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Best of Howard Stutz

Gaming Guru

Howard Stutz
 

Soap opera surrounds Wynn Resorts

27 February 2012

LAS VEGAS, Nevada -- A chapter in the Articles of Incorporation for Wynn Resorts Ltd. gave its board of directors a clear map on how the company could sever ties with its largest shareholder.

Ironically, Japanese businessman Kazuo Okada, whose nearly 20 percent stake was reduced to zero in a matter of hours on Feb. 17, signed off on his own demise 12 years ago when Article VII was first put into place. He agreed to the language in 2000 when Wynn Resorts was Valvino Lamore, Steve Wynn's limited liability company that was in the infant stages of planning the Desert Inn's transformation into the $2.7 billion Wynn Las Vegas.

Last week marked the first time Wynn Resorts used the death penalty.

The board kicked Okada out of the company based on findings of an investigation by a consulting firm run by former FBI Director Louis Freeh. He alleged that Okada committed 37 violations of the U.S. Foreign Corrupt Practices Act, breached his fiduciary duties to the company and engaged in conduct that could jeopardize Wynn Resorts' gaming licenses.

But even if federal authorities never charge Okada with a crime, and even if Nevada gaming regulators pass on revoking or limiting his license to operate his slot machine maker Aruze Gaming America Inc., Okada is still out as a Wynn stockholder.

Based on Wynn's Articles of Incorporation, the board was completely within its rights to cut Okada loose. His only recourse now is filing a lawsuit and getting a temporary injunction to have the company reinstate his 24.5 million shares, which were repurchased for $1.9 billion, 30 percent below their market value. The difference is about $800 million.

As of Friday, Okada had not taken legal action.

Legal academics thought the move by Wynn was highly unusual.

"While the board has significant leeway to defend the company from threats, there are limits," said professor Ehud Kamar, a corporate law expert at the University of Southern California School of Law. "I have seen agreements to sell shares back to the company that shareholders signed under pressure, but they were agreements nonetheless. I have never seen a company unilaterally redeem someone's shares of common stock. The proper way to do this is to negotiate the terms with that someone."

University of Pennsylvania Law School Professor Jill Fisch, who specializes in corporate law, said the passage in the Wynn articles pertains to gaming companies, which face stringent gaming regulatory oversight. That language is not typical on Articles of Incorporation for most publicly traded companies.

"It's very unusual, but the kicker here is you are dealing with a regulated entity," Fisch said. "You have language that is seems exclusive to the gaming industry."

According to Nevada gaming regulations, a licensed gaming company is obligated to use all available tools to distance itself from unsuitable individuals.

Other gaming companies have similar language to guard against shareholders that could be deemed unsuitable. In 2009, Las Vegas-based Global Cash Access Holdings bought out the shares of the company's two founders after their legal transgressions caused Arizona gaming regulators to threaten the company's ability to do business with Indian casinos there.

One question is whether Okada's alleged actions were enough to deem him unsuitable. He's never been charged with crime, just alleged to have taken improper steps.

"As an outsider, I'm not really sure what he is alleged to have done was broad enough to trigger a revocation," Fisch said.

Macquarie Securities gaming analyst Gary Pinge, who is based in Hong Kong, wasn't positive that Okada's alleged actions warranted "as drastic an action as redemption and cancellation of $3 billion worth of shares at such a steep discount to market value."

Pinge said industry sources in Asia told him the 37 alleged violations -- providing free hotel rooms and meals to Philippine gaming officials -- are "nothing other than standard industry practice."

Pinge's comments veered away from Wall Street, which treated last weekend's events as a final play. Two analysts, Janney Montgomery Scott's Brian McGill and Steve Wieczynski of Stifel Nicholaus Capital Partners, both used the Japanese word "sayonara" in research report headlines following Tuesday's Wynn conference call on the Freeh report and Okada's ouster.

"See you later" would have been more appropriate. The reality is that we're in the early rounds of Wynn versus Okada.

Susquehanna Financial Group gaming analyst Rachael Rothman expects Okada to take action in court because of the damage to his business reputation and the potential impact on his Philippines casino license.

Law professor Kamar said a judge could "easily unscramble" the stock repurchase.

"If the court decides to intervene, it can, among other things, order the company to issue new shares or it can declare the redemption void," Kamar said.

In addition to Okada's expected lawsuit, there is also the matter of the "informal" inquiry by the Securities and Exchange Commission into Wynn's $135 million donation to the University of Macau.

No one expects Okada to simply walk away.