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.
