Tag: SPACs

Acting Director of SEC’s Corp Fin Issues Statement on Disclosure Risks Arising from De-SPAC Transactions

Posted by Adam Brenneman, Jared Gerber, and Rahul Mukhi, Cleary Gottlieb Steen & Hamilton LLP, on
Thursday, April 22, 2021
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Adam Brenneman, Jared Gerber, and Rahul Mukhi are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Brenneman, Mr. Gerber, Mr. Mukhi, Nicolas Grabar, Giovanni P. Prezioso, and Leslie N. Silverman.

Last week, John Coates, the Acting Director of the SEC’s Division of Corporation Finance (“Corp Fin”), released a statement discussing liability risks in de-SPAC transactions.

The statement focused in particular on the concern that companies may be providing overly optimistic projections in their de-SPAC disclosures, in part based on the assumption that such disclosures are protected by a statutory safe harbor for forward-looking statements (which is not available for traditional IPOs). Director Coates’s statement questions whether that assumption is correct, arguing that de-SPAC transactions may be considered IPOs for the purposes of the statute (and thus fall outside the protection offered by the statutory safe harbor). He therefore encourages SPACs to exercise caution in disclosing projections, including by not withholding unfavorable projections while disclosing more favorable projections.

The statement has received considerable media attention and is plainly part of a broader effort by the Commission staff to identify potential securities law and policy concerns with the growing SPAC market. In addition to statements by staff in the Division of Corporation Finance, the effort includes:

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The Activism Vulnerability Report Q4 2020

Posted by Jason Frankl and Brian Kushner, FTI Consulting, on
Tuesday, April 20, 2021
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Jason Frankl and Brian Kushner are Senior Managing Directors at FTI Consulting Inc. This post is based on their FTI memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Introduction & Market Update

FTI Consulting’s Activism and M&A Solutions team welcomes our clients, friends and readers to our sixth quarterly Activism Vulnerability Report, documenting the results of our Activism Vulnerability Screener from the recent fourth quarter of 2020, as well as other notable trends and themes in the world of shareholder activism and engagement. Almost one year ago to the day, we sat down to write this report for the fourth quarter of 2019. Our team had just begun the shift to working from home offices and spare bedrooms, while still adjusting to full days of video conference calls due to the rapidly spreading COVID-19 coronavirus.

While it was not until the latter half of the fourth quarter of 2020, or even the start of 2021, that many of the pandemic’s biggest concerns began to subside, many areas of the market remained incredibly resilient throughout the year. The S&P 500 Index, the Dow Jones Industrial Average Index and the Nasdaq Composite Index rose 16.3%, 7.3% and 43.6%, respectively, in 2020. While the three leading indices all ended the year on solid ground, the incredible market voracity from the COVID-19 pandemic should not be overlooked. The S&P 500 Index reached an all-time peak of 3,386 on February 19, before it fell 33.9% in just 32 days to 2,237. As measured from March 23, 2020, however, the Index regained the previous high in less than five months on August 18 (an increase of 51.5%). For the S&P 500 Index and the Nasdaq Composite Index, the period of 2019 and 2020 represents the best two-year performance since 1998 and 1999, during the heart of the Dot-Com boom.

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Surge in SPACtivity Leads to Litigation and Regulatory Risks

Posted by Caitlyn Campbell, McDermott Will & Emery LLP, on
Monday, April 19, 2021
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Caitlyn Campbell is partner at McDermott Will & Emery LLP. This post is based on her McDermott Will & Emery memorandum.

Introduction

Not far behind the dramatic increase in the use of special purpose acquisition companies (SPACs) is a corresponding increase in the number of shareholder lawsuits and increased activity at the US Securities and Exchange Commission (SEC). In recent days, Reuters reported that the SEC opened an inquiry seeking information on how underwriters are managing the risks involved in SPACs, [1] and the SEC’s Division of Corporation Finance (Corp Fin) and acting chief accountant have issued two separate public statements on certain accounting, financial reporting and governance issues that should be considered in connection with SPAC-related mergers. [2] This increase in activity by SEC staff comes on the heels of nearly two dozen federal securities class action filings, several SEC investor alerts and earlier guidance from Corp Fin. [3] The surge in litigation and regulatory interest is likely to continue and expand throughout 2021 and beyond.

In Depth

A SPAC is a company with no operations that raises funds from public investors through an initial public offering (IPO). The proceeds from the IPO are placed in a trust or escrow account for future use in the acquisition of one or more companies. A SPAC will typically have a two-year period to identify and complete a business transaction. If the SPAC fails to do so during the specified period, then it must return the funds in the account to its public shareholders on a pro rata basis and then dissolve.

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Interest in SPACs is Booming…and So is the Risk of Litigation

Posted by Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper, Cadwalader, Wickersham & Taft LLP, on
Friday, April 16, 2021
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Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Fraidin, Mr. Patti, Mr. Halper, Jared Stanisci, Sara Bussiere and Victor Bieger.

Following these ten steps will prepare SPAC boards, sponsors, and advisors for the likely shareholder suits and potential regulatory investigations that are increasingly becoming part of the SPAC landscape.

If 2020 was the “year of the SPAC,” 2021 may be the year of SPAC litigation. SPACs—Special Purpose Acquisition Companies—are publicly traded companies launched as vehicles to raise capital to acquire a target company. Often called blank-check companies, SPACs are companies in which shareholders buy shares without knowing which company the SPAC will target and acquire. Investors place their faith in the sponsor: the entity or management team that forms the SPAC. The SPAC generally has around twenty-four months to seek out and acquire a target, or else must liquidate and return the capital.

Hundreds of new SPACs were launched in 2020 alone. Booming M&A or other transactional activity in any sector can invite litigation driven by plaintiffs’ attorneys, and SPACs are no exception. In just the first three months of 2021, more than 40 suits targeting SPACs have been filed. The nature of these claims evidence growing sophistication, as lawyers used to challenging traditional M&A transactions begin to tailor their claims to the unique characteristics of the SPAC lifecycle. And with SPACs going mainstream—and attracting attention from outside the usual financial circles—regulators are closely examining transaction disclosures and other aspects of SPAC deals. [1]

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Statement on Accounting and Reporting Considerations for Warrants Issued by SPACs

Posted by John Coates and Paul Munter, U.S. Securities and Exchange Commission, on
Thursday, April 15, 2021
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John Coates is Acting Director of the Division of Corporation Finance, and Paul Munter is Acting Chief Accountant, Office of the Chief Accountant, at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Mr. Coates and Mr. Munter, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Introduction [1]

In a recent statement, Acting Chief Accountant Paul Munter highlighted a number of important financial reporting considerations for SPACs. [2] Among other things, that statement highlighted challenges associated with the accounting for complex financial instruments that may be common in SPACs. Additionally, CF staff also issued a recent statement [3] highlighting key filing considerations for SPACs.

We recently evaluated fact patterns relating to the accounting for warrants issued in connection with a SPAC’s formation and initial registered offering. While the specific terms of such warrants can vary, we understand that certain features of warrants issued in SPAC transactions may be common across many entities. We are issuing this statement to highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions and to discuss the financial reporting considerations that apply if a registrant and its auditors determine there is an error in any previously-filed financial statements.

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Statement by Acting Director Coates on SPACs, IPOs and Liability Risk under the Securities Laws

Posted by John C. Coates, U.S. Securities & Exchange Commission, on
Friday, April 9, 2021
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John Coates is Acting Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Mr. Coates, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs). [1] [2] Shareholder advocates—as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves [3]—are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public. [4] With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing.

The staff at the Securities and Exchange Commission are continuing to look carefully at filings and disclosures by SPACs and their private targets. As customary, and in keeping with the Division of Corporation Finance’s ordinary practices, staff are reviewing these filings, seeking clearer disclosure, and providing guidance to registrants and the public. They will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.

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Energizing the M&A Market Post-Crisis

Posted by Jennifer F. Fitchen and Brent M. Steele, Sidley Austin LLP, on
Tuesday, March 30, 2021
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Jennifer F. Fitchen and Brent M. Steele are partners at Sidley Austin LLP. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

During these unprecedented times, all of us have had to acclimate to new ways of working, adapting creatively to the changed environment. Economic activity, including M&A dealmaking, has inevitably been depressed by the COVID-19 crisis, especially in Q2 2020—but industries and businesses have found novel solutions to the problems they face. By Q4, M&A was again beginning to surge.

In this post, we examine the creative deal structures that are being employed with much greater frequency throughout the M&A market. Based on interviews with 150 US corporates and private equity firms, this post analyzes the ways in which M&A is moving forward in spite of the pandemic.

Q2 2020 saw a marked downturn in M&A activity relative to pre-crisis transaction levels. But, since then, dealmaking has bounced back strongly. While a full-scale recovery may not be achievable in the immediate future, there are many reasons to be positive.

The increased use of creative deal structures will be an important part of that story, helping buyers and sellers to overcome some of the risk aversion holding M&A back in the currently volatile and uncertain environment—and enabling more confident parties to pursue emerging opportunities. Indeed, we are already witnessing such an increase, reflected in the rising number of joint venture transactions and the boom in the launch of special purpose acquisition vehicles (SPACs).

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A SPAC-tacular Distraction Compelling Opportunities in “Other” Event-Driven Investments

Posted by Doug Francis and Sam Klar, GMO LLC, on
Wednesday, March 24, 2021
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Doug Francis is Head of Event-Driven Strategies and Sam Klar is Portfolio Manager of Event-Driven Strategies at GMO LLC. This post is based on their GMO memorandum.

The combination of record-level SPAC issuance and a flood of non-SPAC M&A has created a supply-demand imbalance in the event-driven asset class. With SPACs garnering most of the limelight, we believe investors are missing an excellent opportunity to deploy capital into “other” event-driven investments, most prominently merger arbitrage.

A Wild Year

It’s certainly been an interesting 12 months in the event-driven asset class. From soft catalyst event situations upended by the onset of COVID in Q1 2020, to the March 2020 “Arbageddon” widening in merger arbitrage spreads, to countless instances of hedge fund repositioning causing atypical volatility in typically boring share class arbitrage. It’s been a truly wild ride.
The combination of Q1 2020 performance challenges for the asset class and slow-to-recover new merger volume last spring and summer led to the perception that there was “nothing to do” in event-driven. The record issuance of SPACs in 2020 and early 2021, accompanied by some high-profile bouts of outperformance in former SPACs like Nikola, amended that narrative slightly. Recent commentary has been willing to stipulate that there was nothing to do in event-driven, apart from SPACs.

The Current Opportunity

As experienced event-driven investors, we’ve often chafed at the notion that event-driven’s attractiveness waxes and wanes as much as commentators would suggest. Indeed, our team mantra is “there’s almost always something to do,” and our historical results have supported this claim’s veracity.

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Limiting SPAC-Related Litigation Risk: Disclosure and Process Considerations

Posted by Caroline Bullerjahn and Morgan Mordecai, Goodwin Procter LLP, on
Sunday, March 14, 2021
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Caroline Bullerjahn and Morgan Mordecai are partners at Goodwin Procter LLP. This post is based on their Goodwin memorandum.

Introduction

2020 marked an incredible surge in the prevalence of Special Purpose Acquisition Company (“SPAC”) initial public offerings and business combinations (“deSPAC transactions”). In 2020, there were 248 SPAC IPOs (raising total gross proceeds of over $83 billion) and 66 deSPAC transactions, as compared with 2019’s 59 SPAC IPOs (raising approximately $13.6 billion in gross proceeds) and 28 deSPAC transactions. [1] And the pace continues to skyrocket in 2021 with 160 SPAC IPOs in the first two months of the year and 13 completed deSPAC transactions. [2] This spectacular rise, and the related profits, has unsurprisingly garnered attention from both the United States Securities and Exchange Commission (“SEC”) and plaintiffs’ law firms. Most recently, the SEC’s Division of Corporation Finance released guidance [3] (the “SEC’s SPAC Guidance”) concerning disclosure obligations for SPAC IPOs and deSPAC transactions, highlighting many process and disclosure-related issues that plaintiffs’ lawyers typically raise and have focused on in recent SPAC lawsuits. As we anticipate that plaintiffs’ firms will continue to hone in on SPAC-related litigation in 2021 (likely using the SEC’s SPAC Guidance as its new and more tailored playbook), SPAC sponsors, their boards of directors, and the directors and officers of acquisition targets should all be focused on key steps to limit litigation risks and minimize costs associated with these risks.

Disclosure-Based Claims and the SEC’s SPAC Guidance

Given that SPAC transactions have not historically been the subject of significant litigation, particularly as compared to traditional IPOs and public-to-public M&A transactions, plaintiffs’ firms played catch-up in this area during 2020, largely recycling their traditional M&A playbook. Accordingly, following the filing of the initial Form S-4 in connection with the deSPAC transaction, plaintiffs’ firms have alleged disclosure-based claims under Section 14(a) of the Exchange Act, claiming that the proxy statements issued are deficient due to the failure to disclose financial projections for the SPAC entity, immaterial details relating to negotiations or pursuit of other potential acquisition targets, reasoning for not hiring a financial advisor, or financial analyses that the SPAC board considered. See Wheby v. Greenland Acquisition Corp., C.A. No. 1:19-cv-01758 (D. Del. Sept. 19, 2019) (basing Section 14(a) action on alleged failure to make disclosures related to line items and reconciliations underlying financial statements, the target’s financial projections, terms of a non-disclosure agreements and letters of intent with potential targets, the basis for not hiring a financial advisor, and communications regarding future employment of the SPAC sponsors). More recently, however, plaintiffs’ firms are couching such pre-closing disclosure-based claims as breach of fiduciary duty claims, often filing in New York state courts, and are honing in on the unique aspects of SPACs and deSPAC transactions.

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Top Governance & Stewardship Issues in 2021

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Thursday, March 11, 2021
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This post is based on an article by the ISS Global Governance Research Team, Institutional Shareholder Services, Inc.

Key Takeaways

Protests in 2020 that swept across the US have cast a spotlight on levels of racial and ethnic diversity of corporate directors, C-suite executives and corporate workforces. Progress on racial and ethnic diversity on US corporate boards has been slow, and there is even less diversity in C-suites from which many director candidates are drawn. Shareholders, politicians, stock exchanges, activists, and rank-and-file employees are expected to apply pressure for increased diversity and inclusion. A variety of shareholder proposals addressing D&I concerns have been submitted at US companies. Similarly, there is a focus in the Canadian market to improve BIPOC diversity in both the public and private domains, while disclosure and regulatory challenges hamper measuring progress in Europe. Meanwhile, in many global markets, efforts to boost gender diversity levels in boardrooms and C-suites are expected to continue.

The continuing COVID-19 pandemic will necessitate holding many shareholder meetings via electronic means. Given ongoing health and safety concerns, a majority of US and a significant number of other companies around the world are expected to continue to hold virtual-only meetings for at least the first half of 2021. The pandemic outbreak on the eve of most 2020 proxy seasons created challenges for many companies as they scrambled to switch from traditional in-person AGMs to virtual-only formats via the Internet or other electronic means. The significant short-notice changes needed left many companies ill-prepared to provide shareholders with meaningful levels of participation on a variety of technology platforms, or even in meetings held behind closed doors. Some shareholders expressed concerns regarding the inability to ask questions or to vote at virtual meetings. While a number of industry participants appear to have addressed problems in providing access to meetings, shareholders may not be as forgiving as last season if companies experience technical mishaps or hold bare-bones, audio-only meetings with limited opportunities for shareholders’ questions and dialogue.

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