The bursting of the SPAC bubble has left quite a few companies that went public via a de-SPAC looking for an exit. The depressed valuations of these companies might make them tempting acquisition targets, but a recent Freshfields blog says that potential buyers of a recently de-SPACed business need to recognize that they come with a lot of baggage that needs to be addressed during the acquisition process. The memo lays out some of these issues. This excerpt discusses some of the challenges created by the legacy SPAC capital structure:
As part of a de-SPAC transaction, de-SPACed companies typically inherit “public warrants,” which were issued to the public investors in the SPAC IPO, and “private placement warrants,” which were issued to the SPAC sponsor, as well as potentially PIPE investors, in putting together the financing for the deal. The terms of the public warrants and private placement warrants are usually identical, except that the de-SPACed company may redeem the public warrants if its stock price reaches or exceeds certain levels, whereas the private placement warrants are not redeemable.
Both public and private placement warrants may contain provisions that provide that in the case of a merger or other business combination transaction, the warrants become exercisable for the merger consideration. This means that the buyer cannot unilaterally take them out (subject to the redemption provisions of the public warrants based on the deal price) and—if some warrant holders do not exercise their warrants right away—may have ongoing obligations to pay the merger consideration for the life of the warrants.
As a separate matter, in a deal that involves less than a specified percentage (usually 70%) of listed stock as the deal consideration, the warrants often provide that the exercise price will be adjusted if the warrant is exercised within a specified period of time after the closing of the deal (usually 30 days) such that the warrant holder will be entitled to receive upon exercise, on a net basis, the Black-Scholes value of the warrant (calculated as of immediately prior to closing, based on certain assumptions specified in the warrant agreement).
This creates an added complication in that a buyer may not know the exact amount of consideration to be paid for the de-SPACed warrants at the time of signing. Buyers should, therefore, consider whether the warrant agreement terms may be amended and whether it would be feasible or desirable for the buyer to enter into agreements with the warrant holders that lock in the treatment of their warrants at the time of signing.
The memo points out that de-SPACed companies may also have inherited legacy target securities which may have bespoke provisions and further complicate cleaning up the company’s capital structure post-acquisition. The memo also covers the implications of fiduciary duty issues for the de-SPACed company’s board, the potential concentration of voting power and the potentially divergent interests of its shareholders.
— John Jenkins, DealLawyers.com, September 14, 2022