January 12, 2009

Hedge Fund Activism Extends to SPACs

– by Ted Wallace, Director of Research, The Altman Group

A Special Purpose Acquisition Company (SPAC) is a publicly traded shell (or blank check) company formed for the specific purpose of buying an existing company through, usually in a particular industry. At the IPO, investors purchase units of the SPAC, consisting of a combination of shares and warrants, at a relatively low price. The SPAC then generally has 24 months to find a suitable company to purchase through a reverse-merger.

So how would a hedge fund become the target of hedge fund activism? Ask TM Entertainment & Media, Inc. (AMEX: TMI). This SPAC must complete an acquisition before October 17, 2009 or its “corporate existence will cease by operation of law” and its funds and assets will be distributed among its shareholders. This, however, is apparently too long to wait for Phil Goldstein of Bulldog Investors.

On December 17th, Goldstein (d/b/a Opportunity Partners LP) filed preliminary proxy materials to commence a consent solicitation to replace the board of directors with his nominees, who will “promptly dissolve the issuer and cause the cash in the trust account to be distributed to shareholders.” A consent solicitation gives Goldstein the opportunity to end this quickly: in order for his proposals to be deemed “passed” and his directors elected, Goldstein needs the consents of 50% of TMI’s shareholders. Opportunity Partners owns 18.52% of the shares.

Utilizing the ability to act by written consent is different from a “standard” proxy contest. A consent solicitation allows Goldstein to control the timeline: once he has the consents of 50% of TMI’s shareholders, the solicitation is over and his proposals pass. This is balanced, though, by the higher threshold of required votes. Goldstein must acquire the consents of 50% of the outstanding shares, rather than a plurality for each director.

TMI’s management states in its preliminary consent revocation materials that it believes that an acquisition transaction can be completed by October 17, 2009; it cites examples of other SPACs that have recently done so – despite poor market conditions. TMI also states that liquidating early could result in lawsuits from other shareholders – they made an investment and expect TMI to stick to the terms of its incorporation. Here are TMI’s SEC filings.

The Future?

Is TMI a forerunner of a wave of forced-liquidations of SPACs? Or is this just another example for Phil Goldstein’s detractors to cite when they say that he’s only interested in his own pocketbook and doesn’t care how his actions affect value for other shareholders?

It’s obvious that Goldstein wants his money out of TMI – whether because he has better things to do with it, or because he doesn’t believe that TMI will be successful even if a merger is completed. Consent solicitations can be quick and painless or long and drawn out (under state law, Goldstein has 60 days to reach 50%).

I think this will serve as an interesting test-case: if Goldstein is successful early, it may trigger a wave of copy-cat liquidation solicitations (by other hedge funds) at other SPACs. Perhaps, though, “copy-cat” isn’t exactly the right word, because such a wave might be an indicator that Goldstein is in fact representing the feelings of other hedge fund SPAC shareholders – that while the SPAC seemed like a great investment vehicle a year ago, today’s market conditions are just too tough. Hedge funds recently hammered by the market may see this as an easy way to get their cash back.

If Goldstein’s solicitation goes the long and drawn out route, though, it may indicate the opposite – and exactly what TMI is currently saying – that even though it was a year and a half ago, the SPAC’s shareholders made an educated investment decision and expect the shell company to conform to its written mandates. A longer process may indicate more faith in the SPAC setup itself.

For more about SPACs, visit the “SPACs” Practice Area. Here are some interesting Goldstein quotes from his keynote interview at The Deal’s M&A Outlook 2009 conference.

NB: Goldstein is no stranger to the world of SPACs. He has been both an ardent promoter of the investment vehicle and an agitator in the past. In fact, because of Goldstein’s ability to take advantage of loopholes in the SPAC setup, many SPACs now incorporate a “bulldog” provision – preventing any investor (or group) holding more than 10% of the shell company to exercise conversion rights (and thus force the scuttle of an already-approved merger).