Kalbian Hagerty LLP in the News acquisition company (SPAC) activity
Published January, 2008
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Essential Elements of a SPAC
The essential elements of a SPAC transaction are as follows:
1. A company is formed with the purpose of raising capital through a public offering of units (typically a share and a four year warrant) and investing, within a two year period, at least 80 percent of the net assets of the SPAC in a merger or other business combination with a private operating company in a particular business sector.
2. The management team of a SPAC is typically comprised of prominent business men and women who have expertise in a particular business sector and have M&A or operating expertise.
3. The management team typically receives 20 percent of the equity in the SPAC for a nominal investment, but also agrees to purchase warrants from the SPAC in a private placement immediately prior to the offering.
The equity and the warrants are held in escrow for two to three years and the proceeds of the warrant purchase (normally three percent to five percent of the amount being raised in the public offering) are placed in trust and distributed to the public stockholders in the event of liquidation. No salaries, finder’s fees or other cash compensation are paid to the management team prior to achieving a business combination and the management team does not participate in the liquidating distribution if it fails to achieve a business combination.
4. Once the management team has identified an operating company to acquire, the shareholders must approve the acquisition by a 60 percent to 80 percent majority. The shareholders, if they do not approve the acquisition, can vote to redeem their shares. Typically more than 98 percent of the initial proceeds of the public offering are held in trust pending approval of the acquisition.
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Retail Investors & SPACs
SPACs are a popular vehicle with retail investors because they give them the opportunity to participate in transactions originated by experienced management teams that are generally only available to conventional private equity funds. SPACs also provide the transparency, liquidity and investor protections of a listed company.
SPACs are attractive to management teams for the 20% participation in the equity and the opportunity to employ a public vehicle to acquire an operating company in an industry in which they have expertise and experience.
SPAC’s are typically listed in the U.S. on the OTC Bulletin Board and/or the American Stock Exchange. A large number of SPAC’s have also been listed on the London Stock Exchange AIM exchange and this year the first SPAC was listed on the Euronext Amsterdam exchange.
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If you have questions about this topic, we welcome your inquiries via Web form or phone. Please direct them to the authors of this article:
James R. Hagerty
Managing Partner
Washington, DC Headquarters
Washington, DC, USA
John F. McCarthy, III
Of Counsel
KALBIAN HAGERTY LLP
Washington, DC Headquarters
Washington, DC, USA