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High Court rules against Companies Act breach

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A corporate matchmaker whose introductions led to one company buying another is entitled to its fee, the High Court has ruled.

The company's contract did not breach the "financial assistance" clause of the Companies Act, the Court said.

Corporate Development Partners (CDP) is a consultancy which will introduce companies wishing to expand by acquisition to other companies which are prepared to sell their businesses. It operates on a monthly retainer but makes most of its money through a fee that is a percentage of the total value of any subsequent deal.

In 2005 it signed a contract to act for E-Relationship Marketing (E-RM), which was looking to grow its business. CDP introduced it to a company which it quickly became apparent was too large to be acquired by E-RM. In the end that third company, Red Eye, acquired E-RM.

When that deal was concluded, though, E-RM said that it could not pay CDP because it had been advised that the contract the two companies signed was illegal.

"On 5 October 2005, Mr Redding of E-RM wrote to Mr Littell [of CDP] advising him of Red Eye's acquisition of E-RM," said Mr Justice Rimer in his ruling. "He asserted that the clause in the February agreement entitling CDP to payment in consequence of that acquisition amounted to the provision of financial assistance by E-RM for the purchase of its shares. He said E-RM's lawyers had advised that such assistance was unlawful and that the relevant part of the agreement was unenforceable. In the circumstances E-RM could not and would not pay any transaction fee to CDP."

Sections 151 to 153 of the Companies Act of 1985 prohibit a company giving financial assistance to another person to acquire that company. "Where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place," says the Act.

"Where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred," it says.

"E-RM's subsequent assumption of the payment commitment in clause (2) of the February agreement was by way of a reward for such introduction, or facilitation, and itself facilitated – or assisted in – the acquisition of E-RM," argued E-RM, according to Rimer's ruling.

Rimer disagreed that this meant that section 151 of the Act had been broken. While he conceded that it might be possible to stretch the meaning of the legislation to include the acts in question, he said that previous cases had warned clearly against doing that.

"In Chaston v SWP Group plc Arden LJ identified the general mischief against which section 151 is directed as follows: 'namely that the resources of the target company and its subsidiaries should not be used directly or indirectly to assist the purchaser financially to make the acquisition'," said Rimer.

This, and another case, were adopted as the correct approach later by the Court of Appeal, said Rimer. "I must, therefore, identify the commercial realities of the February agreement and guard myself against straining to interpret it as involving the giving of illegal financial assistance if that cannot fairly be regarded as encompassed within it. I must also have regard to the general mischief against which section 151 is directed," he said.

"My main difficulty in this case is, however, in understanding what section 151 has to do with it," said Rimer. "Even giving a broad interpretation to 'financial assistance', it appears to me unsound to describe E-RM's commitment to pay a transaction fee to CDP as amounting to relevant 'financial assistance … for the purpose' of the acquisition."

"Since CDP was playing no role in the negotiation of the acquisition – and was neither intended nor required to – the commitment to pay it the transaction fee was not going to, was not intended to and did not in fact assist or advance the acquisition at all," he said. "The payment commitment was not a condition of the takeover; it would not serve to reduce Red Eye's acquisition obligations by a single penny; and it was neither intended to, nor did it, smooth the path towards any ultimate acquisition."

Rimer disagreed with much of the case made by the defence, but said that he did not see the relevance of E-RM's section 151 argument, saying that there was "no substance" in it. Rimer ruled in favour of CDP.

Copyright © 2007, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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