By Mark S. Nelson, J.D.
Special purpose acquisition company (SPAC) deals soared during the pandemic, but the deals have always been complex and, with the SEC potentially clamping down on such deals, and market conditions making it uncertain that some SPACs will find merger partners, litigation involving SPACS is likely to increase. A SPAC case involving a problematic property and problematic behaviors by a hedge fund and assorted individuals offered the perfect opportunity for a court to decline to enforce a merger contract via specific performance. The court noted that, even if damages are inadequate, damages are at least one available remedy in the absence of specific performance, which the court would have had difficulty justifying and enforcing given the international dimensions of the transaction. In reaching that conclusion, the court made a number of assumptions about breach of contract, albeit without actually ruling on whether a breach occurred, and without ruling on the availability of any affirmative defenses. The court has set a trial date regarding the issue of damages (26 Capital Acquisition Corp. v. Tiger Resort Asia LTD., September 7, 2023, Laster, J.).
Delaware Chancery Court opinions are well-known for their detailed factual set ups, but this SPAC case was especially convoluted, and the court used 51 of 72 pages in its opinion to describe the numerous corporate and political intrigues that it said ultimately counseled against awarding specific performance.
The case involved a merger agreement that explicitly allowed specific performance. The target company was a Philippines-based casino that was described as a gaming paradise with multiple buildings joined by skybridges, an indoor beach, thousands of gaming machines, several hundred gaming tables, nearly 1,000 hotel rooms, and “the world’s largest dancing fountain.”
Among other things, the target had hired a U.S.-based hedge fund to advise it, but that hedge fund also took a 60 percent ownership interest in the SPAC sponsor, something the target apparently was unaware of. The hedge fund also aided the drafting of a term sheet that favored the SPAC sponsor.
There also arose questions about whether the transaction could close after a Philippines court issued two rulings. Testimony cut both ways, with witnesses stating conflicting views about whether closing the deal would run afoul of the foreign court’s orders. Also, the court described a “business trip” with “heavy luggage” bearing “an ‘item’ for ‘No. 2.’” that was to occur after the first court order. “After conventional methods failed, Lazaro and Lorenzana proposed the dodgy bargain, which included the unconventional method of delivering an ‘item’ to Romualdez to bring his influence to bear,” explained the court.
It was in this milieu that the Chancery Court addressed the question of “whether the SPAC can obtain a decree of specific performance compelling the target to use its reasonable best efforts to close.” The court made a number of assumptions, including that the target breached the reasonable best-efforts requirement. The court also assumed that the SPAC was ready, willing, and able to close and that money damages would be inadequate.
The court recited that specific performance is a specialized type of mandatory injunction in which a party is required to meet its contractual obligations where there has been a proven breach of contract (emphasis in original). For purposes of deciding the issue, the court assumed a breach. However, the court ultimately concluded for multiple reasons that specific performance was inapt.
The court explained first that the court decree would not be self-executing and that the SPAC/de-SPAC transaction involved a distant enterprise with event precursors to closing that were to occur in a foreign country. Another reason counseling against specific performance was the Delaware court’s lack of any effective sanctioning power because whatever sanction would apply would be available under Philippines law. Moreover, closing the transaction could violate an order issued by the Philippine Supreme Court. The legal issues in the case also cautioned the Delaware court to exercise comity regarding courts in the Philippines.
The court then looked to the conduct of some of the parties in the matter. Said the court: “Finally, the SPAC has engaged in conduct that should not be rewarded with a decree of specific performance. Unbeknownst to the target, the hedge fund leveraged its exclusive relationship to secure a 60% ownership interest in the SPAC’s sponsor.”
According to the court, the balance of the equities also did not clearly and convincingly favor specific performance.
In a footnote, the court was careful to explain why a trial on damages would still occur despite concluding that specific performance was not justified, even if damages were somehow still inadequate as a remedy because of the uniqueness of the casino property at the heart of the transaction. “That does not mean that damages are unavailable,” said the court. “‘[S]pecific performance might be the preferred remedy because the contract relates to a unique property right. But if a court lacks the ability to order specific performance, it does not mean that the plaintiff is out of luck. The plaintiff instead must consider other, less ideal remedial options’” (citation omitted).
The case is No. 2023-0128-JTL.