SPAC sued over unsuccessful merger of Philippines casino
US law firm Schulte Roth & Zabel has sued 26 Capital Acquisition Corp for unpaid legal fees in relation to the unsuccessful merger of Okada, the largest casino in the Philippines.
Legal battle ensues after failed SPAC merger
Schulte Roth & Zabel took the matter to Delaware’s Court of Chancery, seeking to prevent 26 Capital, a Special Purpose Acquisition Company (SPAC), from dissolving without settling its alleged legal obligations. The law firm had provided legal counsel to 26 Capital concerning its intended US$2.5 billion SPAC merger with Okada Manila, an affiliate of Japan’s Universal Entertainment (6425.T).
Court requested to block SPAC dissolution
The legal dispute between the legal firm and its former client, 26 Capital Acquisition Corp,cited unpaid legal fees exceeding US $1.9 million. This dispute arose in the aftermath of 26 Capital’s unsuccessful merger attempt with the Philippines’ largest casino. This is a setback from 26 Capital. Earlier this month, a Delaware chancery judge declined to compel Okada Manila to proceed with the merger, citing disclosure shortcomings within the deal. The judge’s ruling also condemned 26 Capital’s behaviour, stating that the company “engaged in conduct that should not be rewarded” by being allowed to force the merger’s completion.
SPACs vs. IPOs
In comparison to traditional Initial Public Offerings (IPOs), SPACs have gained significant attention in recent years. SPACs, or blank-check companies, raise capital through an initial public offering but don’t have a specific business plan. Instead, they seek to acquire existing businesses, allowing them to go public more swiftly than the conventional IPO route. Schulte Roth & Zabel asserted its right to the substantial legal fees incurred while working on behalf of 26 Capital, stating that creditors must be compensated before investors can redeem their shares. The law firm’s statement highlighted the importance of adhering to legal obligations in SPAC transactions.
26 Capital’s decision to dissolve
26 Capital recently declared its intention to dissolve completely. This course of action involves liquidating its trust account and distributing assets to its stockholders. Should this dissolution proceed, Schulte Roth & Zabel contends that it would be left without any recourse to recover its unpaid legal fees.
Risks associated with SPAC transactions
The legal dispute between Schulte Roth & Zabel and 26 Capital serves as a testament to the complexities and risks associated with SPAC transactions, particularly when compared to the more conventional IPO process. While SPACs offer companies an expedited path to going public, they are not without their challenges. The lack of a predefined business plan in SPACs can lead to unforeseen obstacles, such as the disclosure issues encountered in the 26 Capital case.
In contrast, IPOs involve a more structured and regulated approach, with companies required to meet rigorous disclosure standards before going public. This scrutiny helps ensure that investors are adequately informed about the company’s financial health and potential risks.
As SPACs continue to play a significant role in the world of finance, legal disputes like the one between Schulte Roth & Zabel and 26 Capital highlight the need for clear guidelines and oversight to protect the interests of all parties involved. Whether SPACs will maintain their popularity or face increased regulation remains a topic of ongoing debate within the financial industry.
Background of deal
In June 2023, the merger deal between Asian-based Tiger Resort Leisure and Entertainment Inc (operator of Okada Manila) and special purpose acquisition corporation (SPAC) 26 Capital Acquisition Corp was terminated. Initially valued at US$2.6 billion, the merger aimed to take Okada Manila public on NASDAQ. Delays arose in late 2022 due to conflicts between Universal Entertainment Group and 26 Capital, led by billionaire gambling investor Jason Ader. The merger was seen as a way for Okada Manila to access funds, new customers, and lenders.
However, the dispute stemmed from founder Kazuo Okada’s ousting in 2017 amid allegations of financial mismanagement. Okada’s removal from Universal Corporation’s leadership led to a complex legal battle. Despite charges being dismissed, legal issues persisted, affecting Okada Manila.
The structure of proposed deal (Source SiGMA)
The situation escalated in May, with Okada’s partners seizing control of the casino. A lawsuit was filed against Jason Ader and 26 Capital, alleging fraud and violations of the Investment Advisers Act. Universal Entertainment Corporation accused 26 Capital of significant breaches, including unauthorized disclosures and violations of securities laws.
The termination of the merger and ensuing legal battle revolved around alleged misconduct by Jason Ader, casting doubt on the proposed deal’s viability.
