Deal or No Deal? Is the Contract for PokerStars to Acquire the Atlantic Club still Valid?

During the last week, the Wall Street Journal and the New Jersey blog ‘MeadowlandsMatters’ have both reported that, according to the Atlantic Club Casino and other sources, the agreement between PokerStars and the casino in Atlantic City was terminated by the Atlantic Club when the license to operate a New Jersey brick and mortar casino had not been granted to PokerStars by April 26.

In December, PokerStars confirmed that they had an agreement in place to acquire the struggling casino, and at the same time, save almost 2000 jobs that were in jeopardy.  Sources close to the situation confirmed that PokerStars subsidized the casino with payments totaling millions of dollars during the fall and winter months to keep it operating and to help keep those jobs, while the Casino Control Commission and the Division of Gaming Enforcement conducted their due diligence process to review the application to acquire the casino.  That approval process could take as long as 120 days from the date the application is considered complete, which the commission confirmed happened on April 10, 2013. Presumably both sides were aware prior to April 26 that the license could not be approved by the April 26 date reportedly in the contract.

Michael Frawley, Chief Operating Officer of the Atlantic Club, offered the following statement dated May 1, via the casino’s public relations firm:

“Our purchase agreement with PokerStars has been terminated in accordance with its terms. The Atlantic Club remains committed to the aggressive pursuit of the opportunities presented by online gaming.  The advent of New Jersey’s online gaming legislation has changed Atlantic City’s future for the better and The Atlantic Club is absolutely going to be a part of that future.

In the interim, our intentions are to maintain our year over year market share gains through our unique brand positioning as ‘the best deal in Atlantic City’.   The Atlantic Club’s 2013 revenue and net revenue trends are proof positive that customers are rediscovering us and our popularity is higher than ever.”

Frawley has not returned phone calls this week and through his P.R. firm, has declined to take part in an in-person interview.

Eric Hollreiser, Head of Corporate Communications at PokerStars offered the following comment late on May 2:

“In December 2012, The Rational Group (d/b/a PokerStars) entered into a purchase agreement for the acquisition of the Atlantic Club.  Several days ago we received a purported notice of termination of this agreement from the current owners of the Atlantic Club. It was the Rational Group’s expectation and understanding, based on the ongoing dealings between the parties, that the closing date would be extended to allow the transaction to be completed.  The Rational Group remains entirely committed to resolving this situation and to our investment in New Jersey”.

How Important is the Date April 26?

Many questions have arisen about how the “hard date” of April 26, 2013 could be part of a contract that might allow an out for one of the parties to terminate the agreement.  The regulations for licensing in New Jersey are public and it is clear in the statute  that a person or entity that is attempting to acquire a casino ,in whole or in part, may not “close” on the transaction until such time that an Interim Casino Authorization (ICA) is granted.

It is well known that PokerStars applied for that license, which is now pending before the Casino Control Commission. According to the Commission, although PokerStars submitted their application months ago, it was not deemed a “completed” application until April 10. That is the date in which the clock would begin for the Division of Gaming Enforcement to conduct their investigation (they have a 60 day window from that date to accomplish that and then submit their recommendations to the commission) and then the Commission has up to an additional 30 days to render its decision as to the granting of the license. Therefore the deadline for the license decision would be in August.

What this author has also found in the regulations however, is that a provision date in a contract which stipulates a settlement or closing date that is less than 121 days from the date of a completed application makes that provision void. As taken from Article 6B, 5:12-95.12, a, of the Statute:

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, which application shall include a fully executed and approved trust agreement in accordance with section 5 of this 1987 amendatory and supplementary act. Any contract provision which specifies an earlier closing or settlement date shall be void for all purposes”.

Therefore, if, as has been reported, the termination by Atlantic Club was sent based on the fact that the closing had not taken place by April 26, that is not a legally valid reason to terminate the agreement.  Furthermore, although the contract terms have not been made public by either side, it is quite common, if not almost mandatory, to include a “severability clause” into any such contract. That would mean that, if the alleged terms that caused the termination letter to be sent were based on a provision that was not in keeping with law, that provision being struck would not stop the rest of the contract from being deemed intact.

This author is not an attorney, but even though the Atlantic Club has said the deal is terminated, it would appear that there could still be a question about whether there is a legal, binding contract between the parties to complete the acquisition. As long as a severability clause is present in the contract, removing the provision that gave a deadline of April 26 would not, nor could not, deem the rest of the contract invalid.

While there has been a lot of speculation as to what may have precipitated this breakdown in the agreement, no one at either the Atlantic Club or PokerStars say that this has anything to do with any issues surrounding PokerStars receiving approval for an Interim Casino Authorization in Atlantic City. Sources within Atlantic City say that there have been no indications made to either side that such a license would not be approved.

Diamond Flush Poker will continue to update as more information becomes available.

 

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8 Responses to Deal or No Deal? Is the Contract for PokerStars to Acquire the Atlantic Club still Valid?

  1. Grange95 says:

    As a lawyer, I would want to see the actual contract before deciding if the statute you cite applies to the contract. However, I note that the statute specifies that the 121 day requirement applies to the “closing or settlement date”. To me, this means the date that the applicant takes final legal control of the casino. In other words, the purpose of this provision is to mandate that the transfer of control cannot occur any earlier than 121 days after submission of the license application in order to provide at least 120 days for the commission to determine whether to grant a license.

    A “closing date” or “settlement date” is generally understood to be the date a deal is consummated, meaning the date ownership and control is transferred, payment is made, and other legal consequences accrue. It is common for a contract to contain other types of deadlines and important dates. So, a requirement that PokerStars obtain a valid license within a certain period after the contract was signed would not necessarily be a “closing or settlement date” requirement. To give a hypothetical, a contract for sale of a casino might be entered into on January 1. The contract might require the buyer to post a set amount of cash as security for the sale by March 1, obtain a casino license by September 1, complete all due diligence inquiries by December 1, and close the sale on December 31. In this hypothetical, the only “closing or settlement date” is December 31, even though failure to meet the other deadlines could also terminate the contract. Turning back to the cited statute, if the contract tried to specify a closing date before May 2 (121 days after January 1), then that provision would be void. But if the contract requires the buyer to obtain a license before May 2 but specifies a closing date after May 2, the contract would not appear to violate the statute.

    • Diamond Flush says:

      I agree with you that without the termination or the contract being public, we are forced to make several assumptions to arrive at possible conclusions. If we go with what was implied in the minimal public statements received from both sides, and if we assume that “settlement” in this case means transfer of title and control of the casino, and if we further agree that the termination was based on “settlement” not happening by April 26, then it is my belief that a provision in the contract stipulating that settlement must occur by that date is void based on the subsection in the statute that I quoted. Two important things to consider: 1. By statute, settlement (closing) cannot occur without the new owner receiving an ICA, so it wouldnt matter whether an earlier date was part of the contract, it’s implied by needing to adhere to the statutes. 2. The subsection clearly states that the date from which the 121 days shall begin is not based on the submission of an application by PokerStars which happened in December 2012, but by the date in which it is deemed a “completed” application. Such a word makes all the difference in this case. The 121 day minimum stated in the statute is when the clock would start for the review of the application. Whether any preliminary review was done before it was deemed complete doesn’t matter. The completion date is only in April 2013, confirmed by the authorities, therefore, any date in the contract requiring settlement prior to 121 days following April 10, 2013 makes that provision null in its entirety. IF the termination is based on that provision, the termination therefore would also be invalid, and if severability is part of the contract, the balance of the contract remains in force. Not having the contract public, does not allow for even speculative conclusions as to other covenants or their status. I realize there are a lot of “ifs” involved here, so it looks like we are in wait and see mode.

      • Grange95 says:

        “if we assume that “settlement” in this case means transfer of title and control of the casino, and if we further agree that the termination was based on “settlement” not happening by April 26 …”

        I agree with the first half of the assumption, but cannot agree with the second half of the assumption. The closing or settlement date is the ultimate last date when ACC would give control to the Rational Group. Business sale contracts have lots of preliminary deadlines prior to the closing date which, if not met, can lead to termination of the contract. For example, real estate titles must be cleared, vendor contracts reviewed for assign-ability, accounts receivable reviewed and valued, insurance reviewed for coverage continuity, employment contracts and benefit plans reviewed, and yes, licensing approvals obtained from various authorities.

        Here, we have no reason to believe that a licensing deadline was intended to also serve as the closing date for the sale. In fact, it would be highly unlikely that the dates would be the same. What is most common–and is most likely in this case–is that there was a licensing date, followed by a final transition period of 30-90 days prior to the closing date.

        • Diamond Flush says:

          I disagree about the closing date not being the trigger point, although certainly all of those other things must happen as well. We will have to wait to either hear it from either of the parties, or have a chance to view the termination document and the contract.

  2. Grange95 says:

    Just did some quick calculations using the April 26, 2013 licensing deadline. If the contract was signed on or before December 26, 2012, there would be a period of at least 121 days between the contract date and the licensing requirement date. Assuming the contract was signed even earlier in December, the parties may well have expected PokerStars to apply for its license fairly shortly after the contract was signed. In any event, even though the statute does not require a 121-day window for licensing (as opposed to closing or settlement), it does appear PokerStars had more than 121 days to obtain its license. And again, the contract may have–and like did have–a closing or settlement date much later in 2013, which would have allowed the parties time to complete all of the legal and operational issues necessary for transferring control once PokerStars was licensed to operate the casino. Of course, without the contract, we are all left to speculate as to the precise deadlines, requirements, and other relevant provisions related to termination of the contract for failure to obtain a license.

    • Diamond Flush says:

      I tried to answer completely via your other post, but again, the application date (December) is not what is referred to by the statute, its the “completed” date, which is decided by the authorities and not by either party to the contract. I have no reason to believe that there would have been a closing or settlement date much later in 2013 as you suggest is likely, in fact, I believe that when entering into the contract, both sides preferred for it to be completed much sooner rather than later.

  3. Grange95 says:

    Without the contract itself, we do not know if the ultimate closing date was April 26, 2013 or some later date, whether in May or sometime later in 2013. As I discussed in my reply comment above, it seems more likely that the licensing date required by the contract was not the same as the closing date. However, even if April 26 was the actual closing date, we also have no reason to believe that the required 121-day window was not met (the contract would have to have been signed on or before December 26, 2012, which seems likely).

    Final thought: for transactions of this size, the companies undoubtedly used high-priced law firms experienced in major sales of businesses. Licensing is such a basic legal requirement, and the statute is very clear about the time requirements, I find it highly unlikely the contract would be deficient in this manner. If it is, there is a major malpractice claim lurking out there.

    FWIW, I’m an attorney in an insurance company. Last year we spun off a subsidiary in a sale to another financial services company. Insurance, like gaming, is a highly regulated industry. Even though we knew in advance we would likely have all regulatory approvals, the due diligence process involved dozens of lawyers on both sides spending weeks digging into obscure regulations, minute details, and unlikely contingencies. Having lived through a business sale, I just don’t see ACC and TRG screwing up such a basic requirement. But, without the contract, we are all just speculating.

    • Diamond Flush says:

      Quote: ‘However, even if April 26 was the actual closing date, we also have no reason to believe that the required 121-day window was not met (the contract would have to have been signed on or before December 26, 2012, which seems likely)’.

      If the settlement date contingency was April 26 then clearly the 121 day window was NOT met, regardless of when the contract was signed. Again, the 121 days is not based to begin when an application is made, but, imo according to the statute, when the COMPLETED application is in. We know that the completed date was in April.

      IANAL obv, but if I am right about what appears to have happened, I am leaning to agree that some high priced lawyers should be sweating it right now. As you said, it seems crazy that such mistakes could have been made. More wait and see mode ;)

      Thanks for writing.