Financial Assistance – does a break fee constitute unlawful financial assistance?
Paros Plc v Worldlink Group Plc [2012] EWHC 394
A recent decision in the High Court held that a break fee constituted unlawful financial assistance and highlighted the importance of considering the implications of making variations to the terms of a contract.
FACTS OF THE CASE
In Paros Plc v Worldlink Group Plc a break fee was included in the heads of terms in relation to a proposed reverse takeover of Wordlink Plc (“Worldlink”) by Paros Plc (“Paros”), a shell company listed on AIM. The heads of terms set out non-binding terms which stated that Worldlink would re-register as a private limited company and that Paros was to acquire the entire issued share capital of Worldlink.
The heads of terms also contained certain binding terms, including a provision for a break fee, under which Worldlink agreed to bear Paros’ costs and its advisers’ fees and costs in relation to the negotiations. For the period up to Worldlink re-registering as a private company, if the negotiations were terminated due to Worldlink refusing to proceed with the acquisition, Worldlink would be required to pay Paros £12,500 per week up to a maximum of £150,000. After re-registration Wordlink was to pay Paros’ costs in relation to the transaction unless negotiations ended as a result of Paros acting in bad faith.
Two weeks after the heads of terms had been signed, the parties agreed to vary them to provide for a purchase of Worldlink’s assets instead of its share capital. The remaining heads of terms were not amended.
Negotiations between Paros and Worldlink were later halted when Worldlink refused to proceed further due to differences between their representatives. Paros then brought a claim against Worldlink for its costs (amounting to £700,000) relating to the negotiations, arguing that the variation of the heads of terms caused the limit on the amount payable by Worldlink to no longer apply.
DECISION
In deciding Paros’ claim in relation to the break fee, the court considered whether it constituted unlawful financial assistance. It was held that prior to the variation to the heads of terms and whilst they referred to a share purchase, the proposal for Worldlink to pay Paros’ costs was unlawful financial assistance, as it was a public company with negative net assets. It amounted to ‘other financial assistance’ under section 152 of the Companies Act 1985 (now sections 677 of the Companies Act 2006) as Worldlink would be materially reducing its net assets by paying the amounts due under the break fee.
However, following the variation of the heads of terms so that the deal became a proposed purchase of assets instead of a shares, the break fee ceased to be unlawful financial assistance and became enforceable by Paros. As Wordlink did not re-register as a private limited company the cap on Paros’ fees remained applicable and Worldlink were ordered to pay £150,000 to Paros.
IMPLICATIONS
This case illustrates that even in short and seemingly uncomplicated contracts, it is vital to consider the effect minor variations can have a significant impact on the terms which are not being amended. When making variations to a contract, it should be reviewed in its entirety to ensure there are not any unintended effects as a result.
Normally break fees do not constitute financial assistance where the net assets of the company are not reduced to a material extent by the payment of a break fee. In this instance, because Worldlink had negative net assets the break fee was unlawful. The court also followed the established principle that a key question in deciding whether a break fee constitutes financial assistance is whether its purpose is to smooth the path to the acquisition of shares. If that is its purpose, it is irrelevant whether an acquisition of shares actually took place.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
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