In light of the current financial crisis and the resulting dearth of exit opportunities for private equity and hedge funds investments, merger with a U.S. listed “special purpose acquisition company” (SPAC) has gained legitimacy and popularity as a viable exit event for portfolio companies of private equity and hedge funds, particularly for companies in China.
Due to their structure and listing requirements, SPACs generally have a limited time in which to complete their intended acquisition or they are liquidated and dissolved. Typically, that life span is between 24 to 36 months.
Currently, many SPACs are bumping up against their time limit because of the challenges in closing a SPAC business combination in this economic climate. In recent years, there have been attempts to extend the time limits of certain SPACs. Between January 1, 2007 and March 15, 2009, at least 31 SPACs filed proxy statements with the SEC to solicit shareholder approval for extending their time limits. This extension requires the SPAC to jump through certain rather complicated hoops. Target companies should be aware of the legal consequences to the SPAC for seeking such an extension since they will most likely be in control of the SPAC once the merger transaction is completed.
In general, when dealing with a U.S. incorporated SPAC, the target company should consider issues related to 4 main areas – limitations in the SPAC’s charter documents, the securities law liabilities for prior disclosure, contractual obligations related to the SPAC’s termination and the risks related to business uncertainty for deal completion. There are ways to solve all of these issues, depending on the risk tolerance of the target company. Most of these issues may not be obvious during the negotiations of the merger agreement. However, the target company would be strongly advised to negotiate solutions to these issues as part of the merger agreement to preserve its negotiation leverage with the SPAC sponsors.