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Актуальные проблемы международного права

from just seven in 2010 to 613 SPAC IPOs in 2021, which is approximately 63 % of the whole IPO market in the U.S1.

In this article I will focus on the advantages as well as the possible risks and difficulties of this mechanism mainly from legal standpoint, though it is worth mentioning that a number of experts cast doubt on overall economic efficiency of such deals2.

The essence of SPAC/de-SPAC mechanism

In the word of finance special purpose acquisition companies are considered to be the part of or an alternative to private equity funds, as they model allow private investors, although indirectly, but to invest money in a private company, before it becomes publicly traded. Generally, the whole process can be described the following way:

1.The first step is the creation of a special purpose acquisition company. This stage is organized and financed by founders or promoters who become the company directors. The founders’ experience and reputation are of crucial importance for potential investors, as these are the people responsible for finding a perspective and profitable target company for subsequent acquisition. The founders have quite palpable personal interest: they receive a significant share (usually about 20 %) in the acquired company, so their profit is highly dependent on the new company’s commercial success.

2.The next step is the SPAC IPO. Here the founders pull private investor’s funding through initial public offering process. The securities are sold in the form of shares, warrants and, most commonly, units consisting of one common stock share and a warrant to acquire shares in the future. Since the SPAC in its essence constitute a mere «shell company» without any viable economic activities, it is not possible to identify fair market price for its stock. In this regard, the law poses requirements as to the SPAC share capital value, and in the U.S. the typical nominal price for the SPAC stock is usually $ 10 per unit. At least 85 % of the funds raised through IPO go to a special escrow or trust account, which provides guarantees to investors that their money will not be wasted or illegally withdrawn. Should the SPAC fail to find a target company and arrange deal in due time, the nominal value of the units must be returned to the investors.

3.Then follows the so-called de-SPAC process: merging with a target company. After a successful IPO the special purpose company is to find a target company for future merger or acquisition. Another legislative requirement protecting investors is that a fair market value of a target or its assets must be at least 80 % of the amount kept in the escrow or trust account. In other respects, the founders are free to choose any company, taking into account its growth prospects, financial performance and other indicators, however, all

1«SPAC Analytics» Statistic provider // URL: https://www.spacanalytics.com/.

2For instance, Dimitrova Lora. Perverse incentives of special purpose acquisition companies, the «poor man’s private equity funds» // Journal of Accounting and Economics. Volume 63, Iss. 1. February 2017. P. 99–120 ; Johannes Kolba, TerezaTykvová. Going public via special purpose acquisition companies: Frogs do not turn into princes // Journal of Corporate Finance. Vol. 40. October 2016. P. 80–96.

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Секция 6. Private international law talks

the substantial information about the de-SPAC deal must be disclosed to investors. Those investors, who for some reasons disapprove the merger deal, may exercise the right of redemption — i.e. the shareholders’ right to force a company to repurchase its shares under certain circumstances. Once merger or acquisition deal is closed, the investors who put their money into the SPAC, become the legitimate owners of the new public listed company.

In the U.S. the term for finding a target is strictly limited and cannot exceed 2 years following the IPO, so if the de-SPAC deal is not arranged during that time, the SPAC goes through liquidation and the money are to be distributed among investors. All costs and expenses in this case are by the SPAC directors.

Cross-border deal challenges

As the SPAC IPO process has gained the greatest popularity in the U.S., usually such deals involve an American «shell company» and the target located in European or Asian jurisdictions. In such situation, lawyers working on cross-border de-SPAC deals may face the following difficulties:

(1)Applicable law. In terms of choice of law governing securities issuing and exchange, most jurisdictions have chosen the law of the issuer’s jurisdiction as basic collision binding. This approach is reflected, inter alia, in the U. S. Uniform Commercial Code1. Thus, in the above mentioned situation, the matters connected with the SPAC IPO process will be governed by the U.S. law. At the same time, the law applicable to the subsequent merger deal is to be chosen by the parties on the principle of party autonomy.

(2)The choice of the appropriate corporate structure for the new company. Corporate governance in the U.S. can be much more flexible than in civil law countries, so it is important to select a structure that satisfies the needs of both sides without violating local corporate formalities.

(3)Compliance with public entity requirements in both jurisdictions. For the company listed in the U.S. and wishing to operate in foreign markets it is important to comply with American market standards, including specific rules for standards for foreign private issuers, as well as accounting, audit and other rules of European jurisdiction.

The pros and cons of using the SPAC mechanism

Thus, we can identify the main advantages SPAC mechanism over the standard IPO. First of all, the new mechanism is much less burdensome time-consuming for a target company: while an IPO usually takes up to 18 months, a SPAC merger or acquisition deal can be closed in 3–6 months. Moreover, the burden of complying with all the listing formalities lies with a SPAC, therefore, the target company can focus on its inner growth and development before going public. Finally, such deal is an opportunity to reduce the costs of entering the public market for the special purpose company, as the SPAC IPO doesn’t require long and expensive underwriting and roadshow procedure.

1 § 8–110. Applicability; choice of law // The Uniform Commercial Code.

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Актуальные проблемы международного права

However, we should bear in mind that the SPAC deals boom led to a wave of litigation against special purpose companies initiated by their shareholders1. In my opinion, in legal terms, the key problem lies in inherent conflict of interests for the SPAC founders and promoters. As mentioned above, the amount of time given for the SPAC to find a target company is limited. Thus, in the situation when the term is expiring, but a target has not yet been found, the founders may choose to merger with any company, disregarding its economic viability and growth potential, just to avoid the SPAC dissolution and subsequent losses.

The founders misconduct can manifest itself in multiple ways, however, the most typical way for the investors to fight the management unconscionability is the fiduciary duty claims. For instance, in a highly publicized MultiPlan Corporation case of 2022 stockholders accused the company management of violating their fiduciary duties and suppressing substantial information about a de-SPAC merger deal2. The investors alleged that due to inadequate informational disclosure they were unable to take a balance decision whether to exercise their redemption rights or not. The court decided that even though the directors interest in the deal was disclosed to the shareholders properly, the management did withhold the fact that the key customer in the deal was a competing company wishing to eliminate the need for MultiPlan’s services in the future, therefore, the shareholders were deprived of relevant information necessary to estimate the investment attractiveness of the enterprise.

Conclusion

As we can see, the SPAC mechanism does have substantial advantages and may become a good alternative to a typical IPO process in the nearest future, as nowadays more and more jurisdictions develop a legal framework for «shell companies» IPOs as well as the rules governing cross-border de-SPAC deals. At the same time, the problem of the SPAC possible management misconduct remains unsolved, and the special purpose companies should consider that risks and manage them at the internal corporate level to forestall possible claims.

1Couture, Wendy Gerwick, Top Ten Issues in De-SPAC Securities Litigation (February 18, 2022). University of Arkansas at Little Rock Law Review, Forthcoming // URL: https://ssrn.com/abstract=4038385.

2MultiPlan Corp. Stockholders Litigation (2022), Delaware Court of Chancery Decisions // URL: https://law.justia.com/cases/delaware/court-of-chancery/2022/c-a-no-2021-0300-lww.html.

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