A SPAC is a listed company that does not operate as an actual business. The capital which a SPAC attracts during its IPO is used to attempt to make an acquisition. In the context of an acquisition, shareholders can sell their shares back to the SPAC. This right is also referred to as a redemption right and can be seen as a “full satisfaction or your money back” guarantee.
The popularity of the special purpose acquisition company, or SPAC, has skyrocketed in recent months not only in the US, but also in Europe. Many SPAC IPOs in the pipeline at the moment, particularly on Euronext Amsterdam. In the first part of this publication, I discuss the most important features of a SPAC. I then provide details on the opportunity that investors are offered to sell the shares they buy during the IPO back to the SPAC in the context of creating a ‘business combination’ (BC).
The SPAC in a nutshell
A SPAC IPO involves investors putting their capital into a listed company that does not actually conduct any commercial activities. Such a ‘shell’, also referred to as a ‘blank-check company’, then pursues a business opportunity, by targeting the acquisition of a company. Given the fact that the business the SPAC will be acquiring is unknown at the time of the IPO, the investors in the IPO are essentially placing trust in the incorporators of the SPAC.
The incorporators of a SPAC are referred to as ‘sponsors’ or ‘promoters’. Investors will have to be convinced to entrust their assets to a SPAC based on the sponsors’ reputation, experience and intended acquisition strategy. The sponsors will have to meet those expectations by creating a ‘BC’, which they will generally have to do within a period of 24 months, subject to a possible extension of 6 months. The proposed BC requires shareholder approval.
In the context of their investment in the SPAC, the investors receive a combination of shares and warrants (rights to shares), which are often bundled in units. In the first weeks following the IPO, these units can be traded as such, but afterwards they are unbundled and are traded on the stock exchange separately as shares and warrants. If the stock price rises after the BC has been established, the warrants can be converted into shares.
Generally speaking, sponsors are not paid any management fees, or if so, only a token amount. Conversely, with a relatively small investment consisting of a combination of shares and warrants, they can acquire a substantial participating interest in the SPAC once a successful BC is created.
The proceeds from the IPO are placed in an escrow account. This ensures that investors will for all intents and purposes get their investment back if no BC is formed and the SPAC is liquidated. If a BC is formed, the amount on the escrow account will accrue to the SPAC and to any shareholders that exercise their redemption right.
In the context of the BC, the investors are offered the opportunity to exercise their redemption right. Redemption rights generally do not accrue to the incorporators, sponsors or management of a SPAC. The right relates to ordinary shares, but generally not to warrants. If shareholders exercise their redemption rights, the SPAC will have to repurchase the relevant shares. The amount the SPAC pays per share in that event is equal to the IPO price less a pro rata share of any taxes paid, or plus a pro rata share of any positive interest received, on the balance of the escrow account.
In the past, redemption rights only accrued to shareholders who voted against the proposed BC.1 In short: if you had objections against the BC and voted in a shareholders’ meeting accordingly against the BC you could get your money back. In several recent SPAC IPOs on Euronext Amsterdam, however, shareholders that voted in favour of the BC or abstained from voting were also offered the opportunity to exercise their redemption right around the date the BC was formed.2 In these SPACs, the redemption right is separated from how a shareholder votes on the BC. The extension of the redemption right seems to have crossed the Atlantic from the US, where – while the exchange rules may only oblige SPACs to grant redemption rights to shareholders that vote against the BC – in practice, redemption rights are generally granted to all public shareholders, regardless of how they vote on the BC.3 The “not good money back” of “full satisfaction or your money back” guarantee has thus evolved into a “money-back” guarantee.
The possible frustration of a BC by activist shareholders is one important reason for broadening the redemption right. As things previously stood, for example, a BC could be frustrated by shareholders who acquired a stake in the SPAC below the IPO price and then voted against the BC, only to follow this up by exercising their redemption right to make a ‘quick’ profit. This ‘arbitrage’ played by activists reduced the chance that the BC would be approved. By broadening the redemption right, the vote on the BC is no longer decisive and thus the risk of any interloping activists’ is mitigated.4 The scheme for exercising the redemption right and the technical settlement are described in the prospectus that is published in the context of the SPAC's IPO.
Repayment to shareholders that exercise their redemption rights is deducted from the balance of the escrow account and thus from the amount that is available for the BC. This will have to be taken into account when the SPAC enters into BC-related contracts. In order to reduce the risk of insufficient cash, the SPAC can attract additional equity, usually by means of a so-called PIPE (private investment in public equity) or with the assistance of debt financing. If a PIPE commitment already exists at the time of the IPO, this commitment is included in a forward purchase agreement.5 Finally – and it is always important to make sure you have a handle on the terminology, you often see a PIPE in combination with a ‘bulldog provision’. The intent of this provision is that investors, whether acting alone or jointly, can exercise their redemption right only up to a certain percentage (such as 15%). This provides extra security and ensures that sufficient cash will be available if a BC is formed.
The redemption right gives investors in a SPAC the opportunity to exit the SPAC in the context of a BC. In the past, this right only accrued to shareholders that had voted against the proposed BC. Recently we have seen a broadening of the redemption right. It accrues to all investors, regardless of how they voted in relation to the BC. SPACs thus offer an investment opportunity that involves a relatively low risk.
*This article was first published in Dutch in edition 4.2021 of Financial Investigator magazine.
1 See, inter alia, Offering Circular of Pan-European Hotel Acquisition Company N.V. dated 12 June 2007 and Offering Circular of German Acquisition Limited dated 2 July 2008, both with regard to their IPOs on Euronext Amsterdam.
2 See, inter alia, Prospectus for European FinTech IPO Company 1 B.V. dated 22 March 2021 and Prospectus for Pegasus Acquisition Company Europe B.V. dated 29 April 2021.
3 See https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/ in the section entitled ‘Redemption Offer’.
4 See also Van Kessel & Lemstra, ‘De SPAC (special purpose acquisition company)’, Ondernemingsrecht 2020/143.
5 See https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/ in the section entitled ‘Forward Purchase’ and the Prospectus for Pegasus Acquisition Company Europe B.V. dated 29 April 2021, p iii.