"Well, with that the argument began—and it went hot and heavy. At first, Jabez Stone had a flicker of hope, but when he saw Dan'l Webster being forced back at point after point, he just sat scrunched in his corner, with his eyes on that japanned box. For there wasn't any doubt as to the deed or the signature—that was the worst of it. Dan'l Webster twisted and turned and thumped his fist on the table, but he couldn't get away from that. He offered to compromise the case; the stranger wouldn't hear of it. He pointed out the property had increased in value, and state senators ought to be worth more; the stranger stuck to the letter of the law. He was a great lawyer, Dan'l Webster, but we know who's the King of Lawyers, as the Good Book tells us, and it seemed as if, for the first time, Dan'l Webster had met his match."
~ "The Devil & Daniel Webster", by Stephen Vincent Benét (1936)
I. What Does the Contract Say?
When Rational Group US Holdings—parent company for PokerStars—filed suit to enforce an agreement to purchase the Atlantic Club Casino from Resorts International Holdings, the Complaint painted a picture of PokerStars as a white knight rescuing the Atlantic Club from certain disaster, only to be repaid with treachery. Not surprisingly, commentary in the poker community has generally taken PokerStars' side in the dispute, calling the Atlantic Club's termination of the purchase agreement a "loophole" which was grossly unfair given the fact that PokerStars had already paid $11 million of the $15 million purchase price as weekly expense advances to keep the Atlantic Club solvent and operational. The Atlantic Club's demand for an additional $4 million termination fee was portrayed as simply twisting the knife in PokerStars' back.
Of course, to this point the actual purchase agreement has not been released to the public, so commentary about the case has naturally been shaped by how PokerStars portrayed the purchase agreement. But when it comes to contracts, the devil is in the details. To evaluate the dispute between PokerStars and the Atlantic Club, there is no substitute for reviewing the nitty gritty of the actual purchase agreement.
Via some contacts in the legal community, I was able to obtain copies of all of the court filings related to the temporary restraining order (TRO), including a copy of the Purchase Agreement (attached as an Exhibit to the Complaint). So, without further ado, lets take a look under the hood.
II. The "Outside Date"
Probably the biggest issue raised by PokerStars was a claim that the "outside date" in the purchase agreement (April 26, 2013) was void for violating this New Jersey gaming statute provision:
"[W]henever any person contracts to transfer any property relating to an ongoing casino operation … under circumstances which require that the transferee obtain casino licensure … the contract shall not specify a closing or settlement date which is earlier than the 121st day after the submission of a completed application for licensure or qualification… Any contract provision which specifies an earlier closing or settlement date shall be void for all purposes."
PokerStars' argument is that its application was not "completed" until April 11, 2013, and thus any contractual provision for an "Outside Date" less than 121 days later (before August 9, 2013) would be void pursuant to law. However, for PokerStars' argument to work, the "Outside Date" in the Purchase Agreement would also have to be the "Closing Date" specified in the Purchase Agreement. Otherwise, the "Outside Date" is something different than a "closing or settlement date" and the statute would not apply.
From the outset, this argument struck me as dubious, primarily because a "closing or settlement date" is generally understood to be the date the actual transfer of property and money occurs between buyer and seller to conclude the transaction. Obtaining any required licenses and other regulatory approvals would usually be a condition precedent to a closing on the sale of a business. A purchase agreement dependent on licensing of the purchaser or similar regulatory approval would never specify a closing date prior to conclusion of the licensing or regulatory approval process. Thus, it seemed fairly clear to me that the "Outside Date" referenced in PokerStars' Complaint and Brief almost certainly was not the same as the contractual "Closing Date".
The Purchase Agreement confirms my expectations, and does so right out of the gate. Section 1.1 provides:
Section 1.1. Purchase and Sale of Interests. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, each Seller shall sell, transfer and deliver to Buyer ..., and Buyer shall purchase from the Sellers, the Interests set forth opposite each Seller's name on Schedule I, for an aggregate purchase price of Fifteen Million Dollars ($15,000,000) ...
Section 1.2 sets out the calculation of the purchase price, and includes references to a "Closing Date", "Closing Date Payment I' and "Closing Date Payment II". [FN1]. Similarly, Section 1.5 sets forth a number of legal documents that are to be executed and delivered "at Closing". In contracts, capitalized words and phrases are generally defined terms, meaning they are a shorthand reference to a particular set of facts, calculations, or conditions used for clarity and consistency throughout the contract. "Closing" and "Closing Date" are defined in Section 1.4 of the Purchase Agreement:
Section 1.4. Time and Place of Closing; Actions Prior to Closing.
(a) Unless this Agreement is earlier terminated pursuant to Article VII hereof, the closing of the transactions contemplated by this Agreement, including the purchase and sale of the Interests (the "Closing"), shall take place not later than the third Business Day following satisfaction or waiver of all the conditions set forth in Article VI hereof (other than those conditions intended to be satisfied or waived at Closing), at the offices of Wilkie Farr & Gallagher LLP, ... unless another time or place shall be agreed to by the parties (the "Closing Date").
As expected, one of the conditions precedent to Closing was for PokerStars to obtain an Interim Casino Authorization (ICA) (Section 6.1):
Section 6.1. Conditions to Each Party's Obligation to Effect the Closing. The respective obligations of each party to this Agreement to effect the Closing is subject to the satisfaction of each of the following conditions on or prior to the Closing Date, any of which may be waived in whole or in part in a writing executed by all the parties hereto:
(c) Interim Casino Authority. The ICA will have been obtained and will be in full force and effect.
Because obtaining the ICA was a condition precedent to Closing, the Closing Date was not a specified date in the Purchase Agreement, and in fact could not be specified as that date was pegged to PokerStars obtaining an ICA (which will not occur, if at all, until later this summer).
By contrast, the "Outside Date" is a specified date in the contract. Pursuant to Section 10.1(a), the general definitions section of the Purchase Agreement:
"Outside Date" means April 26, 2013.
Section 10.1(b) also specifically notes that "Closing" and "Closing Date" are defined in Section 1.4. So, by definition the "Outside Date" is not a "closing or settlement date". Given these provisions, PokerStars improperly conflated the Outside Date with the Closing Date in its Complaint (para. 81) and initial Brief (pp. 20-22). [FN2].
PokerStars did back away from this assertion in its Reply Brief (pp. 11-16), instead suggesting that the Outside Date and Closing Date were "inextricably linked". According to PokerStars, termination via the Outside Date provision is only possible if the transaction had not closed, and closing is dependent on PokerStars obtaining an ICA; therefore, the Outside Date implicitly requires closing on or before April 26, 2013, and thus violates the 121-day provision of New Jersey gaming law.
Although PokerStars' argument may have superficial appeal, it falls apart under closer analysis. The Termination provisions of the Purchase Agreement (Section 7.1) state:
Section 7.1. Termination. This Agreement may be terminated at any time prior to the Closing (with respect to Sections 7.1(b) through 7.1(f) hereof, by written notice by the terminating party to the other parties):
(b) by the Sellers' Representative or Buyer, if the transactions contemplated hereby shall not have been consummated on or prior to the Outside Date; provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose action or failure to act has been the primary cause of or resulted in the failure of the Closing to occur on or before the Outside Date and such action or failure to act constitutes a breach of this Agreement;
The plain language of Section 7.1(b) contemplates that the Outside Date is a deadline for consummating the deal that might occur "prior to Closing". Nothing in Section 7.1(b) requires Closing to occur on or before the Outside Date. [FN3]. Rather, Section 7.1(b) simply provides that, if Closing has not occurred by the Outside Date for whatever reason (including reasons unrelated to the ICA application), then after the Outside Date either party may choose to terminate the Purchase Agreement so long as the party terminating the agreement has not caused the failure to close by breaching any of its duties under the agreement. PokerStars and the Atlantic Club were free to allow the Purchase Agreement to remain in force after April 26, and even through August 9 or later if they had wanted to do so while awaiting the DGE's decision on PokerStars' ICA application. Thus, the Outside Date and Closing Date were not "inextricably linked". [FN4].
It is unquestionable that the Purchase Agreement placed tight time deadlines on PokerStars. Section 5.5(b) required PokerStars to submit an ICA application within three business days, which PokerStars did on December 24 (presumably PokerStars had been working on the ICA application since at least the signing of the original Term Sheet on November 7). From December 24 to April 26 is 123 days; clearly the Purchase Agreement provided more than 121 days for the DGE to consider PokerStars' ICA application. Thus, it was possible pursuant to the Purchase Agreement for PokerStars to obtain an ICA before the Outside Date and still complete Closing as contemplated by Section 1.4(a); of course, this would require PokerStars to have submitted a complete application by December 24. Further, Section 5.5(b) of the Purchase Agreement contemplated that the DGE might determine the ICA application was incomplete and require supplemental filings.
By agreeing to an Outside Date a mere 126 days subsequent to the signing date of the Purchase Agreement, PokerStars put itself in a situation where the ICA approval process needed to go smoothly. The ICA approval process and timelines were known to the parties. There was an inherent risk that PokerStars' ICA application would require additional time to process. Yet PokerStars agreed to an Outside Date that left little margin for error. The Outside Date was a contractual term bargained for by the parties. Absent fraudulent conduct, it would be unfair to set aside a contractual term merely because the provision ultimately worked to the benefit of one of the parties, or resulted in an outcome not anticipated by one of the parties.
III. Retention of Advance Payments / Termination Penalty / Poker Room Buildout
The linchpin of PokerStars' equitable arguments is the claim that, because PokerStars has already paid the Atlantic Club slightly more $11 million in advances to fund the casino's operations since last November, it would be unfair to terminate the Purchase Agreement considering the total purchase price is $15 million. In fact, once a $4 million termination fee is added to the advance payments, the Atlantic Club will essentially receive the full $15 million purchase price, yet PokerStars will be left with no casino, a result PokerStars understandably considers "inequitable and unjust." (PokerStars Brief, pp. 28-29).
Once again, let's turn to the contract. Section 7.2 of the Purchase Agreement governs the rights and remedies of the parties upon termination (emphasis added):
Section 7.2. Effect of Termination.
(c) Remedies of Sellers. Notwithstanding anything to the contrary contained in this Agreement (including, for the avoidance of doubt, Section 7.2(e)), if this Agreement is terminated for any reason pursuant to Section 7.1 (other than by Buyer pursuant to Section 7.1(e)), Buyer shall pay to the Sellers' Representative, for further distribution to the Sellers, within two (2) Business Days of such termination, an amount equal in cash to Four Million Dollars $4,000,000 (the "Termination Payment"), and the Company shall be entitled to retain all Advances paid by Buyer to the Company pursuant to this Agreement and the Binding Term Sheet as of such termination.
PokerStars has also complained about paying nearly $320,000 to the Atlantic Club to fund the construction of a poker room in the casino, as well as incurring more than $1 million in additional fees and expenses in connection with the purchase agreement (a safe guess is that most of these fees and expenses were legal fees connected to the casino purchase and the ICA application process). (PokerStars Brief, p. 13). Section 5.17 of the Purchase Agreement addresses the poker room expenses (emphasis added):
Section 5.17. Poker Room. Prior to the Closing, at the request of Buyer, the Company shall cooperate, in all reasonable respects, with respect to the contruction of a poker room at the Property in accordance with the instructions of Buyer; provided, that Buyer shall fund all costs and expenses related to such poker room in advance, and shall obtain and pay for in advance all necessary Permits and insurance coverage related thereto. In no event shall costs or expenses incurred or any amounts otherwise paid by Buyer in connection with this Section 5.17 be deemed an Advance, and in no event, whether or not the transaction contemplated by this Agreement are consummated, shall the Company, the Sellers or any of their Affiliates be liable, directly or by reimbursement of the Buyer or any of its Affiliates, for any such costs or expenses.
Similarly, Section 7.2(b) addresses other fees and expenses:
Section 7.2. Effect of Termination.
(b) Fees and Expenses. Except as otherwise expressly provided in this Agreement, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Closing is consummated.
Based on these contractual provisions, if the Atlantic Club could properly terminate the Purchase Agreement, then PokerStars really has little reason to complain about the financial penalties it will incur. There are sound business reasons behind each of these financial provisions. First, with respect to outside fees and expenses, it is standard to require each side to bear its own fees and expenses associated with a business transaction. In large part, this standard rule is based on the idea that these types of fees and expenses are simply part of the cost of doing business, and each party to the transaction can control the fees and expenses it incurs as it sees reasonably prudent. Next, with respect to the construction of the poker room, this was a condition of the transaction that was specifically requested by PokerStars for its own benefit, most likely to provide live poker play as a cross-marketing tool to complement its online poker operations. Presumably if the Atlantic Club would have wanted a poker room, it would have already opened one. Sure the Atlantic Club will wind up with a "free" poker room, but the room may well end up being a white elephant of little use to the casino's operations.
Turning to the advance payments, again these payments were for the benefit of PokerStars, which wanted to purchase the Atlantic Club as a going concern rather than as a distressed or insolvent business. Keeping the casino afloat had real value to PokerStars, to the extent that the Purchase Agreement contained an express provision (Section 5.20) requiring the Atlantic Club to provide 24 hours notice prior to filing for bankruptcy, and to give PokerStars at least three days to provide sufficient cash to prevent a bankruptcy filing. Of course, the advance payments also directly benefited the Atlantic Club which has been able to operate through the winter and spring "down" periods primarily by using PokerStars' payments to fund its operations. It's also undeniable that the Atlantic Club will continue to benefit from those advances as it enters the more lucrative summer season and as it seeks another buyer. Nonetheless, the Purchase Agreement would likely never have been agreed to by the Atlantic Club if the advance payments by PokerStars were considered a loan or were to be forfeited back to PokerStars in the event the sale fell through; the Atlantic Club could not risk the negative financial impact of such an arrangement which would likely have made the casino immediately insolvent. Thus, the Purchase Agreement provisions related to the retention of advance payments by the Atlantic Club upon termination were likely an essential term of the deal.
Finally, the $4 million Termination Payment provision also makes business sense. By entering into the Purchase Agreement, the Atlantic Club was barred from discussing a better deal with any other potential buyer, potentially locking the casino into a sale below market value. This period of exclusivity was arguably of great benefit to PokerStars. The Termination Payment is a mechanism which encouraged PokerStars to consummate the sale while also providing compensation to the Atlantic Club in the event the deal fell through. A Termination Payment "penalty" of essentially $1 million per month of the Purchase Agreement's exclusivity period is steep, but hardly out of line given the financial scale of the overall transaction.
The financial consequences of a termination of the Purchase Agreement—regardless of cause—were negotiated by the parties and spelled out in great detail in the contract. Assuming the Atlantic Club properly terminated the Purchase Agreement for failure to close the deal prior to the Outside Date, PokerStars should have to live with the bargained-for consequences of its deal. It is neither unjust nor inequitable to require a party to live up to the legal terms of its contract, even if doing so imposes a steep financial price.
In analyzing the failed PokerStars-Atlantic Club Casino deal, it is important to keep in mind that the parties were sophisticated businesses which negotiated a complex financial transaction. The lengthy and detailed Purchase Agreement memorializing the numerous terms, conditions, and provisions of the deal was presumably reviewed by executives and legal counsel for both parties. Legal counsel for a deal of this magnitude are notorious for parsing every sentence, even every word, of a contract as important as this Purchase Agreement (and are paid handsomely for their expertise).
There is a strong legal presumption that the Purchase Agreement contains the entire contract between the parties (Section 10.7 contains what is known as an "integration clause", which essentially provides that the written contract is the sole and final expression of the parties' agreement). The mere fact that one of the parties—PokerStars—now claims it had a different understanding of the terms of that contract is of little relevance. PokerStars bargained for and agreed to the Purchase Agreement as it was signed by the parties. In fairness to PokerStars, it is entirely possible that making the deal happen required Poker Stars to concede many of the more onerous terms contained in the Purchase Agreement. If so, PokerStars may well have taken a calculated gamble that it could receive ICA approval before the Outside Date, knowing there was a significant downside risk to any delay in the licensing process. On the other hand, PokerStars may well have been simply out-negotiated by the crafty Atlantic Club folks (who had managed the casino to the brink of insolvency). Regardless, if the terms of the Purchase Agreement provide that the Atlantic Club can walk away from the deal and keep the money advanced by PokerStars, it's a little late in the day for PokerStars to start whining about how "unfair" the contract is.
One of the ironies of the PokerStars-Atlantic Club Casino debacle is that PokerStars (and its attorneys) come off looking like fools, which is quite a contrast to the general image of PokerStars as being run by sophisticated businessmen who are at the pinnacle of the online gaming industry. The failure of this deal is certainly an embarrassing setback for PokerStars, but it is not the end of the game by any means. PokerStars still has options available to obtain a license in New Jersey. The Atlantic Club fiasco simply means PokerStars moves forward with egg on its face at best, and mortally wounded at worst.
Tomorrow: A look at PokerStars' legal options in the wake of the Atlantic Club Casino debacle.
[FN1] Interestingly, Section 1.2 of the Purchase Agreement indicates that PokerStars was to be given credit against the $15 million purchase price for $6,434,000 in advances paid to the Atlantic Club Casino prior to signing the Purchase Agreement on December 21, 2012. Those prior advances were made pursuant to the preliminary Term Sheet reached between the parties on November 7, 2012. The amount of these prior payments, coupled with the need for roughly $4.5 million in additional advances (see Section 1.3) during the four months the Purchase Agreement was in effect underscores the severity of the financial troubles faced by the Atlantic Club in the Fall of 2012. To be blunt, the Atlantic Club was hemorrhaging nearly $2 million per month during the six months PokerStars was subsidizing the casino. PokerStars' claim to have saved the Atlantic Club from bankruptcy is most likely true.
[FN2]. The Atlantic Club's lawyers did a nifty bit of advocacy on this point by attaching to their Brief a table summarizing six other casino purchase agreements which contained both Outside Dates and Closing Dates, and which had similar provisions for termination of the purchase agreement if Closing did not occur by the Outside Date. Some of these purchase agreements contained provisions for automatic or optional extensions of the Outside Date in the event regulatory approval or certain other specified conditions were the reason for the delay in Closing. Those provisions for extension of the Outside Date are notably absent from the PokerStars-Atlantic Club purchase agreement.
[FN3]. In fairness to PokerStars and its attorneys, one provision of the Purchase Agreement (Section 5.5(c)) does suggest that the parties intended for Closing to occur before the Outside Date (emphasis added):
Section 5.5. Governmental Approvals.
(c) Without limiting Section 5.5(a) or Section 5.5(b) hereof, Buyer, its Affiliates and the Sellers shall (i) each use its reasonable best efforts to avoid the entry of, or to have vacated or terminated, any decree, order, or judgment that would restrain, prevent or delay the Closing, on or before the Outside Date, including defending through litigation on the merits any claim asserted in any court by any Person, and (ii) each use its reasonable best efforts to avoid or eliminate each and every impediment under any antitrust, competition or trade regulation Law that may be asserted by any Governmental Entity with respect to the Closing so as to enable the Closing to occur as soon as reasonably possible (and in any event no later than the Outside Date), including implementing, contesting or resisting any litigation before any court or quasi-judicial administrative tribunal seeking to restrain or enjoin the Closing provided that the parties shall not be obliged to take any action which is likely to damage their business or that of any of their Affiliates.
The problem with the Purchase Agreement is that the Closing conditions and Termination provisions noted above do not contain similar limiting language linking the Closing Date to the Outside Date.
[FN4]. In another bit of nifty advocacy, the Atlantic Club's attorneys obtained affidavits from three prominent prior members of the New Jersey DGE stating that the statutory 121-day period before any closing date was merely intended to ensure a reasonable period for review of any ICA application, and did not prohibit the parties from imposing a shorter "Outside Date" or "Drop Dead Date" terminating the purchase agreement prior to the closing date. (See Affidavits of Thomas Auriemma, Frank Catania, Sr., and Steven Perskie). Technically, construction and interpretation of the statute at issue is a matter for the court, and the opinions of these individuals are irrelevant. As a practical matter, these opinions gave the judge some cover for declaring that the statute did not bar the termination of the Purchase Agreement; after all, he was only agreeing with the "experts" in that area of the law.