– 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).

Jim Moloney of Gibson Dunn notes: Yesterday, the SEC’s Division of Corporation Finance posted this no-action letter granted to Retalix. In this case, we have a cross-border tender offer transaction involving a bidding group that is making a “partial offer” for the ordinary shares of an Israeli company (target). The offer is structured as one offer designed to comply with both U.S. and Israeli securities laws.

The incoming no-action letter describes the level of U.S. ownership in the Israeli target as less than 40% (i.e., Tier II). In this case the bidding group only seeks to increase its total ownership by 5% to bring their total ownership slightly below 20%. Under the applicable Israeli securities laws a bidder is required to hold its offer open for an additional 4 business days (the additional offering period), without withdrawal rights once all conditions are satisfied and the initial offer expires.

Normally, such an additional offering period would be viewed as a “subsequent offering period” that is permitted under Rule 14d-11. However, Rule 14d-11 requires that the tender offer be for “any and all” outstanding securities. In this case, the offer is a partial one and the bidding group is seeking an additional 5% only. The SEC granted the requested exemption from Rule 14d-7(a)(1) which requires bidders to provide withdrawal rights during the entire offering period to provide for a four day additional offering period without withdrawal rights.

Last month, The Deal ran this interesting article entitled “Change comes to Chancery.” Sounds like the four out of five of the justices – Chandler, Lamb, Strine and Parsons – may be moving on this year. With big regulatory reform likely coming out of Washington, these changes in Delaware really will make this a big year of change!

With our “Implementing the New Cross-Border Rules” webcast coming up, I thought it was worth repeating this survey summary issued as part of yesterday’s “Directors & Boards” e-Briefing:

The financial and economic crisis may spur large and potentially transformational acquisitions that could radically alter the corporate landscape, according to a survey of more than 160 CEOs and senior managers of publicly listed companies in Europe – believed to be the first study of its kind.

Conducted by UBS Investment Bank and The Boston Consulting Group (BCG) during one of the most challenging financial periods in living memory–within six weeks of the collapse of Lehman Brothers – the UBS-BCG CEO/Senior Management M&A Survey reveals a remarkably resilient attitude to mergers and acquisitions given the current capital market constraints and economic outlook.

Nevertheless, it won’t be easy for companies to realize the undoubted opportunities that the current crisis presents. More than half of the firms surveyed face internal and external obstacles to executing a larger deal, including the need to focus on profitability, rather than growth, as well as funding limitations.

Key findings from the survey include:

– Nearly one third of firms (29 percent) expect to make a sizable acquisition over the next year and 21 percent of companies intend to make a large transaction.
– More significantly, 43 percent of companies believe there will be deals that will transform the shape of their respective industries, echoing the experiences of previous crises such as the 1930s and 1970s.
– In addition, 58 percent of firms expect the number of restructuring transactions to increase, potentially leading to a substantial rise in the number of divestitures and closures of business units.
– 73 percent of companies have either stuck to their M&A plans (51 percent) or increased their level of planned deal activity (22 percent) over the last 12 months.
– Only 15 percent of firms believe it is too risky to do an M&A at the moment.

From Womble Carlyle:

The Antitrust Division (“AD”) of the Department of Justice recently issued revised model conditional leniency letters for companies seeking to avoid criminal prosecution for antitrust violations in the wake of a U.S. Court of Appeals decision to dismiss an indictment against a company the AD removed from the Leniency Program. The AD has now made it easier to revoke a company’s amnesty if it determines that there was a significant gap in time between when the company first discovered the anticompetitive activity and when it ultimately terminated its involvement in the alleged antitrust scheme.

The Stolt-Nielsen Case

Stolt-Nielsen Transportation Group, Ltd., an international shipping company, disclosed to the AD its involvement in an illegal market-division plan and obtained an amnesty agreement for all of its behavior prior to the date of the agreement. After conducting its own investigation, however, the AD alleged that Stolt-Nielsen continued to engage in the customer-allocation conspiracy months after the scheme was first discovered by the company’s general counsel.

For the first time in the leniency program’s thirty-year history, the AD revoked Stolt-Nielsen’s amnesty and indicted Stolt-Nielsen and its two subsidiaries (even after a federal district court had ruled that Stolt-Nielsen substantially performed its end of the amnesty agreement). After the Court of Appeals for the Third Circuit had ruled that the lower court could not enjoin the AD from issuing an indictment, on remand Stolt still succeeded in securing dismissal of the indictment on breach-of-contract grounds.

The DOJ’s Leniency Program After Stolt-Nielsen

The three fundamental aspects of the leniency program are not affected by the AD’s recent revisions to the conditional leniency letter: (1) amnesty is automatic if there is no pre-existing investigation; (2) amnesty may still be available even if cooperation begins after the DOJ’s investigation is underway; and (3) all officers, directors, and employees who cooperate are protected from criminal prosecution.

By the addition of footnote two to the model conditional leniency letter, however, the AD has effectively shifted the burden to the company seeking amnesty to prove that it promptly terminated the anticompetitive activity after the company’s general counsel or board of directors discovers the activity.

Because the AD grants amnesty only to the first company that reports the illegal activity, the revised leniency policy now provides a marker system to compensate for the tension between being the first to disclose and the necessity of approaching the AD with freshly cleaned hands. Under this approach, the AD will hold a leniency applicant’s place in the front of the line for a finite period in order for the applicant to perform the due diligence necessary to perfect its application.

Being the second to disclose can – and has – cost companies tens of millions of dollars and resulted in prison sentences for their top executives. A “reform first, repent later” approach can therefore be extremely counter-productive. Timing is thus more important than ever under the AD’s revised leniency program.