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On-Demand: Lessons Learned from the First 200 SPACs

Jan 6, 2022

Join our panelists as they discuss the trends and considerations, including warrants, legislation, etc. surrounding SPACs and provide best practices to avoid the most common pitfalls.


Nina Kelleher:To kick it off today, I really just wanted to spend a few minutes to give an overview of what a SPAC is, a high level look at the life cycle of a SPAC, and then some stats.

We'll only take a few minutes on this and then we'll jump into the good stuff, which is the questions for our expert panelists. And as Bella had said, if you have any questions that come up along the way, feel free to submit them and we are going to try to leave time at the end to address them.

So we've heard a lot about SPACs. It's a fun little acronym. It's a little catchy, but what exactly is it? They're really categorized as blank check companies that are comprised of sponsors, investors, and then ultimately the target company that they're looking to acquire. Sponsors, who typically consist of private equity, really make up the management team of the SPAC. Sponsors raise money from public market investors through an IPO, specifically with the intent to take a target company public.

The timeframe from when a SPAC IPOs to when they take a company public is typically 18 to 24 months. And most SPACs typically don't have a target industry in mind and they are not allowed to have a target company in mind before they go public. So that would be an onslaught of disclosures that they would have to do. So they try to avoid that. If the SPAC merger does not occur, what happens is the proceeds get liquidated back to the investors.

So let's take a look now at the lifecycle a bit. And again, this is really just a high level overview. The first phase of the SPAC is really the formation and the IPO phase. This is typically about eight weeks. It really involves a selection of underwriters, legal documentation, and then regulatory filings in order to initiate the IPO. Sometimes there's a small road show that's organized and the IPO process then starts to take place.

During this phase, SPACs should really evaluate the accounting position of their public and private warrants. There was a lot of focus on this earlier last year, I believe April. So I think that's something all sponsors are now aware of and how they classify them and all of sort of the trials and tribulations that SPACs have been put through with figuring that out.

Then, as we move into the second phase, this really consists of the target search. The SPACs now has IPOed and is public, and really, it just consists of looking for a target. Sometimes there's additional capital raised, often through a pipe investment.

And then once a target is identified, we move into the third phase, commonly called the de-SPAC process. And that is where targets are identified, due diligence is done, and they are merged with the SPAC, essentially taking the private company public. And then post-merger, you have the combined entity, which is the public entity.

So, with that, let's just talk a little bit of some of the stats. I think this slide is jammed up, Bella. I don't know if there's something on your ends with that. Oh, here we go.

So there's been a whole lot of activity, probably since 2019, in the SPAC market. And really just to understand what's going on here, SPACs really are not anything new. They came about around 25 years ago. There was a significant uptick though when we saw that a lot of private equity had dry powder. And as these things have had more momentum, we're seeing that since 2019, there's been over 220 completed de-SPAC transactions. There's currently almost 700 SPACs that are either searching for a target or have announced a target.

So really when you think about what we had said, that usually the lifecycle is 18 to 24 months, having 700 public companies hit the market within the next year and a half is really huge. That's a really, really large volume of public companies. And within 2001, there's been already 440 SPAC IPOs.

With all of this activity, there has also brought on some scrutiny. As I touched upon earlier, there was the warrant classification issue as to whether it would be classified as equity or liability. There's a constant focus that the disclosures are appropriate and the amount of disclosures and the type of disclosures. There's also some debate as to whether SPACs are investment companies or not.

Elizabeth Warren sent an open letter to SPAC executives. And then I think even most recently in December, the SEC Chair floated some new potential rules as it relates to SPACs. And then just some other names that you might know of, some SPACs that have gone public, DraftKings, 23andMe, Virgin Galactic. So really just a tremendous amount of activity going on.

And so with this, Bella, I think we have our next polling question.

Bella Brickle:Poll #2

Nina Kelleher:Thanks, Bella. So for our first question today, I'd like to direct that to John. I think it would be really great if you could lay out for us just a bit about what is different about what's being done with SPACs today versus SPACs 15, 20 years ago when they were really more of like a bad four letter word.

John Pennett:Yeah. Thanks, Nina. So I think back to my prior life at my prior accounting firm, I had an opportunity to work with a company who was trying to go public via a SPAC transaction. So this is probably 20 years ago, and this is a company which is now a household name and a consumer products company. They're advertising on TV all the time. And the answer from both a number of law firms, my old accounting firm, and even other accounting firms that they talked to was, "Hard pass, absolutely not, do not want to be involved or interested with these companies at all." And the reason was the companies who had gone public via SPAC initially were primarily mining companies, gaming companies, companies that were of poor quality, industries that could not go public via a traditional underwritten IPO. So these were sort of like the dregs of society.

So it became sort of like if you're involved in the SPAC world, it means you can't do anything through a traditional offering, so therefore you must be a substandard company. And from a risk management perspective, people just said no.

And you contrast that with what's different of about today, so I think you can use the biotech world as a good example of this, although it's prevalent to many other companies as well. So what was happening was there were these very, very large crossover rounds that were being done right before companies went public. And so those crossover investors were taking large percentages of the allocation of the IPO shares for themselves. So a lot of the traditional hedge funds and other groups that would want to purchase an IPO, to participate in the IPO were really shut out or were really reduced in the amount that they could participate because there really weren't very many shares available.

So one of the solutions to that problem was to say, "Well, let's create our own instrument so we could become the SPAC sponsor. We could create the availability and we can create our own allocation of those shares." Initially what happened was these were kind of very general purpose SPACs that came into play, but quickly became very, very focused. So the SPAC sponsors would recruit management teams or maybe had the expertise in-house already to be highly focused on a particular industry and being able to evaluate high quality targets in that industry.

So you would see ad tech executives who have been successful entrepreneurs be the principles of the SPAC sponsor or biotech companies or renewable energy companies or tech companies, whatever it might be. So these were people with strong pedigrees, and part of their challenge was to invoke a high degree of confidence that they would be looking at very strong companies that had the right and the permission and deserved to be public companies.

So as opposed to the old SPACs were, "We don't know what's going to happen with them. We don't know where they're going to go. We don't know what they're going to purchase," these became highly focused, led by really experienced management teams. And that brought a lot of credibility in addition to much, much stronger capital to the SPAC community.

Nina Kelleher:Thanks, John. That's actually really great groundwork to lay out for us. Carrying along those lines, Mike, I wanted to ask you, given the headwinds that are confronting SPACs, I just briefly touched upon some of the scrutiny they're facing, why do you think they continue to proliferate?

Michael O'Leary:Well, I think that's a really interesting question. There are a lot of headwinds. You've got the SEC, you've got the Chairman of the SEC. Almost every week during the fall of this year, he would chastise the SPAC community and raise issues about conflicts and the misalignment of interests. You've got a couple of bills pending in Congress to introduce new legislation. Not only do you have the warrant issue, but now you've got the issue of the equity, the common stock that is redeemable in these SPACs. Now the SEC is taking the position that is to be treated as temporary equity.

And so you've got, again, another round of many restatements by many of these SPACs that have be done, and then you've got a lot of stockholder litigation that's occurred. And we just had a recent decision that came out January 3rd from the Delaware courts taking the position that the highest standard of fiduciary duty applied to the board with respect to the proxy statement that was put together and the redemption rights that the stockholders had.

So there are a lot of headwinds, but I think there are several reasons why I think the SPAC will continue to thrive out there. I think that even with likely SEC regulations coming out addressing some of the conflict as well as the misalignment of interests and the likely introduction of some legislation through Congress, that none of that is going to be earth-shattering. It's just going to require more organized disclosure by these SPACs, which is something that should be done.

I think the recommendations are actually good recommendations to clarify for the investors, both the initial investors, the hedge funds that tend to invest in these SPACs at the inception in the IPO, and then investors who buy in the market after the fact, whether they're pipe investors or whether they're public investors who then decide they want to invest in that SPAC when they announce a de-SPAC transaction. They need to be sure they understand the nature of the conflicts, the inherent nature of the conflicts. That's all good, from my perspective, good disclosure and I don't think it's going to change the market here at all.

I think that what we've found in these SPACs is that they've been doing a de-SPAC transaction with many companies that really aren't quite ready for doing their own IPO. Some companies can get to the market, if you will, earlier. I think the days of pre-revenue de-SPAC transactions are probably in our rear view mirror. There have been several that have been high profile where there's been a lot of question about the projections they've had. There have been fraud in several of these. And I think that we've represented several target companies, that one of the options has been a de-SPAC transaction.

And in talking to different SPACs about the possibility, if it's a pre-revenue company, the SPACs say, "Really, we're staying clear of trying to do transaction with pre-revenue targets," yet I still think while it may not be pre-revenue, it may be early in the revenue days, and a development stage company with some revenue but a lot of growth yet to come that we'll see be the targets of these SPACs.

I think also while the IPO market last year was stronger, one of the reasons we saw a lot of SPACs is you've got a lot of private equity that have made investments in different companies and the IPO market really has not been available to many of these companies as an exit strategy. You either do an M&A transaction or possibly a SPAC transaction. And these de-SPAC offer a significant alternative to some of these portfolio companies if you will of some of these private equity firms.

So I think there will remain a place for SPACs. I think they'll be a significant part of the market out there in terms of what we see of companies entering the market, the capital markets through a de-SPAC transaction, as opposed to the more traditional IPO, which I'm not sure- It's touch and go. You may have an open market for some industries that may be closed to these de-SPAC given the proliferation. I think there's something like 500, you said 700 companies out there with SPACs looking for companies to combine with their initial business combination. That's a very competitive market out there for targets and compelling for targets.

Nina Kelleher:Yeah, Mike, so just-

John Pennett:Hey, Mike, this is John. Can I-

Nina Kelleher:No, go ahead.

John Pennett:I was going to add one thing real quick, Nina. So one of the things that we've seen in our practice is a lot of companies talking about, "Hey, maybe a SPAC transaction would be a good option for us. So we're a private company. Maybe we have some venture capital, maybe we don't, and maybe we'd be an attractive target for a SPAC to take us public and to get us the funding we need to develop our product," or whatever the situation may be.

And I think one of the things that's sort of an interesting conversation, and I'm sure you've had this with your clients, Mike, as well, is that you're taking on the responsibilities of being a public company, and are you really ready for that?

So there's a lot of companies, certainly anybody who was working in infectious disease or upper respiratory issues, saying, "Hey, with COVID, I can go public via a SPAC transaction, and that'll be really good," but then you look at the quality of the company and where they are and it's like, "No, that's a really bad idea."

So I'm curious to maybe give your thoughts on that, Mike, a little bit, just in terms of the quality of the companies that are still out there that are potential targets.

Michael O'Leary:Oh, I agree. Many targets don't really understand what it takes to be a public company, first to have the financials that just have included in the proxy statement. You've got to have SEC ready financial statements for your operations and many of these companies don't. They've got to be thinking about internal controls and disclosure controls and procedures.

There's a lot of process that has to be put into place. And you're exactly correct, many of these companies that think a SPAC exit might be available to them are not ready for prime time. They're not really ready to be public companies and to be the ones- Because what often happens in these de-SPAC transactions is that the target's management ends up being the management of the combined company. And they're the ones who are going to be responsible for dealing with the SEC requirements and the disclosures that are required in conjunction with that, preparation of financial statements, preparation of proxy statements, disclosure controls and procedures, internal controls.

And it's a lot of preparation. And many of these targets who haven't really given much consideration to it and are early in their development stage are not really ready to be a public company. I completely agree with you. Good point, John.

Machua Millett:So one comment to follow on, Mike, on what you said about sort of a change in the profile of target companies that I think is relevant that we have seen is although some of the early de-SPAC companies may well have been sort of cannabis fueled, Bitcoin enabled, space travel vehicles, we've seen a much greater diversification in the types of companies that are using the de-SPAC product to go public and really an increase in the sophistication of those teams.

So you talked about them, sort of a shift from pre-revenue to revenue companies, we've seen it across the board, the level of sophistication among the target companies, and quite honestly, among the SPAC sponsors going up significantly as we move along here. And many of the companies that we see deciding to go through a de-SPAC transaction now are private equity portfolio companies who have potentially been aiming towards an IPO regardless in 24 to 36 months from now or 18 to 24 months, and this accelerates their timeframe.

But I agree with you 100%. I would be concerned if you saw a SPAC target company that was getting ready to do a de-SPAC who was not engaged in the same sort of preparedness exercises that you see from a pre-IPO company, hiring folks who have experiences, public companies CFOs, et cetera. You definitely need to see that in that process. If it's just a private company team that suddenly says, "We're going to be a public company now," that should be caused for concern. But I think that's the minority of situations.

Michael O'Leary:I completely agree with you. And I also agree that the sophistication of many of these portfolio companies of the private equity, that an obvious exit and one of the things that the private equity tends to focus on for these portfolio companies is, "Look, the exit here may be an IPO. We need for you to be prepared and preparing yourself over the course of the next three to five years so that we can take advantage of that if that's available." And because of that sophistication, they're often in a much better position, you're right, than some of the other early stage companies.

John Pennett:Yeah, I would say, this is John, we've also seen probably an increase in the number of international companies traditionally which are either venture-backed or private equity-backed also considering this back route. So trying to find good quality companies wherever they may be located. And this is obviously providing capital for growth and expansion into new markets, perhaps into the US markets. So that's definitely been an area that we've seen a greater focus on as well.

Michael O'Leary:I agree. I also think that some of that focus, the reason for looking internationally is it's such a competitive market here domestically that they're looking for opportunities outside the US for de-SPAC opportunities.

Nina Kelleher:Yeah. I just wanted to continue on one of the points that you made, Mike, around the SEC and they're coming out with new statements and guidance. It really feels like the SPAC market has fallen really out of favor with the SEC. So is the adoption of new regulations by the SEC targeting SPACs? Do you think this is something that's going to disrupt the SPAC market? And do you have any thoughts on any pending legislation that's being proposed?

Michael O'Leary:Well, I think that a couple things happened. The proliferation of the SPACs has made the SEC kind of open its eyes and take a second look at these SPACs. There've been a lot of high profile litigation with some of these SPAC and some of the disclosures they have and a lot of concern about the fact that some of these SPAC seem to think, although I think that's been disproved, that they seem to think that they had a way out from the forward-looking statements exception for blank check companies, which blank check companies do not get the exemption that regular operating companies do.

And so there was thought that these SPACs didn't have that advantage. The SEC has said, absolutely, they completely disagree with that position. I think one of the bills pending in Congress will make that part of the, if it is ultimately passed, that will become a black letter law as opposed to a gray letter law right now, which it's an interpretive law. But I think most of the securities practitioners out there don't agree with the position that some people have espoused that they are exempt and therefore don't have to worry about their forward looking statements and not having the advantage of a safe harbor.

I think that despite the fact, and yes, I think they've fallen out of favor. I think Gensler in particular does not like them and wants to see some new regulations be adopted to make sure that there's more rigorous disclosure about both the risk factors and the misalignment of interests. And you've now got one decision that was by the Delaware Chancery Court raising the bar in terms of the fiduciary duties that applied to the board.

And so there are headwinds, but I don't think it's going to shut it down. I think even the legislation that's pending in Congress, the first one addressing the forward looking statements issue and another addressing disclosures is not likely to really severely disrupt this market. I think there's a strong tailwind with SPACs. I think that both the warrant issue that came out and the temporary equity treatment, I think that came about as a result of a closer look in this market of so many SPACs being done, of just how they were fitting within the different guidelines of the accounting rules. And they determined, "Well, they don't really fit very well and they should be treated differently."

But the reality is you look at the balance sheet of a SPAC post-IPO, nobody's really paying attention so much to that balance sheet. What's important is the de-SPAC transaction. And that's why despite the fact that you've got the change in the warrant treatment and the change in the equity, the redeemable equity, it's a speed bump, if you will. And now that it's been out there, any new SPACs will pay attention to their warrants and how they should be properly accounted for, and the same thing with their redeemable equity.

So I see these as potential speed bumps, people will have to adjust and it may take a temporary period to adjust, but I don't think it's going to be really disruptive to the SPAC market.

John Pennett:Yeah, Mike, this is John-

Machua Millett:I actually think the disclosure related regulations and what have you are welcomed by the vast majority of sponsor teams. They're perfectly comfortable with that and they're happy to increase disclosures as required and they'd love some more clarification.

I think what's not terribly appreciated is the sort of thing that happened in April, which however you want to term what the SEC did, it was clearly a change in position in terms of warrant accounting. And you had several hundred SPACs who were well down the path of going IPO who had to back up and restart, right? So it basically shut down the SPAC IPO market for two or three months. Changing the landscape is --

Michael O'Leary:No, I agree.

John Pennett:This is John. I think one of the things that you saw and I think maybe has been a sense of kind of discomfort for some folks has been these are somewhat engineered transactions, right? So how you're allocating your warrant and the shares and kind of the alignment of interests kind of gets into a little bit of financial engineering in terms of how you set that up. The initial accounting for the potentially redeemable shares was a little bit engineered as well.

So I think part of this process has been clarity. And so I think the sponsors now know what the rules of engagement are if they want to have liability accounting for their warrants and what language they need to put in if they don't. I think the clarity on the presentation of the potentially redeemable equity and forward purchase agreements and things like that is now pretty clear. So sort of that subjectivity and there was a lot of inconsistency in those presentations, I think that's all now clear and people can design the instruments the way they want to design them to get the desired outcome.

The number of transactions, the agreements are largely similar at this point in time. So there's a lot of consistency in the documents themselves. And so you can get the best language, if you would, and get that agreed. Once you've understood how you're engineering the transaction and how you're allocating the potential economics of the deal, the rest becomes relatively mechanical.

So I think that does make it a little bit easier now for the sponsors. And I think some of them have also sort of said, "I don't really care what the accounting is for the warrants and things like that. If it's liability, it's liability. If it's equity, it's equity. We're trying to get an economic outcome here, and as long as we hit that, that's fine. The rest of it's just accounting stuff that'll be dealt with."

Michael O'Leary:Completely agree, John. You're exactly right. I think the clarity, it does help add clarity and so the sponsors now know what to do. And I don't think they really do care. They just want to know what the proper accounting treatment is and that now has been- There is guidance out there and they'll just follow the guidance.

John Pennett:Right.

Machua Millett:So, Nina, maybe that transitions-

Nina Kelleher:So, Mach- Yeah.

Machua Millett:Yeah, maybe that transitions into a discussion of litigation.

Nina Kelleher:I wasn't sure if I should have it go into litigation or talk a little bit about how directors and officers might feel what their potential exposure is here.

Machua Millett:Yeah. So I think those two things feed together, and Mike had mentioned the decision out of Delaware and MultiPlan about what the appropriate review standard is for a de-SPAC transaction and whether or not the fiduciary duties of the directors were satisfied. So we can talk a little bit about that as well.

But I think the first question is sort of, from a litigation and enforcement perspective, what has changed here? And the answer from my perspective is it's not much, but a lot, and I'll explain what I mean by that. What has changed is the sheer volume of these transactions and the level of attention that follows any explosion in activity in the public markets.

So to give some sense, we had 613 SPAC IPOs last year. That was up from 248 and 2020, which itself was almost five times more than we had in 2019, which was 59. So going from 59 in a year to 613 in a year in two years is obviously significant. And to Mike's point earlier and John's point, we have 575 SPACs, plus or minus a few, who are currently looking for reverse merger targets. So they're out there in the marketplace looking for potential reverse merger partners.

By comparison, we had 397 traditional IPOs last year, which was up from 221 the year before, which is also a significant increase, but not nearly as significant as for SPAC IPOs.

And then finally, how about de-SPACs? We had 196 de-SPACs last year, which was up from 63 the year before, so more than triple as many. And if that doesn't triple this year, I would be surprised given the number of SPACs who are looking for targets.

So that kind of level of activity brings attention, and that attention is not always positive. So there's certainly been sort of a negative news loop around SPACs and the supposed dangers of SPACs and what have you. You have also had far greater attention from the SEC, as we've been talking about, and you have more attention from the Plaintiffs’ Attorneys Bar, which is a group of folks who are interested in their own profit as well. And so if they see an area of potential growth, they will take advantage of it, and they have done so in this space.

When I say that nothing much has changed, what I mean is that the core piece of litigation that still exists that really drives the risk in this marketplace is post de-SPAC stock drop related securities class actions. Those are the high frequency and potential high severity cases. So they are not during the SPAC search period or in the investment period, they are post close of the de-SPAC transaction when the operating company goes public.

And if the stock price of that operating public company goes down significantly or if it shoots up and then comes back down, the Plaintiffs’ Attorneys Bar will step in, they will launch an investigation to find a representative shareholder, and they will file suit. And we have seen that 44 times in the last year or so.

So that's up. That is obviously an increase in frequency. De-SPAC related securities litigation used to be less than 1% of all securities litigation, now it's about 17% of all securities litigation. Why? Well, there's a heck of a lot more de-SPACs. And the Plaintiffs Bar is watching. They're watching their Bloomberg terminals and when they see stock price declines, they bring the litigation. It doesn't mean that there's merit to that litigation, and we shall see how these cases play out. Most of them are pre-motion to dismiss, and unfortunately, just like bad news travels fast, bad cases get resolved faster than good cases.

So a couple of the cases we have seen go to a resolution thus far have been some of the uglier cases involving fairly clear accounting fraud at the target company or serious disclosure issues around the teams who are conducting the de-SPAC, but that doesn't change the basic litigation. And the frequency of it is up, but it's still about the same right now as traditional IPO litigation, and the severity is yet to be determined. But that type of litigation has always existed. I did some of that when I was a securities defense lawyer at Skadden back in the mid-2000s. It's always existed and it still does for a de-SPAC transaction.

However, with greater attention, you've got other sort of pieces of litigation as well. I guess I'd throw some into sort of an attention grabbing category. I would throw Churchill/Lucid, Virgin Galactic, and the Ackman-related suits into that category. They are basically taking a novel legal theory and trying to pursue them, bringing a lot of public attention, but again, not necessarily much merit to those cases. And I think when you look at them objectively, they're questionable as to whether they have any real basis.

You then also have a large number of disclosure related cases that are threatened or filed at the time that you announce your de-SPAC deal. It is essentially a tax that is placed on the transaction by the plaintiff's lawyers who will come in and say that you have failed to make certain technical disclosures. You will revise your disclosures to add a few and you will pay them a mootness fee typically of around $150,000 to go away and let you finish your deal. High frequency, we see it all the time now, but very low severity.

Finally, I think one of the things that's misunderstood is the concept of is there litigation against SPACs during the search period when they're out there looking for a target, and the answer is very infrequently. So we've seen less than a handful of those sorts of cases during the search period, largely spurned target companies who say that their information has been stolen or angry unit holders of one sort or another.

And then you have the SEC, which SEC enforcement action in this space is of course a wild card as it is for any public company. But what we have seen to date I think is that there hasn't been a lot of SEC enforcement action that has been separate from a large securities case. So the SEC's enforcement actions regarding Akazoo and Nikola and some other situations that have some pretty extreme fact patterns came only after there was securities litigation. So it's not as if there is a separate category of that sort of situation. They are interrelated.

So that feeds, Nina, into your question about, well, what do directors do about this in terms of trying to protect themselves? Because these cases are brought not only against the SPAC and the target company, but also the officers and directors of both. And I think the answer to that, particularly in the face of that decision from Delaware saying that directors' decision about a particular de-SPAC deal should be evaluated on an entire fairness basis as opposed to a business judgment rule basis, which is significantly easier to win a motion to dismiss on, is that they really need to focus on the quality of the people they're working with and the quality of the deal.

So certainly looking, if you're going to join a SPAC, the board of directors, you want to look at the quality and the track record of the team, the sponsor team. You want to look at the due diligence capabilities. You want to make sure that this team has the ability to diligence the deal and do a good deal because that is your ultimate defense. If you do a good deal and everything goes well, you're not going to see litigation, but if something goes wrong, even with a good deal, you want to be able to show that you've acted truly diligently in completing the acquisition process.

I also think you want to make sure that the people involved, to the earlier point, to Mike's earlier point, you want to make sure that the people involved have public management experience. You want to make sure that they understand the process that they're going through and the risks involved and how to deal with those risks.

Machua Millett:                And then certainly at the end of the day after you talk about quality of advisors and attention to enforcement or litigation considerations and the investment thesis, I am an insurance broker, I think Ds and Os should certainly think about what the D&O insurance looks like at the SPAC and at the de-SPAC target. It's tremendously important to have that protection sitting behind all of these other sort of diligence-based concepts.

That was a long answer. I apologize.

Nina Kelleher:No, it was very informative. I think now is a good point for us to go to our third polling question.

Bella Brickle:Poll #3

Nina Kelleher:Great. I do want to continue on with the recent Delaware court decision. Both Mike and Mach touched upon this. Mike, how would you say that the decision applies to the review of actions by a board of directors with respect to a de-SPAC transaction and the likely effect of future SPAC board approvals of a de-SPAC transaction?

Michael O'Leary:Well, I think there were a couple of things that the court would out and was concerned about with respect to the board of directors and their conflicts. There was not the use of a special committee here, so it was the entire board. And the entire board all had interests in some of the Class B securities, Class B shares that that had been awarded. Even the outside independent directors that were on the board, part of their compensation package included the award from the sponsor of a package of the Class B shares.

Michael O'Leary:Now those Class B shares are not worth anything unless the de-SPAC transaction is done. And so you either have, if no de-SPAC transaction gets done, they're worthless, and if one does get done, then they're worth whatever the trading value is of the stock. The stock of MultiPlan traded below the $10 IPO price post the de-SPAC transaction. And so you had the public stockholders who had paid $10 or bought in it at $10 or so suddenly saw the value of their stock worth I think maybe $5 per share, something like that, and yet the members of the board saw the value of their Class B shares suddenly go from zero to $5 per share, a tremendous in increase in value in the court.

Now, this was only on a motion to dismiss. This was not a decision on the merits. So we'll have to wait for the decision on the merits ultimately if it that goes that route. And so the court concluded that with that and with some of the other factors that they would impose, that in fact the higher standard should apply, the more onerous and rigorous standard that applies to the board as there were no real independent decision makers.

Also, one of the things that we typically see by a SPAC when they're doing these transactions is unless they do take advantage of an independent committee, there's often no fairness opinion. And there was no fairness opinion in this transaction. That's often because the sponsors are financial people. They are financial oriented. They believe they can make their own decisions and don't need to pay for some third party to render a fairness opinion.

There were other factors involved. I think the sponsor engaged its own related party company to provide some financial advice to the SPAC. And there were a lot of things potentially done wrong with this transaction. I think we'll have to wait to see once the decision on merits comes out as to exactly where the dust settles, but I do think it's going to make many of these SPACs and their boards reconsider how they might want to address deciding whether or not to move forward with a particular SPAC transaction.

Do they take advantage of an independent committee? I think that can make sense. Do they continue to award significant amounts of these Class B shares to the independent directors? That might be something they begin to back away from. That means they're going to have to use more cash though to compensate those independent directors. And then does the board or independent committee engage a financial advisor to render a fairness opinion in connection with the transaction? I think all of those, we may see some change, some trends develop as a result of that decision, again, bearing in mind that it's only on a motion to dismiss and not a decision on the merits.

Nina Kelleher:Got it. Thanks. And so, Mach, what are you seeing in the insurance space around current claims as it relates to SPACs and de-SPACs and how does that really come compare historically?

Machua Millett:Sure. So, we talked a little bit about that increased frequency, uncertain severity. I think in terms of MultiPlan, there's a couple points, and Mike hit on it more specifically, but from my perspective more generally, one question is how unique is the fact pattern in MultiPlan? And I think it's pretty unique in terms of some of the factors that Mike mentioned in terms of the lack of an independent committee, the incentives, what have you, and that kind of pushed the court in a particular direction.

So I'm not sure that it applies to all SPACs. I think that should be kept clear, or to all de-SPAC transactions. And I think there's a fair question whether or not it's consistent or correct with prior Delaware decisions about business judgment and entire fairness. This is the Chancery Court and it will be reviewed, I imagine, at appeals court levels and it will be interesting to see what happens with decision.

In terms of overall litigation, I think there is a tendency in this space to overstate frequency and potential severity from my perspective. I do think it is a legitimate area of concern for directors and officers and for SPAC sponsors. They should be evaluating that risk to minimize that risk and protect against it with insurance and risk management and disclosures and what have you, but I do not subscribe to the theory that there has been an avalanche of litigation or anything along on those lines. I think this is predictable based upon the increase in frequency of SPACs and de-SPACs. This could have been expected to come, and it has.

And the best thing that could happen for this industry is if in the coming year, 20 or 30 of these existing cases get dismissed on a motion to dismiss. But certainly I think when you evaluate some of these complaints, which are pretty cookie-cutter, they probably should because the areas that are alleged to have been misrepresented in the public filings, often, if you go look back and look at the public filings, those risk factors are specifically disclosed. And if you didn't read the risk factors in the S-4 or the F-4 for the de-SPAC as an investor, that's on you. It's not on the sponsor team or on the target company. Often those risks are fully disclosed.

Nina Kelleher:Thanks, Mach. So, John, after hearing about different court cases, SEC statements, guidance, considerations that directors and officers should have, from an accounting perspective, would you say that we've really gotten clarity around accounting issues such as the warrant classifications or forward purchase agreements or redeemable shares?

John Pennett:Yeah, I think so. And I think the disclosures are pretty well vetted at this point in time. So things like the risk factors, the related party transactions, the ownership disclosures and the accounting treatment for those various instruments are pretty well-known and pretty well-established at this point in time. So I think there's a pretty fair degree of transparency.

I think when the initial deals were sort of done and sort of contemplated from an accounting perspective, it sort of seemed like, "Well, this sounds really simple. So we go public, we have $300 million sitting in a trust and we operate off $1 million budget until we de-SPAC." It sounds like it should be really simple, but then you have to really understand the economics of the deal and who's got what rights, and I think those disclosures have become much cleaner and crisper over the course of time and pretty well-vetted.

One of the other things that was sort of an interesting, and I've seen this issue come up, was, again, sort of a weird concept, right? So you're sitting with $300 million of cash sitting in the trust, but yet you have a going concern because we don't know if you have enough money to actually complete the de-SPAC transaction. So it seems like a weird conclusion, but it does actually make sense.

And so we've seen different sponsors say, "Well, we'll put some loans in place or like an equity line of credit where we could purchase an additional equity to help fund that de-SPACing transaction," but now all of a sudden you've maybe changed the economics a little bit if it's not just a straightforward 5% interest bearing note. So we've seen a little bit of engineering there, which then drives a whole bunch more disclosures.

So it really, at the end of the day, comes down to being really diligent, really careful, and paying careful attention to disclosures as you would in an IPO process or any public transaction, any registration statement.

Nina Kelleher:Thanks, John. And with that, Bella, I'd like us to get in our last polling question.

Bella Brickle:Poll #4

Nina Kelleher:Okay. Thanks, Bella. I know we're approaching on the end of our time here today, so if we didn't get to a question that you submitted, we'll reach out to you after this session, but I did want to get in one last question that's posed to all of our panelists and it's what do you anticipate may happen in the SPAC landscape in the next 18 to 24 months? So I don't know, John, if you want to kick that off and then we can just get everyone's thoughts on that.

John Pennett:Sure. Sure. So obviously the next 18 to 24 months, there's going to be a lot of companies who are going to be reaching their clock in terms of having to make a decision on a de-SPAC or to return the capital. I do think you'll see some SPACs returning capital. I think they may not find a target that they find attractive. And so I think there will be some that actually do return. There has been some already, but I think there'll be some number that will do that, just with the ability not to find to attractive target.

But at the same time, I think there'll be many that do complete their de-SPAC transaction and I do think that the market for new IPOs in the form of SPACs will continue.

Michael O'Leary:Yeah, so John, I agree with you. I do think we'll see some liquidations and some capital returned because I don't think all 575 of these are going to be able to find a suitable target within the remaining time that they've got left.

I also think we'll see some clarity from the SEC with regulations and perhaps we'll see some legislation from the government adopted that will introduce some laws and I think that will help provide guidance. I think that as I think Mach may have mentioned, that will help give guidance to some of these sponsors that they've been looking for in terms of how to organize some of these disclosures.

I think many of the disclosures are in fact already in these S-4s, and like the point Mach made, in many cases, the investors don't really read those disclosures and you've got a market out there among the government, the legislators who are responding to some complaints by some of their voting public that these SPACs aren't adequately disclosing things. I think that we'll get some guidance. I think it will all be a good thing and I think the SPAC market will continue to proliferate in the future.

Machua Millett:So from my perspective, I certainly don't think we're going to see another 613 SPAC IPOs this year, but I think we will still see a pretty significant number. There are a lot of pre IPO SPACs who are already on file. They won't all go, some will get shelved or pulled, but I think you'll certainly see in the six digits in terms of the number of SPAC IPOs this year and I think you're going to see a really big uptick in de-SPACs. I think you'll be looking at least a couple to a few hundred de-SPACs this year given deadlines and what have you.

And I think it would be healthy, quite honestly, if there were some liquidations. Not everyone should necessarily be able to find the right target to do this and that would be a healthy sign that folks are making concrete, rational, reasonable decisions about whether or not to do a deal, as opposed to just doing a deal for the sake of doing a deal that may not be good at the end of the day.

So I certainly think from that perspective, it will continue to be active and I expect it will continue to have the drum beat of litigation and SEC commentary, but to Mike's point early on, I don't think we're going to see this market shut down, unless there's a very fundamental to decision to be made between Congress and the SEC who don't always see eye to eye anyway. So I expect we will see a lot of activity this year and next.

Nina Kelleher:All right. Well, thank you, John, Mike, and Mach for all of your thoughts and insights today. I'll pass it over to Bella to close us out.

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