Cold Feet or Agreement Breach? A Look at the Galaxy-BitGo Situation

After Galaxy Digital earlier this week revealed it had terminated an agreement to acquire crypto custody firm BitGo, industry watchers said both firms will likely seek to avoid a messy legal battle.

Crypto merchant bank Galaxy said on Monday that it was backing out of its agreement to buy BitGo, alleging the firm failed to deliver audited 2021 financial statements by July 31. 

BitGo countered by hiring law firm Quinn Emanuel, which claimed the firm had already submitted the necessary documents.

“BitGo’s business remains as strong as ever,” R. Brian Timmons, partner at law firm Quinn Emanuel, told Blockworks in an email. “Galaxy is the one who has encountered regulatory headwinds…It has been beset by the Luna controversy.”

Though Timmons previously said BitGo is owed a $100 million termination fee, or damages that exceed that, Quinn Emanuel has not yet launched a suit against Galaxy. A BitGo spokesperson declined to comment.   

Donald Putnam, managing partner and co-founder at merger and acquisition (M&A) advisory firm Grail Partners, called Quinn Emanuel an “attack-dog firm.” 

It’s the same firm representing Elon Musk as he seeks to cancel his takeover bid of Twitter in a trial set to start in October. Quinn Emanuel also represented Ripple Labs in defeating a $175 million case brought by Tetragon Financial Group in Delaware Chancery Court — a bid to retrieve investment following the SEC’s lawsuit. It’s also worked with other digital asset platforms on matters involving federal securities laws.

“They are aggressive, pugnacious, and they bite hard and often,” Putnam said. “Regular law firms are no match for them, so expect the buyers to hire an equally strong gladiator firm.”

A Galaxy spokesperson told Blockworks earlier this week that “we will defend ourselves vigorously” but declined to comment further.

Cold feet or legit agreement breach?

Galaxy first revealed its intent to acquire BitGo in May 2021 in a cash and stock transaction valued at roughly $1.2 billion. The firm planned to become a Delaware-based company and list publicly on the Nasdaq after the acquisition. 

Galaxy said Monday it still intends to go public. The financial statements that Galaxy alleges BitGo did not submit in time were needed for its SEC filing, a Galaxy spokesperson said. 

The deal had already been delayed. The firms revealed on April 1 that the updated cash and equity deal was worth $265 million and 44.8 million newly issued shares. Galaxy would have to pay $100 million to BitGo “in certain circumstances” if the sale didn’t go through by the end of the year, they said at the time.

Timmons said this week that BitGo only extended the deal because Galaxy agreed to pay the potential termination fee, adding that it had other interested suitors.

“It’s not really clear if it’s the buyer getting cold feet or whether there’s a real substantive issue here regarding the financial statements,” said Sam Dibble, partner at law firm Baker Botts. “It’s either a convenient excuse or it’s the actual reason why they’re calling it off.”

Merger cancellations like this are very unusual, according to Peter Stoneberg, managing director at M&A advisory firm Architect Partners. He added that the number of merger deals that get terminated after being announced — crypto or otherwise — is less than 5%.

“Buyers hate to cancel because then the next seller that they want to work with is nervous,” Stoneberg told Blockworks. “For the seller obviously now they’ve got to start the process over again.”

But the recent market turmoil is likely a contributor, said Nauman Sheikh, head of treasury management and derivatives at Wave Financial, adding that private market valuations have repriced and are down between 60% and 80%.

Though Novogratz wrote in a May letter to shareholders that the company was able to dodge headwinds associated with the collapse of Terra’s UST stablecoin and LUNA token, Sheikh added that Galaxy was hurt by Terra’s downfall and is likely reassessing its business operations as a result.

“Liquidity has also dried up substantially following the failures of Terra and Three Arrows Capital,” Sheikh told Blockworks in an email. “So while there are likely technical issues here regarding apparent breaches of terms, it could also be a case in which Galaxy no longer views BitGo as a potentially profitable acquisition with respect to the landscape that we’re in right now.”

Galaxy posted a net loss of $555 million during the second quarter. Its credit portfolio had one instance of a credit impairment in the quarter of about $10 million stemming from the Three Arrows Capital insolvency, executives said.

What happens next?

“Watch for fireworks, followed by a settlement after the ‘Punch-and-Judy’ show,” Putnam told Blockworks. 

Baker Botts’ Dibble agreed, saying there will likely be ample “saber rattling” before reaching some sort of settlement. If Galaxy chooses to go forward with the deal, they could seek to renegotiate the price or come up with another deadline to receive financial statements, he added. Otherwise, they could terminate the deal by paying the $100 million termination fee. 

“I think those two outcomes are much more likely than a full-blown court process,” Dibble said. “Forcing someone to close on a deal like this doesn’t usually happen.”

In addition to avoiding potentially expensive legal fees, a settlement could also spare the companies from “blowback from publicly aired acrimony,” Sheikh said.

Stoneberg said he expects Qatalyst Partners, an investment bank that was serving as an adviser to BitGo the Galaxy deal, will be aggressive on behalf of their client.  

“I would suspect that [Qatalyst] is part of [BitGo’s] strategy to [secure the termination fee], and also that they’ve got one or two other buyers that could be there in the wings once they work through this unwinding,” he said.

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