Last week, the largest ever special-purpose acquisition company, or SPAC, made its debut on the New York Stock Exchange. The SPAC, known as Pershing Square Tontine Holdings, or Tontine Holdings, is sponsored by activist investor Bill Ackman and completed an offering of 200 million units at $20 each, raising $4 billion in proceeds for a future business combination. Additionally, Mr. Ackman’s hedge fund, Pershing Square Capital Management L.P., committed to invest at least an additional $1 billion (and at its option up to $3 billion), setting up Tontine Holdings to target, as it disclosed in its IPO prospectus, a “mature unicorn.”
SPACs are publicly listed blank check companies that raise capital in public markets for the purpose of eventually consummating a business combination with one or more operating companies and taking that company public. Compared to traditional IPOs, SPACs provide an alternate path for companies to raise capital and go public but the SPAC model can pose unique considerations for target companies, including questions about the amount of funds that will be retained in the SPAC’s trust account at closing after giving effect to shareholder redemptions as well as the SPAC economics benefiting SPAC sponsors. Tontine Holdings appears to rewrite traditional SPAC terms with several unique features that directly address these issues, helping to narrow the economic and incentive gaps that in some cases have caused difficulty for SPACs and their counterparties in structuring and consummating a business combination.
- “Tontine” Public Warrants. The most dramatic feature of Tontine Holdings consists of the warrant structure offered to investors in the SPAC. Historically, SPACs have issued units consisting of (i) one share of common stock and (ii) one half or one third of a warrant to purchase common stock at a later date. Shortly following the IPO, the shares and warrants detach and trade separately. Typically the units are sold for $10.00 per unit, the warrants are exercisable at $11.50 per share and the investor owns all of the warrants that are part of the unit upon purchase. In contrast, Tontine Holdings offered units priced at $20.00 per unit, and each unit consisted of (i) one share of common stock, (ii) one-ninth of a redeemable warrant, exercisable at $23.00 per share, and (iii) contingent rights to acquire two-ninths of a warrant, exercisable at $23.00 per share, provided that investors do not redeem their units prior to the business combination. All forfeited warrants from redeeming shareholders will be distributed pro rata to the shareholders who remain in Tontine Holdings at the time of the SPAC’s business combination.
This feature – where investors lose warrants if they redeem their shares — deviates from traditional SPAC practice and is designed to encourage long-term investment in the SPAC, thereby providing deal certainty for the SPAC and target companies that the SPAC will have sufficient cash in its trust account in order to consummate a business combination. “Tontine” is a reference to a 17th century investment plan where investors contributed capital in exchange for annuity payments, which increased for the surviving investors upon the death of the other plan participants. Likewise, investors who remain in the SPAC are entitled to additional warrants, which creates incentives for investors not to redeem their shares, leading to greater deal certainty for any business combination.
- No Sponsor Shares. Another significant departure from historic SPAC terms is the lack of a sponsor “promote” (sponsor shares). Sponsors typically receive shares representing 20% of the SPAC’s common shares for nominal consideration (usually $25,000). The promote can create a windfall for sponsors and, in some business combinations, the sponsor’s shares may be forfeited back to the SPAC, subject to an earnout, or even transferred to other investors. Unlike virtually all other SPACs in the market, Tontine Holdings’ sponsor did not receive any shares of the SPAC – there is no promote – so that the sponsor’s entire economics relies on the warrants it purchased.
- Unique Sponsor Warrant Terms. The SPAC’s sponsor warrant structure also deviates from SPAC market standard and aligns the sponsor’s interest with the public shareholders as a long-term investor. In particular:
- Typically SPAC sponsors purchase warrants for $1.00 per warrant. Tontine Holdings’s sponsor bought warrants for their fair market value of $65 million.
- Typically sponsor warrants are exercisable for a significant percentage of the outstanding common shares (sometimes up to 25% of the shares of the SPAC at the time of its IPO). Tontine Holdings’s sponsor warrants will only be exercisable for 5.95% of the resulting company on a fully diluted basis (with another 0.26% reserved for the independent SPAC directors).
- Typically sponsor warrants are exercisable at a price of $11.50. Tontine Holdings’s sponsor warrants are exercisable at a price of $24.00 (the equivalent of $12.00 for a normal $10 unit).
- Typically sponsor warrants are exercisable and transferable shortly after the closing of the business combination. Tontine Holdings’s sponsor cannot exercise or transfer the warrants until 3 years after the business combination.
- Typically sponsor warrants are exercisable for 5 years. The Tontine Holdings sponsor warrants are exercisable for 10 years – a logical feature given the 3-year no-transfer, no-exercise provision.
As a result of all of these features, the sponsor will not collect any compensation until at least the third anniversary of the business combination and only after a 20% increase in the share price (given the $24 exercise price with units initially sold for $20/unit). Overall, the sponsor’s compensation is structured to be significantly less dilutive to shareholders of the resulting company than the standard SPAC.
- Sponsor’s Forward Commitment. Another feature that sets Tontine Holdings apart from most other SPACs is that various affiliates of the sponsor have committed, pursuant to a forward purchase agreement, to purchase at or prior to the closing of the SPAC’s business combination an additional $1 billion (and at their option up to $3 billion) of units at $20.00 per unit, with such units consisting of one common share and one-third of one warrant. Additionally, certain independent directors have committed to purchase an aggregate of $6 million of such units. As a result of such purchase commitments, Tontine Holdings aims to raise, at a minimum, at least $5 billion in capital, subject to share redemptions. While most SPACs line up PIPE commitments, and in some cases the SPAC sponsor is part of the initial commitment, the forward commitment here is unusual both because of the sponsor’s significant commitment as well as the size of the committed financing.
- Time Period to Complete Acquisition. Time kills all deals, but SPACs have the additional limitation of a finite window to complete a transaction before it must wind up and return the funds in trust to its shareholders. Most SPAC charters prescribe that an initial business combination must be completed within twenty-four months of the IPO closing date or else the SPAC trust account is liquidated and the proceeds returned to investors. SPACs have the option to extend such completion deadline if shareholders approve of an extension pursuant to an amendment to the SPAC charter but, in connection with such extension, SPACs must offer shareholders a redemption right. Like its predecessors, Tontine Holdings has twenty-four months to complete an initial business combination; however, such deadline is automatically extended to thirty months if there is a signed letter of intent or definitive agreement within twenty-four months from the IPO closing. By pre-structuring in an extension, there is less concern that SPAC shareholders will redeem their shares if a deal takes longer than twenty-four months to complete.
In a year when SPAC transactions have seen increased prominence and account for some of the most high-profile public listings, Bill Ackman’s SPAC certainly breaks the mold. It creates new incentives to shareholders not to redeem their shares in connection with a business combination, and it creates different and more long-term economics for the SPAC’s sponsor. Tontine Holdings differs in some other smaller ways as well from typical SPACs, for example in not having the typical underwriters’ overallotment option, and not listing the units when they separate into shares and warrants. Whether or not other SPACs adopt the unique features of Tontine Holdings remains to be seen, and it will be interesting to see if the features of Tontine Holdings work as intended in facilitating a business combination. But if history has taught us anything, it is this simple fact - betting against Bill Ackman is usually a fool’s gambit.