A special purpose acquisition company (SPAC), sometimes called blank-check company, is a shell company that has no operations but plans to go public with the intention of acquiring or merging with a company utilising the proceeds of the SPAC’s initial public offering (IPO). SPACs allow retail investors to invest in private equity type transactions, particularly leveraged buyouts. According to the SEC, “A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.
In the early 2000s, SPACs were typically sold via an initial public offering (IPO) in $6 units consisting of one common share and two “in the money” warrants to purchase common shares at $5 a common share at a future date usually within four years of the offering. Today, a new generation of SPAC offerings are more commonly sold in $10 units of one common share and an “out of the money” warrant or fraction thereof. SPACs trade as units and/or as separate common shares and warrants on the Nasdaq and New York Stock Exchange (as of 2008) once the public offering has been declared effective by the U.S. Securities and Exchange Commission (SEC), distinguishing the SPAC from a blank check company formed under SEC Rule 419. Trading liquidity of the SPAC’s securities provide investors with a flexible exit strategy. In addition, the public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC’s performance.
By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. A SPAC’s trust account can only be used to fund a shareholder-approved business combination or to return capital to public shareholders at a charter extension or business combination approval meeting. Today, the percentage of gross proceeds held in trust pending consummation of a business combination has increased to 100% and more.
Each SPAC has its own liquidation window within which it must complete a merger or an acquisition. Otherwise it is forced to dissolve and return the assets in the trust to the public stockholders. In practice, SPAC sponsors often extend the life of a SPAC by making a contribution to the trust account to entice shareholders to vote in favor of a charter amendment that delays the liquidation date.
In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net assets at the time of acquisition. Previous SPAC structures required a positive shareholder vote by 80% of the SPAC’s public shareholders for the transaction to be consummated. However, current SPAC provisions do not require a shareholder vote for the transaction to be consummated unless as follows:
Type of transaction & Shareholder approved required
Purchase of assets- NO
Purchase of stock of target not involving a merger with the company -NO
Merger of target with a subsidiary of the company – NO
Merger of the company with a target – YES
So stockholders of the SPAC can make an informed decision on whether they wish to approve the business combination, the company must make full disclosure to stockholders of the target business, including complete audited financials, and terms of the proposed business combination via an SEC merger proxy statement. All common share stockholders of the SPAC are granted voting rights at a shareholder meeting to approve or reject the proposed business combination. A number of SPACs have also been placed on the London Stock Exchange AIM exchange. These SPACs do not have the aforementioned voting thresholds.
Since the financial crisis, protections for common shareholders have been put in place allowing stockholders to vote in favor of a deal and still redeem their shares for a pro-rata share of the trust account. (This is significantly different from the blind pool – blank check companies of the 1980s, which were a form of limited partnership that did not specify what investment opportunities the company plans to pursue.) The assets of the trust are only released if a business combination is approved by the voting shareholders, or a business combination is not consummated within the amount of time allowed by a company’s articles of incorporation.
The SPAC is usually led by an experienced management team composed of three or more members with prior private equity, mergers and acquisitions and/or operating experience. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually held in escrow for 2–3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to between 2% to 8% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation.
No salaries, finder’s fees or other cash compensation are paid to the management team prior to the business combination and the management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams agrees to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found. Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fiduciary duties. The SPAC is further prohibited from consummating a business combination with any entity affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders.
I-Bankers Securities Inc. has participated in 118 SPAC IPOs as an (co-)underwriter since 2003 and 14 deals in 2019, in total more than any other bank. In recent years, bulge bracket banks have started participating in more SPAC IPOs, with Cantor Fitzgerald & Co. and Deutsche Bank Securities Inc. on the cover of 30 SPAC IPOs from 2015 through August 2019. Citigroup, Credit Suisse, Goldman Sachs, and BofA have all built a significant SPAC practice, while Cantor Fitzgerald led all SPAC underwriters in 2019 by book-running 14 SPACs that raised over $3.08bn in IPO proceeds.
Since 2018 the top five law firms with SPAC IPO legal assignments are Ellenoff Grossman & Schole; Skadden, Arps, Slate, Meagher & Flom; Graubard Miller; Winston & Strawn, and Kirkland & Ellis.
SPACs in Europe
In July 2007, Pan-European Hotel Acquisition Company N.V. was the first SPAC offering listed on the Euronext Amsterdam exchange, raising approximately €115 million. I-Bankers Securities has been the underwriter with CRT Capital Group as lead-underwriter. That listing on NYSE Euronext (Amsterdam) was followed by Liberty International Acquisition Company, raising €600 mln in January 2008. Liberty is the third largest SPAC in the world and the largest outside the U.S.A. The first German SPAC was Germany1 Acquisition Ltd., which raised $437.2 million at Euronext Amsterdam with Deutsche Bank and I-Bankers Securities as underwriters. Loyens & Loeff served as legal counsels in The Netherlands.
SPACs in emerging markets
Emerging market focused SPACs, particularly those seeking to consummate a business combination in China, have been incorporating a 30/36 month timeline to account for the additional time that it has taken previous similar entities to successfully open their business combinations.
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