Coby Brooks, also an executor of the estate and current Hooters CEO, and Wellspring spokesperson Mark Semer declined to comment on Tuesday.
"At the end of the day, it's in the hands of the courts," said Mike Pruitt, president and CEO of Chanticleer.
Chanticleer Investors lent $5 million to Brooks in 2006 in an agreement that gave Chanticleer the "right of first refusal" to block any sale of Brooks' stake in Hooters and instead buy the chain itself.
Chanticleer first expressed its desire to exercise that right by faxing a notice to Horry County Court around 11 p.m. the night before a Dec. 2 hearing to approve the sale of Hooters. Brooks' executors had spent about a year searching for a buyer and finalizing its sales agreement with Wellspring. Although Judge Deirdre Edmonds approved the sale, the ruling did not address the right of first refusal or decide which party would buy the chain.
The fight to buy Hooters was further complicated when Hooters of America and executors of the Brooks estate sued companies closely tied to both Chanticleer and Wellspring in a Delaware court, according to legal filings. The complaint and one court order were filed under seal in The Delaware Court of Chancery, but other filings indicate that Hooters of America and the executors want the court to decide whether Chanticleer has the right to buy Hooters.
No matter which private equity firm buys Hooters, the acquiring company will likely move to streamline operations by cutting costs and closing some locations, said Ron Paul, president of consultancy Technomic, which tracks Hooters. In the meantime, the legal proceedings will only be a distraction, Paul said.
"The downside isn't the customer interface. It's the management not being able to pay as much attention to the brand," Paul said.
Friday's hearing
Horry County Probate Judge Deirdre Edmonds is expected to rule on Wellspring's request to intervene at a hearing Friday morning.
If granted, that motion would make Wellspring a party to the sale, giving them standing in court for further litigation, said Jim Young, an attorney for Wellspring. The motion by itself would not stop the sale to Chanticleer.
Young questioned the witnesses at the Dec. 2 hearing, but Edmonds struck that part of the proceedings from the record because Wellspring lacked standing. Richard Smith, a lawyer for the Brooks estate, argued that Young's questioning aimed to put Wellspring in a better position to block Chanticleer's bid to buy the company.
If the judge rules in Wellspring's favor, it would prevent the same thing from happening in future proceedings, said Brant Hellwig, a law professor at University of South Carolina.
"The motion to intervene, if it's accepted, would give them standing to raise objections to the approved sale," Hellwig said.
The sales agreement, including the amount Wellspring would pay for Hooters, has been sealed by the court.
Coby Brooks would be allowed to retain some of his stake in the company and he has the right to turn down any buyout offer not allowing him to do so, according to other court filings.
Delaware court proceedings
Hooters of America and the executors of the Brooks' estate filed a lawsuit on Dec. 7 against HOA Holdings Inc., a company tied to Chanticleer, and Neighborhood Restaurants International Inc. and Hubcap Merger Sub Inc., companies tied to Wellspring.
The five executors are Coby Brooks; Edward Greene, president and chief operating officer of Naturally Fresh Inc.; James Creel and Carter Wrenn, longtime friends and local businessmen; and Glenn Brooks, Bob Brooks' brother.
Although the complaint is sealed, a letter from an HOA Holdings attorney to the judge states the case would decide whether Chanticleer successfully exercised its right of first refusal. HOA is acting on behalf of Chanticleer to exercise the right of first refusal, according to the letter. Pruitt said HOA is not a subsidiary of Chanticleer but declined to further comment on the relationship.
Wellspring is conducting the deal on behalf of Neighborhood Restaurants International and Hubcap Merger Sub, according to Horry County court documents. Both companies were founded within one day of each other, according to corporate registration records.
Hubcap Merger was registered in Georgia on Oct. 20, according to the Georgia Secretary of State's records, but lists its principal office address as 390 Park Ave., Fifth Floor, New York, N.Y. - the same address as Wellspring.
Neighborhood Restaurants International is registered in Delaware.
Chanticleer linked to Hooters
Chanticleer's history with Hooters goes back to its inception in 2006, according to Securities and Exchange Commission filings.
Chanticleer Holdings Inc. created Chanticleer Investors as a subsidiary and now holds an 11.5 percent stake in the company. Pruitt is president and CEO of both companies. As a publicly traded company, Chanticleer Holdings must file financial reports with the SEC.
Wellspring, a private company, is not required to file with the SEC. Wellspring controls about $3 billion in investments and sold Dave & Busters earlier this year for $570 million.
Chanticleer was created in 2006 to lend $5 million to Brooks and Hooters of America. The loan was used to fund Hooters Air, a now defunct airline that operated in Myrtle Beach from 2003 to 2006, Creel said during his testimony Dec. 2. That same agreement gave the company right of first refusal in a sale of Hooters of America.
Parent company Chanticleer Holdings has also previously done business with Hooters.
Chanticleer Holdings owns 50 percent of the franchise rights for Hooters restaurants in South Africa. Chanticleer partnered with a South African company to open a Hooters restaurant near Durban in 2009 and another in Johannesburg in 2010, according to HootersSouthAfrica.com and SEC filings.
The company also launched a failed bid to acquire Hooters Inc. and Texas Wings, which would have given Chanticleer control of 67 Hooters franchise locations, according to SEC filings. In the Hooters Inc. deal, Chanticleer would have paid about $51 million for Hooters Inc. and its 22 restaurants. The deals to buy those companies were first announced in 2008, but Chanticleer failed to gain the funding it needed to complete the purchases.
The man behind the company
Pruitt graduated from CCU in 1984 and played on 1982 and 1983 baseball teams that went to the National Association of Intercollegiate Athletics World Series, according to Mike Cawood, associate athletic director at CCU. He had a "very good" .377 batting average, Cawood said.
The infielder remains deeply involved with Coastal, donating and helping raise money, administrators said. He won Coastal's 2007 Distinguished Alumni of the Year Award for his promotion of the baseball programs and involvement with various boards and committees.
"He's been an incredible ambassador for Coastal Carolina, not only with money but as far as time, energy," said Mark Roach, executive director of the CCU Athletic Association. "Just everywhere he goes, he's always telling everybody about Coastal."
Pruitt met Bob Brooks through his involvement in Coastal, he said. Brooks made major donations to Coastal and the football stadium is named for him. Pruitt's affinity for Coastal and Brooks don't factor into his investment decisions, he said.
"I'm a business person, an investor and at the end of the day you have to make good [investments]," Pruitt said.
The future of Hooters
The circumstances surrounding the Hooters sale are unusual, but the end result for the chain will likely be the same regardless of which firm buys the company, Paul said.
"It's more complicated and unusual in that you also have the family involved and some disputes there," Paul said.
Tami Brook's claim to one-third of the estate, including Hooters, had originally been contested by the will's executors, but those disputes were later dropped, according to court documents.
Usually after a chain is acquired by a private equity firm, they begin revamping the company by closing underperforming locations, Paul said. Whichever company buys Hooters is likely to do that, so expect fewer restaurants in six months to a year after the sale, he said.
Hooters of America wholly owns about 100 restaurants out of the more than 400 locations, with the rest being franchises, according to Technomic estimates. The company would only close the wholly-owned locations and not the franchises, Paul said.
The legal battle could also be a drag on management, leaving them less time to focus on matters such as the brand or menu changes, he said.
"It's always a distraction that takes time and somebody has to pay the legal bills," Paul said.
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