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This Debevoise memo takes a look at the SPAC recently launched by Bill Ackman’s Pershing Square Capital, and notes that in addition to being the largest SPAC IPO of all time ($4 billion), the terms of the deal differ from those found in the typical SPAC template. Here’s an excerpt addressing some of those deviations:

– No Founder Shares. In a striking deviation from customary terms, Pershing Square is foregoing the typical 20% “promote”, consisting of founder shares provided to the sponsor for nominal consideration. Instead, Pershing Square will purchase warrants, at their fair market value, that are not transferrable or exercisable until three years after the closing of the initial business combination. Typically, sponsor warrants are exercisable 30 days after closing of the initial business combination. The Pershing Square Tontine warrants may represent only 5.95% of the post-business combination company and are only exercisable at a 20% premium.

This structure is less dilutive to stockholders than the typical founder share structure and, according to the prospectus, Pershing Square believes “this incentive structure is better aligned with our stockholders and potential merger partners.” However, it is important to note that Pershing Square holds 100 shares of Class B common stock (as opposed to the Class A shares offered in the IPO), with each share of Class B common stock carrying a number of votes such that, in the aggregate, the 100 shares of Class B common stock held by the sponsor have the voting power of 20% of the issued and outstanding common stock of Pershing Square Tontine immediately following the IPO.

– Non-detachable Warrants. In another significant departure from typical SPAC structure, an investor that elects to redeem its shares in response to the acquisition transaction entered into by the SPAC must also give up 2/3 of the warrants the investor received along with its SPAC shares. Traditionally, an investor kept all of its warrants if it redeemed its shares, leading to arbitrage opportunities for investors who could redeem their shares, recouping their original investment, and hold onto their warrants. This type of arbitrage opportunity still exists with Pershing Square Tontine, but its attractiveness is significantly diminished by the reduced number of warrants a redeeming stockholder will hold.

–  “Tontine” Warrants. Pershing Square Tontine provides an additional incentive to stockholders to not redeem their shares in connection with the SPACS’s initial business combination. Not only do redeeming shareholders lose their warrants, but all warrants received by the company from redeeming shareholders will be put into a pool to be distributed pro rata to the shareholders who do not redeem their shares. The name “Tontine” is a reference to a 17th century investment plan into which investors contributed capital in exchange for their pro rata shares of an annuity payment, with each surviving investor’s share of the payment increasing as other investors died. Like the 17th century investment plan, this structure rewards those who remain.

The memo notes that there has generally been little variation in standard SPAC terms, but the Pershing Square deal appears to have engaged in a “major rewrite” of those terms that seems to have “turned the market on its head overnight.”  These changes, which were intended to better align the interests of founders with those of investors, were favorably received by the market. Pershing Square’s SPAC closed up 6.5% on its first day of trading, and its shares traded as high as 9% above the IPO price that day.

– John Jenkins