Transactions involving SPACs, or special purpose acquisition companies, are back in fashion. While SPAC transaction activity is not nearly as high as during the SPAC boom of 2020-2022, today’s SPAC transactions are more disciplined.

A SPAC is a shell company formed for the purpose of merging with a private operating company. The SPAC raises capital and becomes a publicly traded entity through an initial public offering (SPAC IPO). Following the SPAC IPO, a private target company must be promptly identified and the parties must execute a business combination agreement within 18-24 months of the IPO date. The process of merging the private target company with the SPAC in order to take the private company public is referred to as the de-SPAC transaction. If a merger is not successfully completed within the required timeline, the SPAC must liquidate and funds must be returned to investors.

This article will highlight the key components of the business combination agreement entered into between a publicly listed SPAC entity and a private operating company. The business combination agreement outlines the merger structure and valuation of the target company. It also contains a number of representations, covenants, and closing conditions.

The de-SPAC transaction is often structured as a reverse triangular merger, whereby a subsidiary of the SPAC will merge with and into the target company. The target company survives the merger as a subsidiary of the publicly traded SPAC entity. The consideration paid to the target company is usually in the form of cash and newly issued shares in the combined company.

The target company and the SPAC entity must make representations regarding their compliance with laws and financial condition. Since the private target company is an operating business, it typically makes representations with respect to its business licenses, intellectual property, material contracts, property ownership, and other aspects of its business functions.

Many of the covenants in the business combination agreement are intended to encourage the parties to make reasonable efforts to consummate the merger. There may be an exclusive dealing covenant, prohibiting the parties from soliciting a merger proposal from a third party.

Typical closing conditions to the merger include obtaining clearance from the Securities and Exchange Commission (SEC) and other necessary regulatory approvals. The consummation of the merger is also contingent on obtaining shareholder approval from shareholders of both the SPAC entity and the target company. In addition, the SPAC may be required to have a minimum amount of cash available in order for the transaction to close.

The SPAC entity is often incorporated in the Cayman Islands for tax and regulatory purposes. Prior to the consummation of the merger, the SPAC entity may be required to “domesticate” into an entity incorporated in the United States.

In order to raise additional capital for the de-SPAC transaction, the SPAC may initiate a private investment in public equity (PIPE) deal. This enables the SPAC to raise funds from private investors. Institutional and accredited investors will commit to purchase shares in the combined company at closing. This arrangement is memorialized in a PIPE securities purchase agreement, which is executed substantially concurrently with the execution of the business combination agreement.