Failure of a single term does not necessarily cause the whole agreement to fall down, as a recent High Court judgment shows.
ParOS plc and Worldlink Group plc entered into an outline agreement for a type of merger known as a ‘reverse takeover’. This involved ParOS, a company listed on the Alternative Investment Market (AIM), acquiring the entire share capital of Worldlink, an unlisted public company, in exchange for shares in ParOS. The transaction would have given the former owners of Worldlink 99 per cent ownership of ParOS.
The deal would have allowed Worldlink to bypass the lengthy and costly process of applying for a listing on AIM. ParOS had become a ‘shell company’ on AIM, meaning that it had disposed of its operating business.
Under the terms of the outline agreement, Worldlink would be required to pay ParOS’s costs should the deal fall through. However, if Worldlink were to pull out prior to re-registering as a private company (one of the stages required for the transaction), it would pay only a ‘break fee’ of £12,500 per week from the date of the outline agreement, with a cap of £150,000. There was also an exclusivity period during which Worldlink was not to enter into negotiations with any other party. The terms were later varied by agreement such that instead of ParOS acquiring Worldlink shares, it would acquire the company’s assets.
In the event, Worldlink withdrew from the transaction, listing instead on the Frankfurt Stock Exchange. ParOS subsequently issued a claim against Worldlink for some £720,000 in fees and costs, and claimed breach of the exclusivity clause.
The High Court ruled that although there was a breach of the exclusivity clause, this did not cause the failure of the transaction. Nominal damages were awarded for this and for another minor breach by Worldlink. Nor did the variation in the clause relating to share acquisition bring down the whole agreement. The Court held that the rest of the agreement still applied, including the provisions regarding the payment of the break fee.
Accordingly, the Court awarded ParOS £150,000 for the break fee, £4 in nominal damages, and dismissed the rest of the claim.
This case shows that the courts interpret agreements according to what they say, rather than what is intended by the parties. It is also illustrative of the problems that can arise when one term of an agreement is varied without reviewing the whole document and the dangers of provisions not being clearly related to each other. Anyone thinking of revising an agreement already in place should always take legal advice before continuing.
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