February 2, 2024

Going Private: Structural Complexities for SPACs

I think it’s fair to say that the bloom is off the rose for a whole bunch of SPACs, and many of those companies may be contemplating the viability of a take private deal.  This O’Melveny memo is directed at those companies, and reviews the fiduciary duty, regulatory, financing and structural issues associated with take private transactions.  This excerpt points out that when it comes to deciding between a one-step merger and a two-step transaction with a front-end tender offer, SPACs may need to sacrifice the speed of a tender offer in order to ensure the rollover equity they’ll need post-closing:

While a two-step merger may be completed more quickly than a one-step merger, parties may be sacrificing flexibility for speed if they choose the former. Two-step mergers must comply with specific tender offer rules that do not apply to one-step mergers, such as the “best price rule.” The best price rule generally requires that, subject to certain exceptions, the consideration offered to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder in the tender offer. In a two-step merger, the transaction parties may also lose some flexibility as it relates to the amount and the form of transaction consideration.

For post-SPAC companies in particular, the acquiror will likely want company management to “roll” some or all of its equity in the public company into the new private company, as opposed to cashing out its equity for the deal consideration. The securities in the new private company that company management receives could be viewed as additional or different consideration compared to what public stockholders receive in the tender offer. To address this risk, company management typically commits not to tender in the offer itself but to roll all of its equity only after the completion of the tender offer but before the second-step merger’s completion.

The memo goes on to point out that in order to address this issue, some two-step transactions require executives participating in the rollover to sign agreements under which they agree to refrain from tendering their shares, but these have been challenged by plaintiffs. Claims targeting these arrangements – regardless of their merits – could still present significant distractions and may even disrupt the deal itself.

Shameless plug: As we roll into proxy season, don’t forget to check out our annual “Activist Profiles & Playbooks” webcast next Tuesday at 2 pm eastern!

John Jenkins