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In its decision in Paros Plc v Worldlink Group
Plc1, the High Court considered whether break
fees in heads of terms constitute unlawful financial
assistance.
Facts
ParOS plc (ParOS) and Worldlink Group plc
(Worldlink) were in negotiations with a view to
undertaking a reverse takeover, that is, the unquoted Worldlink was
proposing to acquire the larger AIM-quoted ParOS with the result
that the shareholders of Worldlink would become majority
shareholders in ParOS.
ParOS and Worldlink entered into heads of terms in respect of the
proposed reverse takeover. Some provisions of the heads of terms
were intended to be legally binding whereas others were intended
not to be legally binding:
The non-binding provisions of the heads of terms stipulated
that Worldlink would re-register as a private company as soon as
possible and ParOS would acquire the entire issued share capital of
Worldlink.
The binding terms provided (among other things) that Worldlink
would pay ParOS a break fee which amounted to ParOS's costs and
fees in the transaction.
The intention behind the proposed re-registration of Worldlink
as a private company was that it could then, once re-registered,
lawfully give financial assistance to ParOS in connection with the
share acquisition as the prohibition in the Companies Act 2006 on
the giving of financial assistance only applied to public
companies.
However, the structure of the transaction changed later in the
negotiations: Rather than providing for Worldlink to re-register as
a private company (and thereby avoid the statutory prohibition on
the giving of financial assistance), the parties attempted to
achieve the same result by structuring the transaction as an asset
rather than a share acquisition. No other provisions of the heads
of terms were varied.
Decision
The court had to consider if the break fee constituted unlawful
financial assistance.
The Companies Act 2006 prohibits:
a UK public company from giving financial assistance for the
purpose of the acquisition of its shares or those of a parent
company, and
a UK private company from giving financial assistance for the
purpose of the acquisition of shares of a public parent
company.
The court held that, although it is not clear whether a break
fee is always financial assistance, in this case, at the time when
the transaction was structured as a share acquisition, the break
fee was "smoothing the path to the acquisition of the
shares" and therefore amounted to unlawful "other
financial assistance" (at least unless and until Worldlink
re-registered as a private company) and had a material effect on
the net assets of Worldlink.
However, once the heads of terms were varied to provide for an
asset rather than a share acquisition, the court found that the
break fee ceased to be unlawful financial assistance and therefore
held that the break fee should be treated as rendered
enforceable.
Comment
The case demonstrates that an initially unlawful provision of
financial assistance can be rendered enforceable by later on
varying the structure of the transaction. It also highlights the
importance of ensuring that, if the parties decide to vary the
structure of a transaction following execution of heads of terms,
all provisions of the heads of terms are considered to make sure
they continue to reflect the intentions of the parties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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