Paros Plc v Worldlink Group Plc

The court construed the Heads of Terms (HoT) and concluded that clause 5.1 entitled ParOS to a capped break fee of £12,500 per week up to £150,000 where Worldlink, while still a public company, withdrew from the proposed transaction. The judge held that although that part of clause 5.1 amounting to financial assistance was unlawful under section 151 of the Companies Act 1985 when the HoT were signed, the subsequent variation of the deal to an asset sale removed the illegality and the break fee was enforceable. The court also held the break fee was payable as of right (no need to prove actual costs) and limited recoverable contractual costs to those incurred "in connection with the Acquisition". ParOS’ claims for additional damages for non-payment, for loss of a real chance caused by breaches of the exclusivity clause, and for negligent misstatement were rejected (the exclusivity breaches attracted only nominal damages and no tortious duty of care beyond the contractual terms was found).

Background: ParOS and Worldlink entered Heads of Terms for a proposed reverse take-over. The HoT contained express, partly binding provisions including an exclusivity obligation and clause 5.1 dealing with costs and a weekly capped break fee. Negotiations later changed the proposed structure from a share acquisition to an asset sale and ultimately failed.

Nature of the claim and relief sought: ParOS sued for (i) unpaid fees and costs under clause 5.1 (seeking c. £719,807), or alternatively the capped break fee of £150,000; (ii) damages said to flow from non-payment (costs of a creditors’ voluntary arrangement); (iii) damages for loss of a real chance alleged to arise from breaches of the exclusivity clause; and (iv) damages for negligent misstatement regarding availability of funding.

Issues framed:

1. Construction of clause 5.1 (whether the capped break fee applied after the parties varied the HoT from a share acquisition to an asset sale; whether the cap limited liability to £150,000; and whether the break fee was payable as of right or required proof of costs).
2. Whether clause 5.1 (or part of it) constituted unlawful financial assistance under s.151 Companies Act 1985, and the effect of any illegality.
3. Whether Worldlink’s conduct breached the exclusivity clause and, if so, whether ParOS lost a real or substantial chance.
4. Whether Worldlink owed a tortious duty of care in respect of representations about funding and whether ParOS reasonably relied on them.

Reasoning and conclusions: The judge construed the HoT as leaving the second and third sentences of clause 5.1 (the break fee and the post-re-registration obligation) in force: because Worldlink never re-registered as a private company its withdrawal liability was limited to the weekly break fee capped at £150,000. The break fee was payable as of right; ParOS did not need to prove actual costs to recover the capped amount. The break fee, as originally drafted, amounted to financial assistance contrary to s.151 at the date the HoT were signed, but after the parties lawfully varied the transaction to an asset sale the illegality fell away and the break fee became enforceable. ParOS’ claim for additional damages for insolvency-related costs was too remote and causation failed. Breaches of the exclusivity clause were found (on specific occasions) but produced no compensable loss beyond nominal damages. The negligent misstatement claim failed because Worldlink had not assumed a tortious responsibility going beyond the contractual information obligations in the HoT and ParOS’s reliance was not so reasonable as to ground a Hedley Byrne duty.

First instance: The claim was allowed in part. ParOS was awarded the capped break fee of £150,000 under clause 5.1 and nominal damages of £4; the remaining claims for unpaid costs above the cap, consequential damages for insolvency/CVA costs, substantial loss of chance from exclusivity breaches, and negligent misstatement were dismissed. Rationale: contractual construction of the HoT; initial illegality under s.151 that was removed by the later consensual variation to an asset sale; break fee payable as of right; no recoverable consequential loss for the CVA; exclusivity breaches did not cause a real chance loss; no assumption of tortious responsibility beyond the HoT.