Chapter 1: Prohibition of Public Offers by Private Companies
1048.The CLR considered the prohibition on private companies offering their shares to the public in paragraph 4.160 of Developing the Framework and then examined the dividing line between public and private companies in Chapter 2 of Completing the Structure. The CLR presented their conclusions in paragraphs 4.54 to 4.62 of the Final Report.
Section 755: Prohibition of public offers by private company
1049.Subsection (1) of this section continues the prohibition in section 81(1) of the 1985 Act on private companies offering their shares or debentures to the public, though the consequences of breaching the prohibition are changed. The prohibition applies only to private companies limited by shares or limited by guarantee and having a share capital. The prohibition does not apply to unlimited companies or to companies limited by guarantee and not having a share capital.
1050.Private companies are also prohibited from allotting their shares or debentures with the intention that they are offered to the public by someone else. Subsection (2) creates a presumption as to when shares or debentures have been allotted in this way. Similar provision was made in section 58(3) of the 1985 Act which this subsection replaces.
1051.A private company will no longer commit an offence if it offers its securities to the public. Instead, if a private company does breach the prohibition it will be compelled to re-register as a public company, unless it appears to the court that the company does not meet the requirements for re-registration and that it is impractical or undesirable to require it to take steps to do so, in which case the court may make a remedial order and/or an order for the compulsory winding up of the company.
1052.Subsection (3) contains an exemption to the prohibition on public offers. Where a private company intends to become a public company it will be able to make an offer before it has completed the formalities of re-registration as a public company. Acts done in good faith before allotment in anticipation of re-registration will not be treated as breaching the prohibition on offers to the public, even if the re-registration arrangements do not ultimately succeed. The exemption also applies if, as part of the terms of the offer, the company undertakes to re-register as a public company and then complies with that undertaking not later than 6 months after the day on which the offer is first made to the public.
Section 756: Meaning of “offer to the public”
1053.This section explains what is meant by “offer to the public” for the purposes of the prohibition on public offers contained in section 755. This section also sets out certain circumstances where an offer is not to be regarded as an offer to the public. It replaces section 742A of the 1985 Act.
1054.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. An example would be where shares are offered to a particular person, with the intention that no one other than that particular person may take up the offer or acquire the shares as a result. 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.
1055.Subsection (4) creates two further exemptions for offers to persons already connected with the company (as defined in subsection (5)) and for offers in respect of securities to be held under an employees’ share scheme (as defined in section 1166). Such offers are presumed to be the private concern of those involved and so not an offer to the public if the conditions set out in subsection (4) are met.
1056.The range of persons already connected with the company for the purposes of subsection (4) has been expanded slightly from the current provision in section 742A of the 1985 Act. Subsection (5) now includes a trustee of a trust where the principal beneficiary is an existing debenture holder of the company or the widow or widower, or surviving civil partner of a person who was a member or employee of the company.
1057.Subsection (6) explains what is meant by a member of a person’s family for the purposes of subsection (5).
Section 757: Enforcement of prohibition: order restraining proposed contravention
1058.This section enables members, creditors or the Secretary of State to apply to the court for an order restraining a private company from carrying out any proposed contravention of the prohibition on offering shares or debentures to the public. This is a new procedure which will enable the member, the creditor or the Secretary of State to prevent by civil action any further activity by the company towards making an offer in contravention of the public offer prohibition. The court must also make such an order if, in proceedings brought by a member under section 994 or by the Secretary of State under section 995, it appears to the court that the company is proposing to breach the public offer prohibition.
Section 758: Enforcement of prohibition: orders available to the court after contravention
1059.This section applies where a private company breaches the prohibition on offering securities to the public. It introduces a new enforcement procedure for breaches; it replaces the criminal offence currently imposed in section 81 of the 1985 Act with a civil enforcement procedure.
1060.If a company breaches the prohibition, certain members, certain creditors or the Secretary of State may apply to the court. In order to have standing to bring the application, the member or creditor must have been a member or a creditor at the time the offer was made in contravention of the public offer prohibition; in addition anyone who became a member as a result of the offer to the public may bring an application.
1061.On such an application, if the court decides the company has acted in contravention of the public offer prohibition then it must order the re-registration of the company as a public company, unless it appears to the court that the company does not meet the requirements for re-registration as a public company (see Part 7 of the Act), and it is impracticable or undesirable to require it to take steps to do so. If the court is unable to order re-registration for these reasons, it may instead make a remedial order or an order for the compulsory winding up of the company (see Chapter 6 of Part 4 of the Insolvency Act 1986). The court has discretion as to whether or not to make these orders. This might be appropriate for example where the company has breached the prohibition but has not allotted shares, and has withdrawn the offer and undertaken not to do it again.
Section 759: Enforcement of prohibition: remedial order
1062.A remedial order is an order for the purpose of putting anyone affected by the breach of the public offer prohibition back in the position they would have been in if the breach had not occurred. It may require any person knowingly concerned in the contravention, whether or not an officer of the company, to offer to purchase the shares or debentures that were the subject of the offer on such terms as the court thinks fit. The remedial order will override the terms of the company’s constitution, but no one holding the securities will be obliged to accept the offer made to purchase them. It may be made whether or not the holder of the securities subject to the order is the person to whom the company allotted or agreed to allot them.
Section 760: Validity of allotment etc not affected
1063.This section makes clear that any allotment or sale of securities or any agreement to allot or sell securities is not made void simply because there has been a breach of the prohibition on offers to the public. Equivalent provision was made in section 81(3) of the 1985 Act.
