Affinity Gaming’s largest shareholder narrows legal focus

Two weeks ahead of a critical shareholders meeting, Affinity Gaming’s largest shareholder narrowed its legal attack on the company.

Attorneys for the Chicago-based investment firm Z Capital Partners LLC asked Clark County District Judge Mark Denton on Monday to stop the company from carrying out a poison pill defense as well as tightening the eligibility rules for people to take board of directors seats. Denton said he would issue a written ruling at an unspecified date.

Companies adopt poison pills to frustrate outsiders that seek to gain control of a company by purchasing stock from others. Once the outsider passes a percentage of ownership, the poison pill releases a deluge of new shares that drastically dilute the outsider’s stake.

Z Capital, which specializes in financially struggling companies, initially bought debt in what was then Herbst Gaming. When Herbst emerged from Chapter 11 bankruptcy in December 2010, debtholders received shares in what was renamed Affinity, which owns 10 casinos, including the three in Primm and two locally under the Terrible’s banner.

Since then, Z has spent nearly $80 million to boost its position from 20.4 percent to 30.4 percent. It has said it would like to increase its stake, but the poison pill would unleash 105 million new shares to other shareholders and slash its position to about 5 percent.

In seeking a preliminary injunction to freeze the poison pill, Z Capital attorney Charles McCrea said, “Z Capital should not have to live under the threat of almost complete annihilation if it should acquire one more share of Affinity Gaming.”

McCrea acknowledged that Nevada law allows poison pills. But in this case, Affinity’s governing documents prior to the adopting the pill late last year contained a clause that required the company to let existing shareholders maintain the “substantial equivalent” of their positions, McCrea said.

But Affinity attorney Yosef Riemer said that the previous rules were extinguished when the company converted from a limited liability corporation to a regular corporation late last year, a move the included the poison pill.

The move was designed in part, Riemer continued, to prevent a slow-motion takeover without paying other shareholders a premium price that is typical when everybody is bought out at once.

While Affinity is not publicly traded, shareholders can buy and sell with each other.

“Affinity’s rights plan (poison pill) in no way keeps any party, including Z Capital, from making an offer to acquire all of the company’s outstanding shares,” according to a letter to shareholders that Affinity filed with the Securities and Exchange Commission on Friday. “What the rights plan does is ensure ... that no one can acquire control of Affinity without paying our shareholders an appropriate price.”

This came against a backdrop of Z Capital saying it could do more to help shareholders cash out. But recent sales at $12.10 a share show a better than 20 percent gain since bankruptcy that beats several other regional gaming companies, according to Affinity.

In addition, Z Capital is fighting the new provision that allows the company to deny board seats to people it considers unsuitable to gaming regulators. Previously, any unsuitable designation had to come solely from regulators.

Z Capital has nominated two people for the seven board seats at the May 14 annual meeting.

Contact reporter Tim O’Reiley at
toreiley@reviewjournal.com or 702-387-5290.