On Tuesday, March 23, 2021 Freshfields’ Ethan Klingsberg joined reporter Leslie Picker on CNBC’s Worldwide Exchange to discuss “SPAC-tivism.” Their conversation centered around advice that Freshfields is providing to private company clients going public through combinations with SPACs, also known as de-SPACs. Freshfields believes that these companies will be at heightened risk of being targets of shareholder activism in the coming years, and therefore is now at the forefront of using creative structuring to assure these companies have the right defenses in place upon the completion of their de-SPACs. As Klingsberg explained, factors such as the public disclosure of internal, long-term financial projections during de-SPAC processes—which do not occur during IPOs—are contributing to the vulnerability of these companies to activist activity following their de-SPACs.
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Alternatively, an abridged transcript of the conversation is as follows:
Leslie Picker, CNBC: One area that there hasn’t been a lot of popularity in recently is traditional shareholder activism. This is buying stock in companies and pushing for management to make changes. Instead, these hedge fund managers are finding opportunities in SPACs. They’ve raised their own SPACs, invested in SPAC merger financing through PIPEs, or SPAC stock and warrants through the public markets. But industry experts say that the SPAC boom over the long run will create billions of dollars worth of traditional activism opportunities.
Ethan Klingsberg, Freshfields: We’re going to have these newly public companies with five years of projections that they have to live up to, and that is a dream come true for activists—because we are going to have all these expectations, and every time there is a misstep or stumble over the next few years the activists are going to come in and say, “you should’ve been cutting costs more, you should put in a new management team, you don’t have the right board of directors.”
Leslie Picker, CNBC: So just to clarify, unlike IPOs, when a company goes public via SPAC they will actually share several years worth of financial projections. Meaning the types of detail that would be included in a regular way merger are often disclosed in conjunction with a SPAC merger, as well. This can set high standards—which, if unmet and the stock falls, could provide low hanging fruit for activists. We are already seeing a derivation of this phenomenon with the wave of short sellers that have been targeting recent SPAC mergers. Freshfields’ Klingsberg says he is urging his clients to start employing defense structures now to fend off a wave of activism later. These can include SPACs with classified boards and multiple classes of stock.
Brian Sullivan, CNBC: Is there any sign, Leslie, that the SPAC craze is slowing down?
Leslie Picker, CNBC: I don’t see any sign that it is slowing down, but we are seeing a pull forward effect. I was told that if the SEC could process the number of filings that were supposed to be coming out right now, or that there was demand to be listing right now, there would be multiples more SPACs than we are seeing. Part of that is this idea that people want to get them out before things do fall off a cliff. We are starting to see some cracks show in what I mentioned with regard to short sellers and some SPACs selling off in the public markets. People are like: “ok I’m seeing some danger on the horizon for this very lucrative market, I’m going to go now rather than wait until the end of the year.”
