On March 22, 2022, the U.S. Securities and Exchange Commission (the “SEC”) published a new compliance and disclosure interpretation (“C&DI”) that provided guidance as to when and how a SPAC sponsor or its affiliates may repurchase SPAC shares during the pendency of a redemption offer prior to the SPAC shareholder meeting to approve a business combination.
Background
All SPACs commit that, in connection with consummation of their initial business combination, they will allow their public shareholders to redeem their shares for a pro rata portion of the funds held in the trust account. Most SPACs must seek shareholder approval to consummate their initial business combination (in order to, among other things, authorize the issuance of 20% or more of their outstanding shares in the transaction). SPACs that seek a shareholder vote to approve the initial business combination usually include their redemption offer within their proxy materials.
In certain de-SPAC transactions, SPAC sponsors explore methods to repurchase SPAC shares during the pendency of the redemption offer. Shares repurchased by the SPAC sponsor are not redeemed (and the pro rata portion of the trust funds attributable to such shares remains available in the trust account). SPAC sponsors may seek to affect (or facilitate) repurchases of SPAC shares if they anticipate a high level of redemptions and are concerned about satisfying a minimum cash condition in the business combination agreement.
The SEC has in the past indicated that a redemption offer may be viewed as a tender offer. The tender offer rules include a provision (Rule 14e-5) which, subject to limited exceptions, prohibits an offeror or its affiliates from repurchasing the class of securities tendered for outside of the pending tender offer. This has raised questions as to whether and how a SPAC sponsor could repurchase SPAC shares.
The new C&DI provides the SEC’s view as to the conditions that must be satisfied for a SPAC sponsor or its affiliates to repurchase SPAC shares during the pendency of a redemption offer.
Conditions
The C&DI states that if the SPAC redemption offer constitutes a tender offer, the prohibitions on purchases outside the offer under Rule 14e-5 by the SPAC and its affiliates apply. However, the SEC will not object to purchases outside the redemption offer by the SPAC sponsor and its affiliates if the following conditions are met:
- the registration statement or the proxy statement filed for the business combination must disclose the possibility that the SPAC sponsor or its affiliates will purchase the SPAC securities outside of the redemption offer, along with the purpose of these purchases;
- the purchases of the SPAC securities will not be made by the SPAC sponsor or its affiliates at a higher price than the price offered through the SPAC redemption process;
- the registration statement or proxy statement filed for the business combination must include a representation that any SPAC securities purchased by the SPAC sponsor or its affiliates would not be voted in favor of approving the business combination;
- the SPAC sponsor and its affiliates do not possess redemption rights with respect to the SPAC securities purchased, or if they possess such redemption rights, such rights are waived; and
- the SPAC must file a Form 8-K prior to its shareholder meeting to approve the business combination, disclosing:
- the total amount of SPAC securities purchased outside of the redemption offer by the SPAC sponsor and its affiliates, and the purchase price;
- the purpose of the purchases;
- the impact, if any, of the purchases made by the SPAC sponsor or its affiliate have on the likelihood that business combination transaction is approved;
- the identities of SPAC security holders who sold to the SPAC sponsor or its affiliates (if not purchased on the open market) or the nature of SPAC security holders (e.g., 5% security holders) who sold to the SPAC sponsor or its affiliates; and
- the number of SPAC securities for which the SPAC has received redemption requests pursuant to the redemption offer.
Takeaways
- Price limitation: Capping the price a SPAC sponsor or its affiliates may pay to repurchase shares at the redemption price will reduce the universe of potential shareholders interested in selling their shares outside the redemption offer.
- Significant features of the pre-shareholder meeting 8-K: The new 8-K requirement will cause SPACs and their sponsors to provide greater transparency to public shareholders in a few key areas.
- Disclosing the number of redemption requests prior to the shareholder meeting will provide public shareholders with a better view of the post-closing company’s cash position (and thus on its ultimate valuation) prior to the vote to approve the deal.
- Disclosing the number of shares repurchased by the SPAC sponsor and its affiliates will indicate the support that SPAC insiders are providing to get a deal “over the finish line.”
- The nature of this support will be apparent as a result of the requirements to disclose the purpose of any such purchases, as well as the impact such purchases have on consummation of the transaction.
