LEGAL GUIDE
OFFER OF SHARES BY A
PRIVATE LIMITED COMPANY
1. Introduction
A private limited company can only offer its shares if an offer can properly be regarded
as being a domestic concern of the persons receiving and making the offer. Thus a
private limited company should first solicit indications of interest and then deal with
investors individually as a ‘domestic concern’. Also unless the promotional material is
approved by an authorised person take care that the communication is exempt such as a
one off communication or a communication to a certified sophisticated investor.
2. Restrictions in the Companies Act 2006
S755 Companies Act 2006 states "A private company limited by shares … must not (a)
offer to the public any securities of the company; or
(b)
allot or agree to allot any securities of the company with a view to their being
offered to the public …"
The Companies Act 2006 s756(3) states "An offer is not regarded as an offer to the
public if it can properly be regarded, in all the circumstances, as –
(a)
not being calculated to result, directly or indirectly, in securities of the company
becoming available to persons other than those receiving the offer, or
(b)
otherwise being a private concern of the person receiving it and the person
making it".
This means that when raising money for private companies you must be very cautious
before attaching an application form. Normally it is done in a stepped process. Initially
there is a business plan, which must not contain an offer, to Investors. If an Investor
likes what he or she sees a dialogue starts which may lead to a specific letter to or
agreement with that Investor. This process makes it clear that the application form or
subscription agreement is not open to anyone other than the named Investor. The matter
is complicated by S.755 Companies Act 2006 which states it is evidence that an
allotment of shares was made with a view to their being offered for sale to the public if
an offer to the public is made within six months after the allotment. Raising equity
LEGAL GUIDE – OFFER OF SHARES BY A PRIVATE LIMITED COMPANY
capital for private companies whose shares are thereafter to be traded is a complex
process.
Thus business plans (or information memorandum) circulated by private companies
ought not to contain an offer of securities. Offers should only be made when the
number of Investors have been narrowed to a select few and then offers then made to
them individually (orally or in writing).
3.
Meaning of "Offer"
The general rule is that an offer is an expression of willingness to contract on specified
terms, made with the intention that it is to become legally binding as soon as it is
accepted by the person to whom it is addressed. An offer must be capable of being
accepted to form a contract for the sale or issue of securities or is an invitation to make a
contractual offer.
Thus business plans designed merely to solicit indications of interest do not constitute
offers for the purposes of the law restricting public offers by private companies in the
Companies Act 2006 (but beware as the definition of offer is broader when dealing with
prospectus law).
4. Prospectus Law
It is unlawful to offer shares to the public in the UK unless there is a prospectus
approved by FSA (s85 Financial Services and Markets Act 2000 (FiSMA)).
There are exceptions such as offers:
 of less than €5m;
 where minimum subscription is €100k; or
 the offer is to less than 100 persons.
5. Financial Promotion Restriction
FiSMA section 21 states that a person “must not, in the course of business, communicate
an invitation or inducement to engage in investment activity”. This is known as the
Financial Promotion Restriction but there are many exceptions/exemptions such as
communications to self-certified high net worth or sophisticated investors. Many of the
exemptions are difficult for small business to use. Probably the most helpful for a small
company is the one off exemption where the law states:
“One off non-real time communications and solicited real time communications
(1) The financial promotion restriction does not apply to a one off communication
which is either a non-real time communication or a solicited real time communication.
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LEGAL GUIDE - OFFER OF SHARES BY A PRIVATE LIMITED COMPANY
(2) If all the conditions set out in paragraph (3) are met in relation to a communication
it is to be regarded as a one off communication. In any other case in which one or more
of those conditions are met, that fact is to be taken into account in determining whether
the communication is a one off communication (but a communication may still be
regarded as a one off communication even if none of the conditions in paragraph (3) is
met).
(3) The conditions are that—
(a) the communication is made only to one recipient or only to one group of recipients
in the expectation that they would engage in any investment activity jointly;
(b) the identity of the product or service to which the communication relates has been
determined having regard to the particular circumstances of the recipient;
(c) the communication is not part of an organised marketing campaign.”
The email sending out the communication is often: “I refer to our discussion the other
day and now as promised enclose the business plan …”
6. Conclusions on offers by a private limited company
First ensure communications that may amount to financial promotions are only sent to
persons exempt from the financial promotions regulations (such as by using the one off
exemtion).
Second ensure a private limited company does not make an actual offer of shares until
you have narrowed the potential shareholders down so you can deal with them
individually.
For further information please contact:
Tom Mackay or Jennifer Carter Shaw, Solicitors, Mackay Carter Shaw LLP
Tel: 0207 193 1009 or 1016
Email: tom@mackaycartershaw.com or jennifer@mackaycartershaw.com
Website: www.mackaycartershaw.com
NOTE: This note is only a general review of the subjects covered and does not
constitute legal advice which will vary depending on the circumstances of each case.
No legal or business decision should be based on the contents of this note. In
particular, users are reminded that changes are continually being made to the law
and the document may not be up to date. [19 November 2012]
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LEGAL GUIDE - OFFER OF SHARES BY A PRIVATE LIMITED COMPANY