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The American investment firm seeking to take control of Everton will face further legal wrangling in the US after failing in a bid to end litigation, although allegations of fraud were thrown out.
Miami-based 777 Partners, who are currently going through the process of obtaining the required regulatory approvals from the Football Association, Premier League and Financial Conduct Authority in order to complete their acquisition of Farhad Moshiri’s 94/1% shareholding in Everton, have been at the centre of a legal case relating to a part of their aviation business.
777 Partners LLC co-founders Josh Wander and Steven Pasko were both named in a lawsuit brought against them in the Delaware Court of Chancery by the MALT Family Trust and Timothy O’Neil-Dunne, a former chief commercial officer of the 777-owned Canadian budget airline, Flair.
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The lawsuit was brought forward after allegations were made against 777 Partners that they had breached contract and fiduciary responsibilities following the Miami firm’s acquisition of travel and aviation assets related to MALT, with an agreement at the time seeing the purchase financed via part cash and part equity for MALT in a newly created business, Phoenicia, who MALT allege they were told would be the vehicle through which 777 Partners would run all of their aviation activities.
Court filings, published on Monday, read: “Early negotiations contemplated an all-cash transaction with a purchase price as high as $26m.”
The parties met at least twelve 12 between November 2017 and August 2018. At some point, Plaintiffs (MALT and O-Neil-Dunne) agreed to forgo an all-cash deal and accept a mix of cash and equity in Phoenicia, a newly formed entity. Plaintiffs allege that during the approximately 10 months of negotiations, the defendants (777 Partners LLC) represented that all their aviation-related business would be operated through that newly formed entity.
The only specific statement offered as support in the filing was a section of a June 17, 2018 email Wander sent to an unidentified recipient, which stated that “[the acquiring 777 Partners entity] and O’Neil-Dunne were a critical piece of anything 777 will do in the aviation space.”
According to the judges statement, on September 12, 777 Partners and MALT executed Phoenicia’s Operating Agreement, and on September 13 the parties executed the sales and purchase agreement (SPA). The SPA contemplated that a 777 Partners affiliate would purchase all outstanding equity of two MALT affiliates. As consideration, the sellers received $4,072,525 in cash. Additionally, MALT received a 3% vested equity interest in Phoenicia, it also received up to a 5% unvested interest, 1% of which vested annually for three years. In connection with these agreements, O’Neil-Dunne entered into the employment agreement with 777 Partners. If the employment agreement was terminated within four years, MALT forfeited 1% of its vested interest. The remaining 2% was given in the form of restricted warrants, which were convertible.
The issue for MALT and O’Neil-Dunne arose in March 2021 when 777 Partners and its affiliates closed on a deal to purchase aircraft to the tune of $42m to lease directly to airlines at a fair market value of $52m. The court filings noted that 777 Partners “are expected to accumulate a net asset value of more than $1bn in a fleet of jets.”
The creation of this new jet leasing business, and it not going through Phoenicia , is the crux of the legal case brought against 777 and its co-founders Wander and Pasko. The Plaintiffs in the case allege that 777 breached contractual and fiduciary duties, breaching an operating agreement that all aviation business went through Phoenicia. Other linked allegations relate to a breach of good faith, breaching implied provisions in the SPA, and entering Phoenicia into ‘unfair’ and ‘self-interested’ transactions.
Allegations of fraud were also made by the Plaintiffs against 777 Partners, Wander and Pasko, as well as Adam Weiss, vice-president of 777 who at the time was CEO of its aviation and travel group.
777 Partners were seeking to have all charges against them dismissed through the Delaware Court of Chancery. The prospective Everton owners were successful in full on four counts, including the allegations of fraud, while part dismissal of three further charges. The request to have charges dismissed relating to 777 Partners and Phoenicia allegedly breaching the implied covenant of good faith and fair dealing by operating the jet leasing business outside Phoenicia, and 777 Partners Defendants (Wander and Pasko) breaching fiduciary duties by causing Phoenicia to enter into self-interested, unfair transactions, were both denied and the lawsuit will move forward, the ruling delivered by Vice Chancellor Morgan T. Zurn on Monday stated.
777 Partners’ attempts to conclude a deal for Everton are expected to have a final decision prior to the end of the year, with one of the main hurdles that the prospective owners will have to cross being one of proving the source of funds for both the purchase price and to implement a workable business plan for the club moving forward. 777 have also committed to finding the rest of the funding to complete the new stadium build at Bramley-Moore Dock, scheduled to open during the 2024/25 season.
Last week, 777 Re, the Bermundan-based life and annuity reinsurance arm of the firm, suffered a downgrade in its credit rating by one of the largest credit rating agencies in the world, AM Best.
In conveying its decision to downgrade 777 Re’s rating from ‘excellent’ to ‘fair’, AM Best explained: “The rating downgrades reflect the revision of 777 Re. Ltd.’s balance sheet strength assessment to weak from very strong, driven by the material decline in the company’s risk-adjusted capital ratio, as measured by Best’s Capital Adequacy Ratio (BCAR). This resulted from the company’s significant exposure to investments in various 777 Partners LLC originated assets resulting in higher risk charges. These concerns are heightened by uncertainty regarding the financial condition of 777 Partners LLC as it has not provided audited financial statements for the past two years.”
Sources close to 777 assert that the downgrading of the 777 Re business will have no impact on the ability of 777 Partners’ football business, which contains Hertha Berlin, Vasco da Gama, Standard Liege, Melbourne Victory, Red Star FC and Genoa, in its plans to acquire, and finance, the deal for Everton moving forward. Ultimately, it will be the regulatory bodies, notably the FCA, that will determine whether or not the green light is given and that a takeover can be concluded swiftly.
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