Where SPAC deals draw scrutiny
A special purpose acquisition company raises money in an IPO, holds it in trust, and must find a target and complete a business combination within the period set in its charter and exchange rules, or return the money. Public shareholders usually can redeem their shares when a combination is proposed, so the quality of the information they receive about the deal is central. SEC rules adopted in recent years expanded required disclosures about sponsor compensation, conflicts of interest, and dilution, and treat the target as a co-registrant in many de-SPAC filings, so the target and its directors share liability for the registration statement. Under those rules, the statutory safe harbor that shields many public companies' forward-looking statements does not cover projections in de-SPAC deals. Delaware courts have allowed stockholder claims where a sponsor's interest in closing a deal diverged from public holders' interest in redeeming with full information.
Records sponsors and targets should keep
Sponsors should keep a clear record of the target search, every conflict of interest involving the sponsor or directors, and the reasons for choosing the target. Projections and the assumptions behind them need careful support, since they are often challenged after the stock trades below the trust value. Extension votes, redemption figures, and trust account statements should be tracked and disclosed accurately. Targets should prepare audited financial statements and internal controls suited to public company reporting well before closing. Side arrangements such as PIPE financing, forward purchase agreements, and non-redemption agreements must be documented and disclosed.
Questions to settle early
We start by reviewing the deadline for completing a combination and the listing standards the SPAC must keep meeting. For targets, we look at readiness to function as a public company, including financial reporting, governance, and the liability that comes with being a co-registrant. Directors benefit from an independent process and advice where interests diverge, and D&O coverage should be reviewed for the transaction and the period after it. Because SEC policy in this area has shifted, the current form of the rules should be confirmed when planning a deal. If a dispute or investigation has begun, the focus moves to preservation and to the disclosures as filed.
