July 30, 2020

SPAC Acquisitions: Key Considerations for Targets

SPACs are definitely having a moment, and the current boom in SPAC IPOs will likely be followed by a boom in “De-SPAC” acquisition transactions – or at least that’s what people hope.  SPAC deals are cross between an IPO & a merger, and this Freshfields blog reminds potential targets considering a deal with a SPAC have plenty to think about. Here’s an excerpt addressing the minimum cash condition:

What is the minimum amount of cash the SPAC must have at closing after giving effect to any possible redemptions? Because SPAC mergers are generally viewed, at least in part, as capital raising events, one of the principal issues for a target company in evaluating a business combination with a SPAC is the amount of cash that will be available in the SPAC’s trust account (where it is required to preserve substantially all of the cash raised in its IPO), less cash used for shareholder redemptions, upon closing of the transaction.

Because SPAC shareholders have the right at closing to redeem any or all of their shares for cash, even if they vote to approve the transaction, it is never certain how much cash will remain in the SPAC’s trust account at closing. In order to protect a target company against this risk, the business combination agreement may include as a condition that a certain amount of cash must remain on the SPAC’s balance sheet at closing after giving effect to all redemptions. Typically, this includes cash raised in the SPAC’s IPO as well as additional cash the SPAC raises in connection with the business combination.

There’s plenty more where that came from – a total of 20 considerations for potential sellers to keep in mind before agreeing to a deal with a SPAC.

John Jenkins