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SPVs for corporate acquisitions

Special purpose acquisition companies (SPAC) appear to be the new flavour of the season in the corporate acquisitions sector. Sometimes also described as a ‘blind pool’, ‘blank-cheque’ or ‘development stage companies’, a SPAC, without any assets, revenue or operational history, raises money through an IPO, based largely on the strength of its management team, industry and geographic area focus, with the intention of merging with or acquiring an unknown company or asset in the near future. Some recent India specific SPACs include Indian Globalisation Capital Inc, Phoenix India Acquisition Corporation and Millennium India Acquisition Company.

Fashionable in the United States in the late 1980s and early ’90s, SPACs faded away because of their unpopularity with regulators. However, the last decade has seen a revival in the number of SPAC filings with the US Securities and Exchange Commission (SEC). This new wave of SPACs are largely an improvisation on the ‘blank cheque companies’ since these companies issue units that are not ‘penny stock, i.e., the stock is priced above $5. One of the other major distinctions is that most current SPACs, upon completion of its IPO, usually have tangible assets in excess of $5 million and are hence exempt from the provisions of US securities laws in general.

he organisational structures of SPACs are now fairly standard, with most of them being organised as ‘C’ corporations (a corporation whose profits are taxed separate from its owners under chapter C of the US Internal Revenue Service) under the laws of the state of Delaware.

The management team and founding shareholders make the initial investment into the company and as part of such investment, purchase for a nominal amount, common stock which is typically locked in until a few years after the proposed future acquisition.

Immediately upon incorporation, the management team appoints an investment bank to assist the SPAC raise money either through a ‘PIPE’ (private investment in public equity) transaction or otherwise. In return for the investment, the SPAC issues units priced either at $6 or the current trend of $8 per unit, consisting of one common stock and two warrants exercisable at a later date, all of which are eventually individually publicly traded.

Thus, upon conclusion of its IPO, the management would typically control 20% of the equity share capital. This 20% shareholding is usually locked-in for a specific period, usually between two to three years after the proposed acquisition that the SPAC hopes to consummate and 80% would be with the public shareholders.

Once the IPO is completed, SPACs normally deposit up to 90% of the IPO proceeds (net of expenses) into a trust, to be used as consideration for the acquisition of a target company or distributed to the public shareholders if an acquisition is not affected within a stipulated time, and the SPAC is liquidated.

First Published in the Economic Times on October 13, 2007

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