ARCP Sues RCS for Canceling $700M Cole Deal

By Gail Kalinoski, Contributing Editor

Michael Weil, RCAP CEO

American Realty Capital Properties, Inc. has fired the next shot in the battle with RCS Capital Corp. over its termination of the Cole Capital Partners L.L.C. $700 million deal by filing a lawsuit against RCS.

The lawsuit, which was filed Tuesday in the Court of Chancery in Delaware, comes about a week after RCS announced it had canceled its planned acquisition of Cole Capital Partners and Cole Capital Advisors, Inc. from an affiliate of its sister company, ARCP. RCS pulled out of the deal several days after ARCP announced two top executives had resigned after admitting there were errors in its financial statements as recently as the second quarter. That news, along with the resignation of CFO Brian Block and Chief Accounting Officer Lisa McAllister, sent ARCP’s stock plunging and also sent shares of RCS, which trades as RCAP, down as well.

“We continue to believe that RCS’s attempt to terminate the Purchase Agreement constitutes a breach of the Purchase Agreement. Under the circumstances, the independent members of the ARCP Board of Directors and ARCP had no choice but to file this litigation in order to preserve and to protect the interests of ARCP’s shareholders under the Purchase Agreement,” ARCP stated in a news release Wednesday.

No other details were provided and as of press time, RCS had not responded to the litigation.
In a Nov. 3 release, ARCP had stated it was informed of the deal termination by a letter received “in the middle of the night.” ARCP said then it believed RCS had no right and “absolutely no basis” for canceling the transaction, which had been scheduled to close that week. ARCP said it “constitutes a breach of the agreement” and that its management and independent board members were evaluating all alternatives.

Both ARCP and RCS were founded by Nicholas Schorsch, who serves as chairman of ARCP and executive chairman of RCS.
But RCS released its own statement Nov. 5 reiterating that RCS and ARCP are “two separate and independent public corporations.” The release noted that they have separate management teams and stressed that the “employees of ARCP accused of wrongdoing are not employed by RCAP.” It also stated they have separate and distinct Boards of Directors “with no overlapping of independent directors.”

RCS said it had taken steps, including the termination of the Cole Capital and Cole Capital Advisors deal, “to protect the interests of its shareholders and the ongoing prospects and continuing enterprise value of RCAP and its subsidiaries.”

ARCP, the largest single-tenant net-lease firm in the world, has been rocked by the fallout from the disclosure of the accounting errors. The Wall Street Journal and Bloomberg reported that the U.S. Securities and Exchange Commission were expected to investigate the accounting irregularities and Reuters reported that the REIT might also face a criminal investigation by the FBI and U.S. Attorney’s Office in New York. Both Moody’s and S&P stated they were putting ARCP’s rating under review and several investment firms such as Ladenburg Thalmann suspended research coverage of the REIT.