Jurisdiction - Australia
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Australia – Break Fees and Financial Assistance.

9 May, 2012

 

In brief
 
  • A recent English court decision treats a break fee as unlawful financial assistance.
  • If followed in Australia, the decision may increase uncertainty as to the lawfulness of at least some break fees.
 
In the recent English High Court decision of ParOs Plc v Worldlink Group Plc a break fee was held to amount to unlawful financial assistance.
 
The break fee was set out in Heads of Terms concerning a possible reverse takeover of Worldink by ParOs, an AIM listed shell company. If discussions ended due to Worldlink refusing to proceed, Worldlink agreed to bear ParOs's costs at the rate of £12,500 per week between signing and re-registering Worldlink as a private company (to which the prohibition against financial assistance did not apply), with a cap of £150,000.
 
Although a post transaction value of £20 million had been assumed by proposed investors, Worldlink had very limited liquid assets. The judge considered that the break fee amounted to financial assistance under the terms of the UK legislation because it would materially reduce the net assets of Worldlink, given they were negative at the time. It was financial assistance because it would "smooth the path" toward the acquisition of shares. (His Honour also noted that it was not clear that a break fee is always financial assistance, referring to dicta suggesting that in some circumstances it may be an "inducement" rather than "assistance".)
 
Ultimately, the Heads of Terms were varied to provide for the acquisition of assets rather than shares (meaning that the prohibition against financial assistance did not apply) and the Court found that the fact that it contravened the prohibition when given did not make it unenforceable.
 
Despite the widespread use of break fees in Australia, unresolved questions remain as to whether, in certain circumstances, break fees may be unlawful, including on grounds that they involve unlawful financial assistance.
 
Some commentators have argued that break fees cannot give rise to financial assistance because the fee is only payable if the transaction does not proceed, and accordingly the company's financial resources will only be diminished where there is no acquisition of shares. The ParOs decision implicitly rejects that argument, taking the view that a break fee "smooths the path" for an acquisition because it allows an acquirer to incur costs to progress an acquisition secure in the knowledge that it will be reimbursed if the transaction fails. 
 
Although the Australian provisions concerning financial assistance are quite different from those considered in ParOs, they were originally based on the UK provisions and UK case law as to what constitutes "financial assistance" may still be persuasive. Even if the ParOs approach is adopted, a break fee will not amount to unlawful financial assistance in Australia unless it materially prejudices the interests of the company or its shareholders or the company's ability to pay its creditors. However, a competing bidder could seek an injunction, triggering a reversal of onus under the Corporations Act that requires the court to assume material prejudice unless the contrary is proven. Determining the level at which a break fee results in material prejudice may be difficult. Accordingly, if ParOs is followed in Australia, it may increase uncertainty as to the lawfulness of some break fees, at least.

 

 

For further information, please contact:

 

Marie McDonald, Partner, Ashurst

[email protected]

 

Bruce Dyer, Partner, Ashurst 

[email protected]

 

Ashurst Corporate/M&A Practice Profile in Australia

 

Homegrown Corporate/M&A Law Firms in Australia

 

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