RCS to Pay ARCP $60M to Settle Lawsuit over Canceled Cole Capital Sale

By Gail Kalinoski, Contributing Editor

Michael Weil, RCS

With both sides saying they want to focus on their businesses not litigation, RCS Capital Corp. has agreed to pay American Realty Capital Properties $60 million to settle a lawsuit over the canceled $700 million Cole Capital Partners L.L.C. deal.

The agreement, which calls for RCS Capital to pay ARCP a negotiated break-up fee of $42.7 million in cash and a $15.3 million, two-year promissory note, comes about three weeks after ARCP filed a lawsuit in the Court of Chancery in Delaware over the terminated deal. On Nov. 4, RCS pulled out of an agreement to acquire Cole Capital Partners and Cole Capital Advisors, Inc. from an affiliate of its sister company, ARCP. The lawsuit ARCP filed against RCS alleged a breach of the purchase agreement. ARCP said it had received a termination notice of the deal from RCS “in the middle of the night,” adding that it believed RCS had no right and “absolutely no basis” for canceling the deal that was expected to close in early November.

Both companies were founded by Nicholas Schorsch, who serves as chairman of ARCP, the largest single-tenant net-lease firm in the world, and executive chairman of RCS, an investment firm that includes broker-dealers who sell real estate products including non-traded REITs.

“We are confident that this settlement is in the best interests of RCS Capital stakeholders. We believe the negotiation of a fixed-cost settlement clearly outweighs the potential expense and distraction of a drawn-out litigation process, enabling us to focus on the execution of our proven business strategy,” Michael Weil, RCS CEO, said in a release from his company.

ARCP CEO David Kay described the settlement as a “positive outcome that serves the best interests of ARCP shareholders and our broader business, including our investment in Cole Capital.”

“Our immediate plan is to stabilize Cole Capital, which we continue to believe is a valuable business, as we focus on creating long-term value and strengthening ARCP’s position as the leading company in the net-lease REIT industry,” Kay added in an ARCP release.

As part of the settlement announced Thursday, ARCP and RCS agreed to “terminate, unwind or otherwise discontinue all agreements, arrangements and understandings between the two companies and any of their respective subsidiaries,” according to the ARCP release.

Meanwhile, the independent members of ARCP’s Board of Directors and ARCP have engaged Morgan Stanley & Co. L.LC. and Citigroup Global Markets Inc. to assist in the negotiation of the RCS settlement and “other strategic matters.” The release noted that included “evaluating long-term alternatives for Cole Capital, in order to maximize the value of that business to ARCP.” Cole Capital was acquired as part of the $11.2 billion merger between ARCP and its former rival Cole Real Estate Investments Inc. announced a year ago.

RCS has been looking to distance itself from ARCP, which has been rocked by a $23 million accounting scandal disclosed Oct. 29 that caused the REIT’s CFO and top accounting executive to resign after ARCP admitted there were errors in the financial statements as recently as this year’s second quarter. Moody’s Investors Services and Standard & Poor’s Ratings Services put ARCP’s rating under review and word spread of possible investigations by the U.S. Securities and Exchange Commission and the FBI and the U.S. Attorney’s Office in New York.

Although they are separate companies with separate accounting systems, the news sent shares of both ARCP and RCS, which trades as RCAP, plunging. Bloomberg reported RCS stock had lost more value than ARCP, down 51 percent from Oct. 29 as of Wednesday. News of the lawsuit settlement pushed RCAP back up Thursday by about 8 percent about 3:30 p.m. EST.

RCS also began losing business relationships as some broker-dealers suspended selling agreements for non-traded REITs associated with Schorsch-related businesses.

On Thursday, Weill said some firms had changed their positions.

“We continue to see progress across our entire industry-leading platform, including the reinstatement of a number of selling agreements within our wholesale business,” he said in the RCS release.