot shares or debentures, the drafting will catch any warrants, options or convertible debt that may confer an entitlement on a holder to acquire shares or debentures. Amendment No. 503 is designed to clarify that.
Clause 530(1)(b) replaces section 81(1)(b) of the 1985 Act.
We are debating clause 530(1)(b). Private companies continue to be prohibited from allotting their securities with the intention that they are offered to the public by someone else. This is presumed to be the case if securities are offered to the public within six months of their allotment or before the company receives the whole of the consideration due to it in respect of them.
The explanatory notes for clause 531 state:
“An offer will not be an offer to the public if it is not calculated to result in shares or debentures of the company becoming available to anyone other than those receiving the offer...Nor will an offer be an offer to the public if the offer is otherwise a private concern of the person receiving it and the person making it.”
Clause 531(3) is similar to section 58(3) of the 1985 Act, which it replaces. No change is intended, and the presumption is capable of rebuttal. However, six months seems a long time for the presumption to remain, so amendment No. 501 probes whether the period could be changed to three months to reduce uncertainty.
Under clause 533, a company does not contravene clause 530 if an offer to the public is made in good faith as a part of an arrangement under which it is to re-register as a public company before the securities are allotted, or if part of the terms of the offer are that it undertakes to and does re-register in no more than six months from the making of the offer. The provision will certainly be welcomed by practitioners and is of practical benefit.
Again to probe, I ask whether the period in which the offer can be made could be extended to 12 months. That is because the announcement of the move to public status may be made—and probably would be—at the company’s annual general meeting, say, in contemplation of a flotation. To have 12 months would mean that the company would have a clear year before its next AGM, which might be more convenient in terms of the length of time for which its share issue approval resolutions were put in place.
In Grand Committee, Lord Sharman moved an amendment to subsection (3), the effect of which was to narrow the scope of the clause. Lord McKenzie said
“Subsection (3)(a) of Clause 525”—
as it was then—
“ensures that the prohibition on offering shares or debentures to the public does not apply if the offer or the agreement to allot shares or debentures is done in good faith in pursuance of arrangements under which the company is to reregister as a public company before the shares or debentures are allotted. Subsection (3)(b) similarly exempts offers which include as part of their terms an undertaking by the company to reregister as a public company within six months of the offer. This enables a private company intending to go public to make an offer to the public before it has completed the formalities of reregistration, without breaching clause.
The exemption also recognises that despite the good faith intentions of the company, the reregistration application might fail or the arrangements to reregister might be derailed. Circumstances can change; for example, the company might suffer an unexpected downturn in trading, such that it no longer meets the requirements of Clause 92”—
as it then was—
“as regards its net assets. In those cases, we do not consider that the company should be held at fault under these clauses for the things it has done in the good faith expectation that it would become a public company.”—[Official Report, House of Lords, 14 March 2006; Vol. 679, c. GC451.]
Although the substance of the measures seems sensible, the question is whether it is adequate for the company to be exempted. The members of the company provide authority for share issues, but the directors enter into agreements to issue shares. Should it not therefore be the directors, rather than the company, who are protected by the provisions? Amendments Nos. 504 and 505 would provide for that.
We consider amendment No. 503 to be unnecessary. We included an extended definition of securities when we introduced the Bill in another place which sought to include various indirect ways in which rights to share or debentures could be conferred. We were persuaded that that was both dangerous, in that the long, detailed definition was unlikely to prove useful for as long as commercial practice develops, and unnecessary, in that the simple prohibition on offering or allotting share or debentures to the public already catches indirect ways of achieving the aim, such as by offering options or warrants.
On amendment No. 501, we do not think it appropriate to shorten the period to three months. The six-month period is the same as in section 58 of the 1985 Act. Indeed, the period has been set at six months since the Companies Act 1928 and seems to be a realistic period for such a rule, in that if there is an offer to the public in less than that time, the onus will be on the company to displace any suspicion that it issued the shares with a view to that particular offer to the public taking place.
Amendments Nos. 504 and 505 refer to the behaviour of directors. We do not believe that that is appropriate. The purpose of the chapter is to distinguish private companies from public companies. The prohibition on offering securities to the public applies to the company. Changing one provision to refer to the behaviour of the directors rather than that of the company would simply confuse the operation of the part.
We know what amendment No. 502 would do, but we see no need to relax the requirements even further. The purpose of the chapter is to ensure that public company rules apply to any company that makes offers to the public. The six-month period was chosen as it seemed more than a reasonable length of time for a company to comply with its promises to re-register.
My point was that in practice resolutions are often taken in the AGM and then worked through during the year, which gives the directors the chance to explain to the members what they are going to be doing during that time. That is why I thought that 12 months would be appropriate. Has the Minister considered that?
Our view is that it would be too easy to evade the requirements in the clauses, which might deny those members of the public who subscribe to shares the additional protection that public company status provides. The six months will run from the offer, not the AGM.