By Nick Brown
Feb 5 (Reuters) - Distressed investor Z Capital Partners has
upped its ownership stake in Affinity Gaming Corp, the latest
twist in a brewing dispute over control of the formerly bankrupt
In filings with the U.S. Securities & Exchange Commission on
Monday night and Tuesday afternoon, Z Capital said it raised its
stake in Affinity to 30.5 percent from 24.97 percent. The
investor has been steadily raising its stake since first earning
an equity share through the company's bankruptcy.
Affinity, previously called Herbst Gaming Inc, declared
bankruptcy in Nevada in 2009, with a plan to split off its slot
machine company and give creditors the equity in a new casino
operator that became Affinity. Large investors like Z Capital
and Silver Point Capital have been buying up shares in Affinity
Silver Point, the second-largest shareholder, owned 24.9
percent of Affinity as of December, according to SEC filings.
Affinity owns hotels and casinos in Nevada, including Primm
Valley Casino Resorts and Terrible's Hotel & Casino, as well as
resorts in Colorado and Missouri.
Z Capital has made no secret of its aim to own a substantial
chunk of Affinity, saying in SEC filings last year that it may
ultimately acquire a controlling stake.
And, in an Oct. 19 letter to Affinity's board it said it
would "seek representation on the company's board to permit us
to fulfill our fiduciary duty to our own investors." It also
heaped praise on Chief Executive David Ross and his team, saying
the "current management team is an outstanding one that should
be fully supported."
Affinity has not commented publicly on Z Capital's
aspirations or its efforts to earn board membership, and the
company declined to comment for this story.
But on Dec. 20 Affinity's board updated bylaws in ways that
appear to reduce shareholder influence over its operations.
Under the new rules, submitted to the Nevada Secretary of
State, directors have discretion to determine suitability of
shareholders, and appointing new directors now requires a
majority, rather than plurality, of stockholder approval.
The board can also adopt shareholder rights agreements that
would allow it to issue new securities without shareholder
votes, essentially giving it the power to create poison pills.
Ross did not return a call seeking comment. Z Capital
declined to comment for this story.
In its filing on Tuesday, Z Capital hinted that it could sue
the board over the governance changes, saying it reserved the
legal right to challenge the rights agreement.
Bernard Black, a governance expert and professor at
Northwestern University School of Law, said the board may be
willing to risk getting sued for the chance to keep control of
"Board members might have adopted the idea of 'Let them sue
us,'" Black told Reuters. "You might think it's not a great way
to think, but they wouldn't be the first board to do that."
The new provisions strip language giving shareholders the
right to vote on mergers or sales, and make it more difficult
for them to inspect the company's books and records.
Z Capital has also objected to Affinity's use of its
chairman, Don Kornstein, a former Bear Stearns investment
banker, to represent the company in asset sales since Affinity
has come out of bankruptcy, namely a 2012 asset swap with Golden
Gaming Inc. Z Capital in its letter said that constituted a
"conflict of interest."
Asset sales have been a key component of Affinity's
restructuring. On Friday, it closed a deal to sell three Nevada
casinos to Truckee Gaming LLC in a $17.4 million deal. According
to SEC filings, it hired Jefferies & Co Inc to solicit bids in
Lucian Bebchuk, who directs Harvard Law's corporate
governance program, said the new provisions sound like "serious
departures" from good governance.
"Especially troubling are the provisions denying
shareholders any right to vote on fundamental changes such as a
merger," Bebchuk told Reuters on Monday.
The company's directors are also free under the new rules to
pursue business opportunities that compete with Affinity, and
are safe from liability for breach of fiduciary duty for failing
to tell the company about such opportunities.
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