The Court of Chancery in Delaware has ruled that credit asset manager Sixth Street Partners can’t stop the $12 billion deal between its minority owner Dyal Capital Partners and rival Owl Rock Capital.
Sixth Street filed a lawsuit in February, alleging that the deal violated the terms of its 2017 partnership agreement with Neuberger Berman’s Dyal, whose business revolves around buying minority stakes in alternatives managers.
Sixth Street claimed that under the deal it would end up directly competing with its future owner, Owl Rock, and that it had specifically negotiated broad transfer rights in its contract to prevent such a situation from occurring.
In late March, lawyers for both sides laid out their arguments to the Delaware Court.
Dyal’s lawyers argued that, counter to Sixth Street’s position, nothing is being transferred under the Blue Owl deal, and that Dyal’s third fund, which holds the financial stake and other rights, remains as is. In addition, Dyal said a precedent case in Delaware — called Borealis — prevents Sixth Street from interpreting its contract the way it has. Dyal also argued that the rights Sixth Street claims to have don’t make commercial sense, as it gives the manager far too much power.
In a decision on Tuesday, the judge ruled for Dyal. “The Transfer Restriction’s unambiguous language compels an outcome in Defendants’ favor,” according to court documents. “Dyal III…is transferring nothing in the Transaction, so the Transfer Restriction is not triggered.” Agreeing with Dyal’s counsel, the judge also cited the precedent case Borealis as crucial to its decision.
“Sixth Street’s interpretation would have the Court enjoin a transaction at any level of Dyal’s corporate pyramid, regardless of whether that entity was explicitly bound by the Transfer Restriction. This runs afoul of Delaware’s well-settled respect for and adherence to principles of corporate separateness and freedom of contract…,” according to the court.
For Sixth Street, the case was about the nature of a partnership with a third party. “We entered into our agreement with the understanding that Dyal would be our partner and not our competitor. We are disappointed that Dyal and Neuberger’s unreliable narrative was the basis of today’s decision, and we will consider appropriate options. Our focus always has been and continues to be providing value for our stakeholders,” said a Sixth Street spokesman.
The battle’s origins date back to December, when Dyal and Owl Rock, a Dyal affiliate, said they would merge and go public using a special-purpose acquisition company sponsored by HPS, another Dyal partner. The new entity would be known as Blue Owl.
The fight itself was not surprising as the risks were detailed in the SPAC’s registration documents, including potential conflicts of interest among the parties. “Certain partner managers that are engaged in managing funds focused on credit investments may consider Owl Rock to be a competitor with respect to their business and may seek to invoke remedies available to them under the investment agreements,” the SPAC acknowledged in Securities and Exchange Commission filings.
A spokesman for Dyal said, “We’re pleased with this resounding victory. We look forward to completing our strategic combination and remain on track to do so in the first half of this year.”