Andrew J. Czerkawski of the Lewis Brisbois Delaware office prepared this post.
The sponsor of a busted de-SPAC merger asked the Delaware Court of Chancery to order the target to close under the merger agreement’s reasonable best efforts clause, but the Court refused to do so in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., 2023 Del. Ch. LEXIS 364 (Del. Ch. Sep. 7, 2023).
BRIEF FACTUAL BACKGROUND
A Japanese gaming company parent, through its intervening subsidiary, owned a valuable casino in the Philippines. A New York-based hedge fund purchased and held a small block in the parent. After the parent failed to launch an IPO, the fund proposed a de-SPAC merger transaction to the parent’s investor relations manager. Receptive to the idea, the parent engaged the fund in a formal advisory relationship, in which the fund would facilitate and analyze any potential SPAC deal.
The fund connected with a potential sponsor and pitched the idea. But before making introductions, the fund demanded and eventually procured a majority economic interest in the sponsor. In a series of events too lengthy and nuanced to detail here, the fund worked as a “double agent”—convincing the parent with whom the fund had a formal advisory relationship to accept the deal while feeding inside information back to the sponsor in order to make it happen.
Meanwhile, an ousted former director of the parent challenged his removal in the Philippines and received a favorable ruling. The Philippine Supreme Court subsequently issued a status quo ante order. Though the parties could not decisively determine whether consummating the deal would violate the order, the fund nevertheless continued to push the closing. The target’s management began to suspect the fund’s deception, which the fund denied.
A month after receiving the status quo order, the ousted director, with the help of the local police, enacted a violent physical takeover of the casino in the Philippines. Still, the sponsor and the fund “seemed not to care about the fate of the employees and remained laser focused on closing the transaction.” After the parent failed to retake the casino via judicial process in the Philippines, a politically oriented “dodgy bargain” occurred. The Philippine executive branch then stepped in and “declared the takeover illegal,” helping the parent regain control.
After more clandestine scheming with the fund, frustrated with further extension of the merger, the sponsor filed suit in the Delaware Court of Chancery, seeking to force the target to close.
Delaware law, though “strongly contractarian,” does not categorically require the Court to enforce a reasonable best efforts clause through an order of specific performance. Rather, granting “[s]pecific performance is a matter of grace that rests in the sound discretion of the court.” Examining multiple factors, the Court determined that the circumstances disfavored the “extraordinary” remedy of specific performance.
First, the transaction’s complexity and “associated difficulty of providing meaningful judicial oversight” weighed against ordering the target to close. The interim steps remaining before closing and the quagmire of factual circumstances counseled against specific performance: preparing audited financial statements; filing a securities registration statement; dealing with the SEC; a foreign gambling corporation; a history of poor internal governance; a physical takeover; likely corrupt political ties; and “exceedingly aggressive” counterparties with “terrible judgment.”
Second, the operative parties and their assets’ overseas locations, outside the Court’s reach to enforce coercive sanctions, rendered any order compelling the target to close a “nullity.” The Court opined, “the sun has set on the era in which a nation might send gunboats to enforce a judgment issued by its courts,” also emphasizing that “Delaware has no blue water navy to send, and the United States Constitution confers authority over international affairs on the federal government, not the several states.” Acknowledging its own enforcement limitations, the Court further opined, “[t]he court is not dealing with an obstreperous billionaire or other headstrong individual whose body and assets are subject to coercive sanction through the American justice system. In this case, the defendants are, quite literally, outside the range of the court’s armamentarium. Firing at such a target just wastes ammunition.”
Third, the foreign status quo order weighed against ordering the target to close. If the target did so, it risked violating the foreign high court order, potentially subjecting it to criminal contempt. Thus, such a consequence counseled against specific performance even under the merger agreement’s reasonable best efforts clause.
Fourth, the Court considered and thoroughly laid out the sponsor acquiror and its hedge fund majority shareholder’s inequitable conduct. With no sugar coating, the Court bullet-pointed their duplicitous actions and emphasized that they “acted as partners to gain and exploit their inequitable advantage over” and “engaged in a conspiracy to mislead” the target and its subsidiaries, “the type of conduct that should not be rewarded with a decree of specific performance.”
Finally, balancing the equities, the Court considered the interests of the acquiror’s unaffiliated shareholders. But the Court nevertheless determined that its shareholders “cannot truly claim the status of innocent victims.” Noting that the acquiror’s shareholders “backed” the wrongdoing and “signed up for the ride,” undertaking to “benefit from the gains or suffer the losses that [the sponsor] and his team delivered,” the Court refused to allow the sponsor to “wrap itself in the mantle of its stockholders to pretend that none of the events described in this case ever happened.” The sponsor and its hedge fund majority stakeholder tried to persuade the Court that “they were justified in doing outrageous things because they were obligated to serve their stockholders.” But the Court refused to lend this logic any credence: “[t]hat assertion is a perversion of the fiduciary regime. Fiduciary duties exist to check management misbehavior. They are not a license for management to misbehave.”
This decision highlights the extraordinary nature of specific performance as an equitable remedy and the potential factors and circumstances the Court will consider when deciding whether to award it. Plaintiff acquirors seeking to compel their targets to close highly complex deals involving foreign parties and foreign assets face an uphill battle.
But, perhaps more importantly, this decision serves as a warning to conflicted financial advisors, deal advocates, and fiduciaries alike, that the Court will not condone surreptitious, conflicted tactics masquerading as serving the shareholders. The Court will look to the plaintiffs hands and apply the maxim: “he who seeks equity must do equity.”