Introduction

A recent English High Court case Paros Plc v Worldlink Group Plc (1 March 2012) examined the application of financial assistance rules in the context of a claim for reimbursement of costs and expenses incurred in connection with an aborted takeover attempt.

Case Summary

Paros Plc (“Paros”) (an AIM listed shell company) entered into a Heads of Terms (“HoT”) in respect of a possible takeover of Worldlink Group plc (“Worldlink”) (an unlisted Plc) by Paros. The HoT provided for an obligation on Worldlink to bear certain of Paros’s’ costs in the event that Worldlink withdrew from the transaction. At a later stage in the negotiations the proposed transaction structure was revised with the intention that it would proceed as an acquisition of Worldlink’s assets and the HoT was amended accordingly. Ultimately the transaction did not proceed to completion and Paros brought a claim for recovery of its costs. Worldlink argued, inter alia, that the break fee provisions in the HoT were contrary to the financial assistance prohibition in Section 151 of the Companies Act 1985 (UK) and consequently was void and unenforceable. Section 151 Companies Act 1985 (UK) provides that where a person is acquiring or proposing to acquire shares in a public company that it is not lawful for such company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.

The judge found that on the basis of previous decisions that:

  • Section 151 of the Companies Act 1985 prohibited not only the giving of financial assistance but also any agreement to give financial assistance in relation to a proposed transaction; and
  • where a transaction is assisted by the entry into a future obligation to pay money, the assistance is considered to be given on the date the commitment is entered into rather than on the date the money is actually paid.  

Paros argued that the break fee would only have become payable had the share acquisition route been followed, and the financial assistance prohibition had not been contravened as the share acquisition route had been abandoned. The judge did not accept this argument and determined that the obligation to pay the break fee had operated to materially reduce the net assets of Worldlink at the time the obligation was entered into (as Worldlink had negative net assets at that time) and therefore constituted "other financial assistance" within the meaning of Section 152 (a) Companies Act 1985 (UK).

Financial Assistance rules in Ireland

Section 60 of the Companies Act 1963 (Ireland) provides that it is not lawful for an Irish company to give financial assistance for the purpose of, or in connection with, a purchase of, or subscription made, or to be made, for any shares in such company. It also prohibits a subsidiary providing financial assistance in connection with the purchase of, or subscription for shares, in its holding company.

Whilst the Section 60 prohibition may be disapplied by private companies by means of a validation/whitewash procedure, this facility is not available to public companies. Section 60 (13) Companies Act 1963 (Ireland) contains a carveout from the prohibition for break fee arrangements which are approved by the Irish Takeover Panel pursuant to Rule 21.2 of the Irish Takeover Rules.

In circumstances where this carveout does not apply the Paros decision could be relevant. It is frequently asserted that break fees cannot constitute prohibited financial assistance because the fee is payable only if the transaction does not proceed. Although the wording of the prohibition in Section 60 of the Companies Act 1963 (Ireland) does not expressly apply a material reduction of net assets test, it would be possible for an Irish Court to apply a similar line of reasoning to that taken in the Paros case (and other decided UK cases) and conclude that an arrangement to discharge an offeror’s costs constituted prohibited financial assistance.

Other aspects of the Paros Case

Notwithstanding the finding that the break fee was, when entered into, unlawful financial assistance and therefore unenforceable (though not void), the judge held that due to later alterations of the HoT (reflecting the change to an asset acquisition) the break fee clause ceased to be unlawful and ruled that Paros was entitled to STG£150,000 (being the cap in respect of the break fee set out in the HoT).

Paros had also claimed damages for breach of the exclusivity clause but the judge found that the transaction had broken down for other reasons and awarded nominal damages. Paros also put forward an alternative argument that it had relied on assurances that Worldlink had adequate funds to pay its fees and it owed a duty of care to Paros. The judge ruled that a duty of care between commercial counterparties would only arise in exceptional circumstances which did not exist on the facts of the case.

Conclusion

The case was somewhat unusual in that the break fee was considered at a point in time to be unlawful and unenforceable but subsequently ceased to be unenforceable. It also illustrates that a court will not always award substantial damages for breach of exclusivity undertakings. In drafting transaction or implementation agreements concerning public company takeovers which include break fees arrangements, careful consideration needs to be given to the application of the financial assistance prohibition (in cases falling outside the carveout contained in Section 60 (13) Companies Act 1963) and, in all such cases, the nature and extent of the target company’s liability in the event of the acquisition not proceeding.