Typical Capital Structure of a SPAC
- Public securities, offered in the IPO are units typically priced at USD 10.00 (in US) or EUR 10.00 (in Europe) per unit, consisting of one share of “Class A” common stock (public shares) and a (fraction of a) warrant, which is typcially detachable and trades separately, redeemable at the option of the SPAC. Both the public shares and the public warrants are (separately) listed and tradeable as part of the IPO.
- Public warrants, the exercise price of which usually fixed at 10% to 15% above the IPO unit price. Public shareholders may typically keep their warrants even after redeeming their public shares inconnection with the de-SPAC process.
- Sponsor shares, automatically convert (fully or partly) into public shares at De-SPAC process closing.
- Sponsor warrants, which are typically not redeemable.
Regarding De-SPAC transactions, i.e., the identification and (indirect) listing of suitable target companies, two trends can currently be observed: US SPACs look more and more to the European market when searching for target companies. In addition, as the SPAC trend has arrived in Europe and Germany, various De-SPAC processed among European/German SPACs and European/German targets are currently being prepared. As the overall (direct and indirect, including post-listing) transaction costs in the US are generally higher than the cost for De-SPACing and listing in a European country, e.g. Germany, and the US post-listing disclosure requirements and overall liability regimes are much stricter than in Europe, target companies will need to evaluate if they prefer a De-SPACing in the US or in Europe. Such evaluation will often depend on the industry the target is active in as we still see more attractive pricing and much higher liquidity on US stock markets (in particular, for tech companies). In addition, pros and cons of De-SPACing vs. a traditional IPO will need to be considered.
Once a target has been identified for acquisition, the De-SPAC process begins with signing of a letter of intent or similar agreement which typically also includes exclusivity arrangements. In parallel to due diligence and “IPO readiness” preparations, a business combination agreement (BCA) and several ancillary agreements will need to be negotiated. After signing ofthe BCA, the deal will be marketed to current SPAC shareholders and new investors, often combined with a pre-signing PIPE financing and market sounding exercise. The disclosure obligations with regard to the BCA may differ materially in Europe and the US depending on the transaction structure (e.g., cash or share issuance; merger). In addition, the disclosure of forward-looking statements during the marketing and (prospectus) disclosure process is typically more restricted in Europe as compared to the US. As we will likely see more and more De-SPAC transactions in Europe and Germany over the next months, legal grounds for disclosure obligations in connection with the BCA between a SPAC and target company will become clearer.