September 8, 2023

Del. Chancery Declines to Award Specific Performance in DeSPAC Merger Fight

Yesterday, in 26 Capital Acquisition Corp., et. al. v. Tiger Resort, (Del. Ch.; 9/23), Vice Chancellor Laster denied a SPAC buyer’s motion for a decree of specific performance compelling the target to use its reasonable best efforts to close a proposed deSPAC transaction. This particular deal “has a lot of hair on it,” and the difficulties of enforcing such an award along with some potentially sketchy conduct by the parties played a big role in the Vice Chancellor’s decision not to award specific performance.

This excerpt from the Vice Chancellor’s opinion lays out some of the complications that would make enforcing an award of specific performance in this situation very difficult:

First, a decree enforcing a reasonable best efforts obligation is not self-executing. Fulfilling the obligation requires identifying tasks that need to be accomplished and deploying the resources necessary to carry them out. The tasks that remain would not pose an impediment to an award of specific performance in a domestic transaction, but in this case, the target is a Philippine corporation that owns a casino in Manila. The corporation has a history of poor governance and last year suffered a forcible takeover that was only resolved through a dodgy bargain to secure political intervention. The nature of the counterparty increases the degree of difficulty exponentially, and the events necessary to get to closing will take place halfway around the world.

Second, to the extent there is a need to back up the decree with coercive sanctions, all roads lead to Manila. When parties are domiciled or have significant assets in the United States, this court can pick from a menu of sanctions. No one has identified any sanction that could be deployed effectively in the Philippines.

Third, closing the transaction could violate a status quo ante order issued by the Philippine Supreme Court. Both sides of the deal think that the litigation that gave rise to the order is meritless and that the order was improvidently granted. They originally sought to convince the Philippine Supreme Court to reconsider it. When traditional avenues failed, they resorted to a dodgy bargain, in which they offered substantial personal benefits to powerful figures in return for ex parte efforts to influence the justices. But instead of playing ball, the justices issued a clarifying order which made clear that they were concerned about the de-SPAC transaction. As a matter of comity, a Delaware court should hesitate before directing a Philippine corporation to take action that risks violating an order issued by that nation’s highest court.

That tidbit in the last paragraph about the parties’ efforts to get politicians to lean on the Philippine Supreme Court isn’t the only part of the deal that the Vice Chancellor concluded was a little sketchy. The buyer’s case for specific performance also wasn’t helped by the shenanigans of a hedge fund that the target retained as its exclusive financial adviser to assist it in finding a SPAC merger partner. Unbeknownst to the target, its adviser leveraged that exclusive relationship to secure a 60% ownership interest in the SPAC’s sponsor & then proceeded to engage in a bunch of actions to tilt the deal terms in favor of the SPAC buyer.

See, didn’t I tell you that this deal had a lot of hair on it? Anyway, the SPAC tried to distance itself from the hedge fund’s antics, but Vice Chancellor Laster was unpersuaded. He concluded that “the hedge fund’s actions are properly attributed to the SPAC, and their joint behavior is sufficiently egregious to warrant denying the remedy of specific performance.”

While the Vice Chancellor denied specific performance, he made it clear that he didn’t mean to suggest that the buyer wouldn’t have any remedy, and said that in the event that it proves that the defendants breached the merger agreement, it may be able to recover damages.

John Jenkins