Delaware Chancery Court declines to grant specific performance in a broken de-spac deal due to inherent limitations of the remedy
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Decision underscores the practical realities required for a court to enforce a specific performance clause, and the importance of having “clean hands” for parties to be eligible for this specific remedy.
Following a five-day long trial that revealed a complicated and cinematically wacky set of facts, Vice Chancellor Laster of the Delaware Court of Chancery found that the buyer-plaintiffs failed to demonstrate that a grant of specific performance to force the defendant target to close a de-SPAC transaction was warranted.  The buyer-plaintiffs alleged that the defendant target had violated its contractual obligation to “use [its] reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable [l]aws to consummate” the transaction. In reaching this outcome, VC Laster emphasized the following factors: 1) whether there are jurisdictional limitations to enforcing an order of specific performance; 2) if an order of specific performance were granted, could the court practically supervise it; 3) whether enforcing such an order implicates international sovereignty concerns; and 4) whether, sitting in equity, the party seeking the remedy is actually deserving of it. Even though the parties had explicitly provided for a specific performance remedy in the Merger Agreement, this decision emphasizes that when considering remedies of an equitable nature (and in contrast to Delaware courts’ modus operandi), a court will not be necessarily deferential to what the parties contracted.
A publicly traded Tokyo-based gaming company called Universal Entertainment Corporation (“Universal”) owns, through a series of intermediate entities, a resort, entertainment complex and casino (“CasinoCo”) based in the Philippines. Universal began exploring opportunities to raise capital for CasinoCo. Through this process executives at Universal connected with a New York-based hedge fund founder named Mr. Eiseman of Zama Capital, whose fund was also a minor shareholder in Universal. Mr. Eiseman persuaded Universal to consider a SPAC transaction to publicly list CasinoCo, and in the process secured an engagement from Universal to be their exclusive “advisor”.
After a failed attempt to do a deal involving former baseball player Alex Rodriguez and his then-partner Jennifer Lopez, Mr. Eiseman brought the eventual buyer-plaintiff, 26 Capital Acquisition Corp. (“26 Capital”) to the table, but not before Mr. Eiseman secured a large ownership stake in 26 Capital’s sponsor for himself, ensuring that he would financially benefit from the 26 Capital side of the deal far more than as a minor Universal shareholder. Moreover, Mr. Eiseman went to great lengths to actively deceive Universal about his involvement with 26 Capital. The malfeasance extended to his working with 26 Capital to craft the commercial terms of the deal and draft the transaction agreements to include SPAC-friendly provisions, and then turning around and convincing Universal to accept these terms to their own detriment. 26 Capital agreed to perpetuate this deception to Universal, with 26 Capital and Mr. Eiseman even conspiring to put on fake dramatic arguments to throw Universal off the scent that something was amiss with their supposed advisor.
The parties signed the Merger Agreement without Universal finding out about Mr. Eiseman and 26 Capital’s behind-the-scenes collusion. But before closing could occur, things started going very wrong at CasinoCo. A ruling in a years-long litigation in the Philippine Supreme Court went against CasinoCo and resulted in the Supreme Court issuing a status quo ante order for the benefit of a former controlling shareholder of Universal.  This caused two problems – the first being that the casino property was forcibly taken over by the successful claimant in the litigation with the help of police, and the second being that even if Universal could regain control of CasinoCo, the nature of the court order made it unclear whether they would violate the order if they proceeded to closing.
To solve the first problem, the former CasinoCo and Universal teams desperately tried to get the Philippine Supreme Court to reconsider by filing numerous emergency orders, all of which went unheeded. As a last ditch effort to regain control of the casino, two members of the CasinoCo board used their political and social influence to strike a “dodgy bargain” with a powerful politician in the Philippines, and to potentially pressure or bribe the Philippine Supreme Court. The “dodgy bargain” was successful in that control of the casino was (forcibly) regained. However, part of the deal was that the two individuals who orchestrated it would receive large, personal monthly payouts from CasinoCo, and Universal executives had hand delivered a potentially illicit package across international borders to this politician in exchange for his cooperation. In respect of the second problem, Universal and CasinoCo executives interpreted the order as prohibiting the parties from closing the de-SPAC transaction. 26 Capital and Mr Eiseman disagreed and pressed very hard to proceed, despite the Philippine Supreme Court issuing a clarifying order that seemed to confirm that the transaction should not be permitted to go ahead under their initial status quo ante order. While the literal battles were unfolding in the Philippines, Universal and 26 Capital had extended the outside date of the Merger Agreement several times to resolve these problems. Additionally, audited financial statements for CasinoCo were required to be produced for an amended F-4 registration statement before the closing of the transaction could occur, which was taking CasinoCo’s auditors much longer than 26 Capital wanted due to the fact that 1) Universal had lost control of CasinoCo’s books during the forcible takeover and 2) unscrupulous payments were being made as a result of the “dodgy bargain.”
In the end, CasinoCo’s auditors resigned following weeks of undue pressure from 26 Capital and Mr. Eiseman to work faster; the last straw was when 26 Capital and Mr. Eiseman tried to bring in their own unqualified auditors to preempt CasinoCo’s auditors, and shared CasinoCo’s financial information without their or Universal’s permission. Once the auditors resigned, 26 Capital then sued CasinoCo and some of its upstream affiliates (but not Universal) for material breach of the Merger Agreement. The buyer-plaintiff called on the court to grant an order of specific performance to compel CasinoCo to fulfill its obligation to use its reasonable best efforts to take actions needed to close the transaction – in this case, the preparation of audited financial statements and filing of the an F-4 registration statement for the shares to be issued.
The court’s use of a multifactor test underscores that, despite Delaware’s strong contractarian approach, a court will not grant specific performance to the parties merely because the parties have made it an available remedy in the transaction agreement. Rather, as specific performance is an equitable remedy, the court should always take into consideration whether the remedy is warranted. In this case, the court reviewed the practicality of granting specific performance, noting the jurisdictional limitations of having the target and its assets located overseas, specifically in the Philippines. While a Delaware court would have the authority to enforce its judgment within the United States, the court noted the inherent limitations on doing so internationally. While this may on the surface sound concerning for deals being done with parties located outside of the United States, the court specifically notes its reluctance to ask a foreign court to enforce a judgment in a jurisdiction where outcomes often depend on “dodgy bargains” and political influence.
The court also pointed to the impracticality of supervising the target’s preparation of its financial statements and the registration statement to meet its best efforts obligations. Because of the specific challenges presented by the “dodgy bargain” and the internal governance issues at CasinoCo, the path to closing would be too complex for a court to oversee and enforce compliance. Although courts can and have supervised specific tasks parties need to get to closing, the court seems uniquely unwilling to wade (or cause a court monitor to wade) into the toxic facts of this case. Further, the court declined to put the target and its executives in a position where they would likely be violating a specific legal order issued by the courts of their home jurisdiction.
Lastly, the court cited the plaintiff’s own inequitable conduct, indicating that 26 Capital’s deceptive conduct should not be rewarded with a decree of specific performance. The court noted that specific performance must be denied when the equities or ethical considerations favor the defendant and 26 Capital’s conspiring with Mr. Eiseman to deceive Universal and CasinoCo made it inequitable to grant them specific performance.
Overall, this case is a reminder that a court’s decision whether to order specific performance is a fact intensive analysis, requiring the party seeking specific performance to make a clear and convincing case that it is warranted from both a factual and an equitable perspective. It also reminds us that in considering a specific performance remedy, the court is entitled to consider whether the remedy can be enforced from both a judicial oversight and jurisdictional perspective. As a result, the practical considerations and limitations of specific performance must always be considered, especially in cross-border M&A transactions.
26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., C. A. 2023-0128-JTL (Del. Ch. Sep. 7, 2023).
 Id at 55
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 Id. at 12-29.
 Id. at 32.
 Id. at 32-43.
 Id. at 46-50.
 Id. at 54.
 Id. at 61.