By James R. Hagerty, Partner, and John F. McCarthy, III, Of Counsel

Over the past year Kalbian Hagerty's corporate lawyers, working in conjunction with experienced investors, underwriters, bankers, and accountants, have developed significant expertise with respect to Special Purpose Acquisition Company (SPAC)transactions, both in the United States and abroad.
 

Specifically, Education Media, Inc. (“EMI”), a newly incorporated Delaware SPAC, hired Kalbian Hagerty LLP, as general counsel last fall.  EMI was formed by John Hendricks, founder and Chairman of the Board of Discovery Communications Inc. and James Kimsey, founder and Chairman Emeritus of America Online, Inc. for the purpose of raising $100 million in the public market to acquire an operating company in the education industry.  In November of 2007, EMI signed a Letter of Intent with investment banking firm Ferris, Baker, Watts to underwrite the public offering.  On November 27, 2007, Kalbian Hagerty LLP filed a Form S-1 registration statement with the Securities and Exchange Commission.

 

            SPACs in their present form are an investment vehicle that has arisen relatively recently (within the past four years) but now account for almost 25% of all IPO’s filed with the SEC. A December 14, 2007 New York Times article “Blank Checks Keep Getting Bigger” noted:

 

“The private equity industry may be in hibernation, but another brand of buyout vehicle – known as the special-purpose acquisition company – is in overdrive.

 

Special purpose acquisition companies are shell entities that go public with little more than the reputations of their founders.  They raise money with the intention of buying a business within a specified time, and promise to liquidate if they do not.  In recent months, dozens of entrepreneurs and financers have tried their hands at SPACs, which are also known as blank – check companies.  They include Dave Cho, the founder of the Nautica clothing line, and Tom Hicks, the buyout veteran, who owns the “Texas Rangers”.

 

 

            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% 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% 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 2 to 3 years and the proceeds of the warrant purchase (normally 3% to 5% 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% to 80% majority.  The shareholders, if they do not approve the acquisition, can vote to redeem their shares.  Typically more than 98% of the initial proceeds of the public offering are held in trust pending approval of the acquisition.

 

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. 

 

Please email the authors at jhagerty@kalbianhagerty.com or jmccarthy@kalbianhagerty.com with questions about this subject.