Paros Plc v Worldlink Group Plc

A contractual break fee may constitute unlawful financial assistance where it facilitates a proposed acquisition of shares and materially reduces the target company’s net assets. An obligation which is conditional upon re-registration as a private company may remain lawful because the statutory prohibition does not apply once that condition is satisfied. Illegality generally renders an agreement unenforceable rather than void in the sense that it was never made. A subsequent variation removing the statutory illegality may restore enforceability where the parties objectively intended the provision to apply to the varied arrangement.

In commercial negotiations, a tortious duty to verify information ordinarily requires exceptional circumstances demonstrating an assumption of responsibility beyond the contract. Loss arising from a failure to pay a debt remains subject to ordinary remoteness and causation principles.

Paros and Worldlink entered into legally binding Heads of Terms concerning a proposed reverse takeover, while the major transaction terms remained subject to contract. The agreement required Worldlink to pay Paros’s costs, but also provided for a capped break fee until Worldlink re-registered as a private company. The parties later varied the transaction from a share acquisition to an asset acquisition, but did not amend the costs clause.

Worldlink eventually withdrew. Paros claimed contractual costs, damages for late payment, damages for breach of an exclusivity clause, and damages for negligent misstatement concerning available funding. The central issues were the construction and enforceability of the costs clause, the effect of the financial-assistance prohibition, the recoverability of consequential loss, the scope of the exclusivity clause, and whether Worldlink assumed a tortious duty of care.

1. Break fee. The variation from a share acquisition to an asset acquisition did not remove the second and third sentences of clause 5.1. The wording remained clear and retained commercial value for Worldlink. As Worldlink never re-registered as a private company, its contractual liability was limited to a break fee of £12,500 per week, capped at £150,000.
2. The break fee was payable as of right. Paros was not required to prove the costs actually incurred. The alternative construction of the costs obligation, considered obiter because the cap applied, would have confined recoverable costs to those incurred in connection with the acquisition, excluding historic liabilities and ordinary corporate running costs.
3. Financial assistance. Under Companies Act 1985, section 151, the break-fee obligation constituted unlawful financial assistance. It was entered into when Worldlink was a public company, related to a proposed acquisition of its shares, and materially reduced its negative net assets. The conditional undertaking to pay costs after re-registration did not infringe section 151 because the obligation arose only when Worldlink became a private company.
4. The unlawful provision was unenforceable rather than void in the sense that no agreement had ever existed. After the parties varied the transaction to an asset acquisition, the break fee ceased to be unlawful. The parties’ objective intention was that clause 5.1 should apply to the varied arrangement, so the obligation was treated as reinstated or rendered enforceable.
5. The claim for CVA and administration costs caused by non-payment failed. Such loss was not reasonably foreseeable within the second limb of Hadley v Baxendale, and the non-payment did not cause the decision to enter into the CVA.
6. The exclusivity clause did not prevent Worldlink obtaining professional advice. It did prohibit discussions with true third parties concerning the possible acquisition of Worldlink, its assets or business, or a material interest in its shares. Discussions with Hurlingham and, probably, Strand and OPLC breached the clause, but Paros failed to prove loss of a real or substantial chance of completing the transaction. Nominal damages of £4 were awarded.
7. No tortious duty of care arose in relation to funding representations. The parties were sophisticated commercial counterparties, the Heads of Terms allocated responsibility for information and due diligence, and the informal and imprecise assurances did not demonstrate an assumption of responsibility beyond the contract.

Paros recovered £150,000 and £4 nominal damages. The remainder of the claim failed.