FINANCIAL SERVICES ACT s.57 -- PROBLEMS IN COMMUNICATING THE OFFER TO SHAREHOLDERS IN A TARGET COMPANYTOnce clients have decided to bid for the share capital of a private company, they will want to know how their offer is to be put to the shareholders of a target company (T Ltd).

Such an offer is a classic example of an 'investment advertisement' (see definitions in inset box).

Under s.57(1) of the Financial Services Act 1986 (FSA), it is a criminal offence for anyone other than 'an authorised person' to issue or cause to be issued an investment advertisement, unless its contents have been 'approved' by an authorised person.Furthermore, anyone who acts in breach of this prohibition is not entitled to enforce any related agreement that follows (unless the court can be persuaded to exercise a fairly tightly-drawn discretionary power) and may be obliged to re-transfer assets.

The definition of investment advertisement is wide; it is not limited to formal documents.

It may cover an 'Information Memorandum', and what is said at meetings, even over the telephone, at least where the same proposal is being put in similar terms to a series of people.

However, some limit may arise from the reference in the definition to the requirement that there must be some 'form of advertising'.

This may be the rationale which could exclude, say, sending out a share sale agreement to intended vendors.

However, in the absence of any reported authority, it is possible only to speculate on what the courts will make of these provisions.Approval of offersAgainst this background, the straightforward course is to have the material approved by an authorised person before any contact at all is made with the intended vendors.

That may turn out to be expensive.

The approver takes on heavy responsibilities: he is required to act in accordance with the conduct of business rules laid down by the Self Regulating Organisation (SRO) or the Recognised Professional Body (RPB) or by the Securities and Investments Board, depending on how his authorisation under the FSA has been obtained.

A full account of his responsibilities is too large a topic to be covered here; but the approver's prime duty is to apply the appropriate expertise, skill, care and diligence to secure that the material is fair, accurate and not misleading (including by omission).

If the authorised person, in giving approval, fails to comply with these duties, he may be liable (under FSA s.62) to compensate private investors, and possibly others, who suffer loss and also to disciplinary sanctions under the rules of his SRO or RPB; which could include removal of his authorisation.

Some 'approvers' now call for extensive indemnities from the bidder.The exemptionsA number of exemptions have been created to the s.57 prohibition.

Some of these arise under FSA s.58 and some 27 others have been created by two exemptions orders.

The Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No 2) Order 1995 SI 1995/1536; and The Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 SI 1996/1586).Because of the likely expense and delay in obtaining approval by an authorised person, clients will often be anxious to fit their case into one of these exemptions.

However, it is important to pay close attention to the detail of the orders before advising.

It is not possibl e even to attempt to summarise all the exemptions here; but it may be helpful to mention the 3 most commonly referred to.Article 4 of the 1995 orderThis is the one usually looked at first; it is headed 'Takeover of private companies'.

However, if the client's aim is speed and lower professional fees, it is likely to prove disappointing.

For this exemption to apply, it is necessary that an offer should be made by means of a document satisfying the requirements of sched 4 to the order.

These call for detailed information about the offer, the offeror and the offeree -- not radically different from the kind of material required under the takeover code for an offer for a resident public company (or for a private one if, broadly, its shares have been offered publicly in the past 10 years).

In addition, the offer document must contain a recommendation by the directors of T Ltd for the acceptance of the offer and must be accompanied by a letter from a competent independent person advising the directors on the financial implications of the offer.Clients are unlikely to regard this as much of an 'exemption' -- the cost (and time) involved in complying is likely to be essentially similar to that incurred in obtaining approval by an authorised person.

It will also need to be pointed out that relying on an exemption is fundamentally less satisfactory than the approval route.

If the conditions for the application of exemption are not met, a criminal offence will be committed and the enforcement of the share-sale which follows will be in question.

If the material is approved, the main risk of FSA sanctions (fraud apart) will have passed from the bidder to the approver and the validity of the transaction will not be open to attack on s.57 grounds.Article 5 of the 1995 orderUnder this exemption, s.57 is disapplied if the material is issued with a view to a sale of shares in a public or a private company carrying at least 75% of the voting rights in general meeting.

There is no mandatory list of information.

Recommendation by directors or independent financial advice is not called for by the article.

A limiting factor is that the transaction must be between parties 'each of whom is a body corporate, a partnership, a single individual or a group of connected individuals...'.

Broadly, 'group of connected individuals' means members of the same close family, at least one of whom in the case of the vendors) is, or (in the case of the purchasers) is to be, a director or manager of T Ltd.

In practice, even for a so-called 'family' company, the existence of employee share schemes, the involvement of more than one family or outside investors often renders this exemption inapplicable.Article 3 of the 1996 OrderThis disapplies s.57 where material is issued by a company whether public or private, to its own members (or members of a company in its group) which is limited to an invitation or information about its own shares (or group shares).

Examples would be rights issue and pre-emption documents.Of course, it would be necessary to persuade the board of T Ltd that it would be in the best interests of the company for the material to go to its members (and that, in itself, may involve the issue of an investment advertisement), A 'share for share' or a loan note offer will be ruled out since the exemption does not apply to material which relates to an investment other than one issued by T Ltd or a member of its group.

Even where art 3 applies, it is for consideration whether the bidder could be in breach of s.57 for 'causing' the material to be issued .ConclusionIt should be stressed that, although expensive in fees and time, generally the soundest route as the basis for a long term investment will be for the approval of an authorised person to be given to anything which could fall within the definition of 'investment advertisement' used in connection with the offer.

It is possible for solicitors who hold an investment business certificate to approve investment advertisements.

Provided it is properly expressed and limited, such an approval would not appear to be 'discrete investment business' for the purposes of the Solicitors Investment Business Rules 1995.

However, s.57 approvals should not be undertaken without a full appreciation of the responsibilities involved: and that is, perhaps another story.DEFINITIONS:-- s.57(2): 'an investment advertisement' means any advertisement inviting persons to enter or offer to enter into an investment agreement or to exercise any rights conferred by an investment to acquire, dispose of, underwrite or convert an investment or containing information calculated to lead directly or indirectly to persons doing so.-- s 44(9): 'investment agreement' means any agreement the making or performance of which by either party constitutes an activity which falls within any paragraph of part II of schedule 1 to this Act or would do so apart from parts III and IV of that schedule.-- s207(2): 'advertisement' includes every form of advertising, whether in a publication, by the display of notices, signs, labels or showcards, by means of circulars, catalogues, price lists or other documents, by an exhibition of pictures or photographic or cinematographic films, by way of sound broadcasting or television or by inclusion in any programme service (within the meaning of the Broadcasting Act 1990) other than a sound or television broadcasting service, by the distribution of recordings, or in any other manner; and references to the issue of an advertisement shall be construed accordingly.