Takeover - Reverse takeover - Claimant and defendant companies entering into heads of terms in relation to reverse takeover of claimant by defendant

ParOS Plc v Worldlink Group Plc: QBD (Comm) (Jonathan Hurst QC sitting as a deputy judge of the High Court): 1 March 2012

In February 2009, the claimant and defendant companies entered into heads of terms (the terms) in respect of the possible reverse takeover of the defendant by the claimant. As part of that takeover, the defendant would move from being a public to a private company.

The terms, which included an exclusivity clause, were intended to be legally binding in parts, but not in others.

Negotiations were carried out by, inter alia, M for the claimant and R for the defendant. Clause 5.1 of the terms stated, inter alia, that if negotiations ended owing to the defendant refusing to proceed with the acquisition, a break fee with a cap of £150,000 would be payable to the claimant. That clause was devised in order to avoid a prohibition in section 151 of the Companies Act 1985 on the giving of financial assistance by a company to a person acquiring or proposing to acquire shares in that company (the prohibition). At the instant time, the prohibition applied only to public companies.

It was intended that, although the break fee was not enforceable until the defendant had become a private company, it would not infringe the prohibition. It was clear that, once the defendant was re-registered as a private company, it could lawfully give financial assistance to the claimant in connection with the purchase of its shares. Clause 5.2 of the terms stated that if negotiations ended owing to the claimant withdrawing and not being in good faith, each party would bear its own losses.

In March 2009, the parties orally agreed that the share acquisition route originally envisaged between them would be replaced by the acquisition of the defendant’s assets by the claimant in consideration for the issue of shares in the claimant. In April 2009, R informed M that there was sufficient money available to advance the transaction, and that he wanted documentation prepared to allow investors to put in money. In October 2009, negotiations broke down and the defendant refused to proceed further. The defendant never became a public company. In December 2010, the claimant issued proceedings.

The claimant claimed for fees and costs under clause 5.1 of the terms or, alternatively, the £150,000 break fee. It further contended, inter alia, that: (i) the defendant had breached the exclusivity clause and that it had therefore lost a chance that the reverse takeover would be completed as envisaged by the terms; and (ii) that the defendant had made a negligent misrepresentation regarding R’s representation to M that sufficient funds were available. The defendant contended, inter alia, that: (i) upon the true construction of clause 5.1 of the terms, its liability was capped at £150,000, since it had never registered as a public company; (ii) clause 5.1 included terms that constituted unlawful financial assistance and was therefore void and/or unenforceable; (iii) alternatively, it could invoke clause 5.2 of the terms, since the claimant had terminated the negotiations not acting in good faith; and (iv) alternatively, if found liable, its liability would be confined to fees and costs incurred in connection with the acquisition and agreed in advance of being incurred.

The question arose as to whether the agreement to provide financial assistance was entirely void, or merely unenforceable until the terms were varied. The court had regard to the issue of whether a duty of care had existed between the parties.

The court ruled: (1) On the correct analysis, illegality would render a contract unenforceable rather than void, if by void it was meant that the contract had never been made. It was clear that property could pass under an illegal contract, and in certain circumstances a court would enforce a contract involving an element of illegality. If a contract was truly void, in that it was treated as having never existed, it was hard to see how that could be carried out (see [80] of the judgment).

Ultimately, it mattered little as to whether the obligation to pay a break fee was to be regarded as void or unenforceable, or both. In March 2009, the parties had varied the terms in a significant way. They had clearly intended at that point that clause 5.1 should apply in full to the arrangement as varied. The break clause had ceased to be unlawful, and there was no longer any reason why the court needed, as a matter of public policy, to decline to enforce the break fee obligation (see [81] of the judgment).

The claimant was entitled to recover the break fee, but no more (see [82] of the judgment).

(2) On the evidence, the claimant had not lost any real or substantial chance of concluding a reverse takeover with the defendant as a result of delays caused by breach of the terms. Although the defendant’s conduct had amounted to a breach of the exclusivity clause, the underlying reason had been a genuine concern as to whether a reverse takeover based on asset acquisition was really in the defendant’s best interests.

The defendant had been under no obligation to do a deal with the claimant and, so long as those doubts continued, it would have prevaricated. In any event, on the evidence, it was likely that any deal between the parties would have ended for the reasons that had actually occurred (see [98]-[100] of the judgment). Consequently, the claimant had failed to prove its pleaded loss and would be awarded only nominal damages for each proven breach (see [100] of the judgment).

(3) With regard to the existence of any duty of care, it was established principle that the touchstone was an assumption of responsibility by the representor, a test which was to be objectively applied. Key factors in determining whether there had been an assumption of responsibility would include: the purpose of the defendant’s representation; the knowledge on the defendant’s part of the claimant’s use of and reliance upon its representation; and the reasonableness of the claimant’s reliance. It would take exceptional facts for a court to conclude that one party had assumed a duty of care to the other going further than the contract required; all the more so where the parties were sophisticated businessmen with their own professional advisers (see [102], [113] of the judgment).

There were no exceptional circumstances in the instant case. On the evidence, none of the representations made in the case could have been capable of leading M to believe that the defendant had actually raised funds in the sense of legal commitment, let alone receipt. There was nothing to show that the defendant had assumed any responsibility beyond the existing contractual obligation. Consequently, the defendant did not owe any duty of care to the claimant beyond what the terms provided (see [114]-[116] of the judgment). The claim for damages for negligent misrepresentation would fail (see [116] of the judgment).

Tom Richards (instructed by Jackson Parton) for the claimant; Alex Barden (instructed by Osmond & Osmond) for the defendant.