December 27, 2019
De-SPAC Process – Shareholder Approval, Founder Vote Requirements, and Redemption Offer
The most intense phase of becoming a public listed company via a combination with a Special Purpose Acquisition Company (SPAC) or the enhanced Private-to-Public Equity (PPETM) mechanism is the De-SPAC process. De-SPACing is the stage after the execution of a definitive agreement and before the actual combination of the SPAC/PPETM public entity with the target operating company.
The De-SPAC process is similar to a public company merger, except that the buyer (the SPAC) is typically required to obtain shareholder approval, which must be obtained in accordance with SEC proxy rules.
Stock exchange rules do not always require a vote by the SPAC shareholders, but the structure of the De-SPAC transaction (e.g., if the SPAC does not survive a merger or is re-domiciling in a different jurisdiction) may require a vote, and if more than 20% of the voting stock of the SPAC is being issued in the De-SPAC transaction (to the seller of the target business, to PIPE investors or to a combination thereof), the stock exchange rules will require a shareholder vote.
This results in most of the De-SPAC transactions conducting a public vote by the SPAC’s shareholders, which involves the filing of a proxy statement with the SEC, the review and commenting by the SEC, the mailing of the proxy statement to the SPAC’s shareholders, and the holding of a shareholders meeting to tally all of the votes casted and record the voting result. The proxy process can take three to five months to complete from the date a definitive agreement for the De-SPAC transaction is signed.
Founder Vote Requirements
The sponsor and any other holders of founder shares will typically commit at the time of the IPO to vote any founder shares held by them and any public shares purchased during or after the IPO in favor of the De-SPAC transaction. As a result, at least 20% of the SPAC’s outstanding shares will be committed to vote in favor of a transaction, helping the process of achieving a majority vote to approve the transaction.
Redemption Offer
As part of the De-SPAC process, the SPAC is required to offer the holders of public shares the right to redeem their public shares for a pro-rata portion of the proceeds held in the trust account, which typically results in a redemption amount equal to approximately $10.00 per public share. Under stock exchange listing rules, if a shareholder vote is sought, only shareholders who vote against the De-SPAC transaction are required to be offered the ability to redeem their public shares. However, the SPAC charter documents typically require the offer to be made to all shareholders. Effectively, if the De-SPAC transaction never occurs, the public shareholders get their money back, while the public warrants, founder shares and founder warrants expire without value.
The sponsor and the SPAC’s officers and directors will waive redemption rights with respect to their founder shares (and any public shares they may purchase) in connection with the De-SPAC transaction or a charter amendment to permit an extended period to consummate the De-SPAC transaction, effectively agreeing to stay invested in the SPAC through the closing of the De-SPAC transaction or until liquidation.
The “Super 8-K”
SEC rules require that SPACs file a special Form 8-K within four business days following completion of a De-SPAC transaction. This Form 8-K is known as a “Super 8-K” and must contain all the information that would be required in a Form 10 registration statement. Thus, the “Super 8-K” is the registration statement for companies that become public reporting companies other than through a registered IPO.
In addition, stockholders of former SPACs are required to hold their equity for a period of twelve months, measured from the date of the filing of the Super 8-K, before they can rely on Rule 144 under the Securities Act. Rule 144 provides a means by which persons who might otherwise be considered “statutory underwriters” (and therefore required to register their offer of equity under the Securities Act prior to their public sale) may sell their equity without registration, typically after a six-month holding period.