Initial public offering
Conflicts of interest
The guidance explains that conflicts of interest may arise since a SPAC’s sponsors, directors, and officers may also have fiduciary or contractual obligations to other entities and may not be working exclusively on behalf of the SPAC to identify acquisition targets. SPACs should clearly disclose any potential conflicts of interest, including describing whether any of the conflicts relating to other business activities include fiduciary or contractual obligations to other entities, how these dual obligations may affect the ability of the sponsors, directors, and officers to evaluate and present a potential business combination opportunity to the SPAC and its shareholders, as well as how any conflicts will be addressed.
Typically, a SPAC must complete a business combination transaction within a specific timeframe or it must be liquidated. CorpFin reminds SPACs that as they near the end of the specified timeframe, their available options may narrow, allowing acquisition targets significant leverage in negotiating acquisition terms. Accordingly, SPACs should consider disclosing the following information related to completing a business combination:
- Financial incentives of SPAC sponsors, directors, and officers, as well as losses that those parties might incur if the SPAC does not complete a business combination transaction
- The amount of control that the SPAC’s sponsors, directors, officers, and affiliates exercise over the approval of a business combination
- Whether and, if so, how the SPAC may amend provisions in its governing instruments or extend its timeframe to complete a business combination
- Balanced disclosure of prior SPAC experience by the sponsors, directors, officers, or affiliates
The guidance states that if the underwriter of the IPO elects to defer its compensation until the closing of the business combination transaction, the SPAC should consider disclosing (1) any additional services that the underwriter may provide, (2) whether compensation for the additional services is conditioned on the completion of the business transaction, and (3) any conflicts of interest the underwriter might experience in providing the additional services given the deferred compensation.
Generally, the economic terms of investments by the SPAC’s sponsors, directors, officers, and affiliates are different from those of the SPAC’s public shareholders. SPACs should consider disclosing the following information related to the financial incentives of their sponsors, directors, and officers:
- Securities owned, including the price paid; concurrent offerings of securities; and the difference between the price of securities previously sold and the IPO price
- Conflicts of interest as a result of securities ownership, compensation arrangements, and relationships with affiliated entities
- Compensation terms, including contingent compensation
Similarly to the economic investments, the terms of securities issued to SPAC sponsors are generally different from the terms of securities issued to the public, and may provide the sponsor with substantial control. This practice could be the same for securities sold in private offerings compared to those securities sold in the SPAC’s IPO. When a SPAC does issue such securities, it should consider disclosing (1) the terms of the securities held by its sponsors, directors, officers, and affiliates compared to the terms of the public shareholders’ securities, including the terms of any convertible debt and the risks to public shareholders; (2) whether the SPAC plans to obtain or has obtained additional funding and how the securities will differ; and (3) the terms of a forward purchase agreement and its impact on other shareholders.