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Incentive Structure of Special Purpose Acquisition Companies

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Abstract

Special Purpose Acquisition Companies (‘SPACs’) are shell companies that are set up with the purpose of raising financing from capital markets in order to acquire and/or merge with a business. Although the idea behind SPACs is similar to private equity funds, their financing and investment methods, investor safeguards and incentive structures differ considerably. This article explains the distinctive features of SPACs and discusses the SPAC incentive structure especially with regard to management compensation schemes and value dilution problems affecting investors.

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Notes

  1. A blank check company is ‘a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person’ and ‘issues penny stock’, Rule 419 of the US Securities and Exchange Commission (‘SEC’) issued under the Securities Act of 1933, as amended (17 CFR § 230.419). In the 1980s, blank check companies were used for fraudulent and manipulative purposes and caused big scandals, some of which even got reflected in Hollywood films such as the Wolf of Wall Street (2013). In response to the scandals, blank check companies were regulated by Rule 419 of the SEC (17 CFR § 230.419). As SPACs do not issue penny stock, they are technically not covered by the definition of ‘blank check company’. However, blank check companies are seen as forerunners of modern day SPACs, since SPACs have voluntarily adopted many features of Rule 419, such as the trust account, conversion and liquidation rights. See Castelli (2009), pp 237–275.

  2. Lakicevic and Vulanovic (2013), p 384.

  3. Source: www.spacanalytics.com (Accessed on 19 August 2016).

  4. Rodrigues and Stegemoller (2014), p 918.

  5. See, for example the following SPAC offerings from 2016: CF Corporation (Prospectus Registration No. 333-210854); Conyers Park Acquisition Corp. (Prospectus Registration No. 333-212133); KLR Energy Acquisition Corp. (Prospectus Registration No. 333-209041); Landcadia Holdings, Inc. (Prospectus Registration No. 333-210980); MIII Acquisition Corp. (Prospectus Registration No. 333-210817).

  6. Berger (2008), p 71.

  7. According to a study of 152 SPACs which went public between 2003 and 2008, the average institutional ownership per SPAC is 35.3%, of which 3.3% are banks, 0.1% are insurance companies, 0.3% are investment companies, 9.6% are investment advisors and 86.7% are others, including mostly hedge funds. Lewellen (2009), p 35. Similarly, Dimitrova finds that institutional investors, typically represented by hedge funds have an average ownership stake of about 29% in the merged entity. Dimitrova (2016), p 13.

  8. Boyer and Baigent (2008), p 8.

  9. Boyer and Baigent (2008), pp 9–10; Lewellen (2009), pp 3-7; Datar et al. (2012), p 19.

  10. Lewellen (2009), pp 3–7; Floros and Sapp (2011), p 865. For example, American Apparel, a fashion products company, was able to go public through a merger with Endeavor Acquisition Corp, when otherwise it may have had difficulties to achieve a traditional IPO due to loan repayment problems caused by some new investments. See case study on Endeavor Acquisition Corp’s Acquisition of American Apparel in Berger (2008), p 71.

  11. Definition of ‘business combination’ as used in the NYSE Listing Standards Sec. 102.06.

  12. The business combination may or may not be submitted to shareholder vote. The types of control that shareholders have on the business combination is discussed below under ‘Shareholder Control’.

  13. See, for example: GP Investments Acquisition Corp, Form S1 Registration Statement as filed with the SEC on April 17, 2015: ‘We may not hold an annual meeting of shareholders to elect new directors prior to the completion of our business combination, in which case all of the current directors will continue in office until at least the completion of the business combination. If there is an annual meeting, as a consequence of our “staggered” board of directors, only a minority of the board of directors will be considered for election and our initial shareholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our initial shareholders will continue to exert control at least until the completion of our business combination.’

  14. The placement of IPO revenues into a trust account is a mandatory legal requirement for blank check companies. Although not legally required by law unless they come under the definition of blank check company, SPACs have voluntarily adopted the same method to gain investor confidence. Feldman (2006), pp 180–181. SPACs that wish to trade their shares on a regulated exchange may also have to place their IPO revenues into a trust account as a result of listing conditions. See, for example, the NYSE Listing Standards Sec. 102.06, NYSE-MKT (ex-AMEX) Listing Standards Sec. 119(a), NASDAQ Listing Rules IM-5101-2.

  15. Lakicevic et al. (2014), pp 154–155. Study based on 184 SPACs that have conducted an IPO between August 2003 and August 2012.

  16. Rodrigues and Stegemoller (2014), p 915. Feldman (2006), pp 190–191, explains that underwriters have been forced to defer some of their fees until after the completion of the business combination in an effort to convince investors that underwriters share the same goal as the investors in closing the deal. Lakicevic et al. (2014), p 155, report that on average, underwriters charge SPACs 6.88% of the IPO gross proceeds, while approximately one-third of this fee, corresponding to 2.30% of gross proceeds are deferred until after the completion of the business combination. The same study also reports that while the average deferred percentage for pre-crisis (2003–2006) SPACs was 18.55%, this figure was increased to 47.77% for SPACs that went public after the crisis.

  17. Dimitrova (2016), p 7; Lakicevic and Vulanovic (2013), p 392.

  18. For example, NYSE-MKT (ex-AMEX) Listing Standards Sec. 119(b) requires that: ‘Within 36 months of the effectiveness of its initial public offering registration statement, or such shorter period that the company specifies in its registration statement, the company must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the deposit account (excluding any deferred underwriter's fees and taxes payable on the income earned on the deposit account) at the time of the agreement to enter into the initial combination.’ The same rule is applied by NYSE (Sec. 102.06) and NASDAQ (IM-5101-2).

  19. Feldman (2006), p 188.

  20. Feldman (2006), p 190.

  21. Some mergers are not exempted from a shareholder vote. See Model Business Corporation Act (MBCA) § 11.04(b), § 11.05; Delaware General Corporation Law (DGCL) § 251(c) et seq.

  22. See NYSE Listing Standards, 102.06.

  23. The conversion right was a mandatory requirement for blank check companies under Rule 419, which SPACs voluntarily adopted and which was later also adopted by stock exchanges.

  24. The listing conditions of both NASDAQ (IM-5101-2(e) and NYSE-MKT Sec. 119(e)) require SPACs to make a tender offer and grant all shareholders the right to redeem their shares, unless the business combination is put to shareholder vote and a conversion right to dissenting shareholders is granted.

  25. NYSE Listing Standards, 102.06.

  26. DGCL § 251(c).

  27. Rodrigues and Stegemoller (2014), pp 911–912.

  28. NASDAQ and NYSE-MKT listing rules were amended in 2010 and 2011 respectively, to allow for tender offers instead of a shareholder vote on the proposed business combination. See the releases by the SEC for the NASDAQ amendment: Release No. 34-63607; File No. SR-NASDAQ-2010-137 and for NYSE-MKT amendment: Release No. 34-63752; File No. SR-NYSEAMEX-2011-04.

  29. See for example, NYSE-MKT Company Guideline, 119(d).

  30. Named after Bulldog Investors, an activist SPAC investor group. See Rodrigues and Stegemoller (2014), pp 911–912.

  31. Lakicevic and Vulanovic (2013), p 392; Rodrigues and Stegemoller (2014), pp 911–912. Lakicevic et al. (2014), p 156, report that for SPACs between 2003 and 2006, the average threshold of redeemable shares was 20.47%, while for the period between 2009 and 2012, it went up to 84.24%. Furthermore, SPACs usually place a cap of 10 or 20% on the shares that can be redeemed by any one shareholder in order to prevent the usage of the redemption right as a similar greenmailing tool. Rodrigues and Stegemoller, ibid. See, for example, Fintech Acquisition Corp. Form S1 Registration Statement as filed with the SEC on December 12, 2014: ‘We believe the restriction described above will discourage stockholders from accumulating large blocks of shares, and subsequent attempts by such holders to use their ability to redeem their shares as a means to force us or our management to purchase their shares at a significant premium to the then-current market price or on other undesirable terms. Absent this provision, a public stockholder holding an aggregate of 10.0% or more of the shares sold in this offering could threaten to exercise its redemption rights if such holder’s shares are not purchased by us or our management at a premium to the then-current market price or on other undesirable terms.’

  32. See, for example, Fintech Acquisition Corp. Form S1 Registration Statement as filed with the SEC on December 12, 2014: ‘Many blank check companies would not be able to consummate a business combination if the holders of the company’s public shares voted against a proposed business combination and elected to redeem more than a specified percentage of the shares sold in such company’s initial public offering, which percentage threshold has typically been between 19.99 and 39.99%. As a result, many blank check companies have been unable to complete business combinations because the number of shares voted against the initial business combination by their public stockholders electing to redeem shares exceeded the maximum redemption threshold pursuant to which such company could proceed with a business combination. Since we have no specified maximum percentage threshold for redemption in our amended and restated certificate of incorporation and since even those public stockholders who vote in favour of our initial business combination have the right to redeem their public shares, our structure is different in this respect from the structure that has been used by many blank check companies. This may make it easier for us to consummate our initial business combination.’

  33. Hale (2007), p 73; Jog and Sun (2007), p 15.

  34. Jenkinson and Sousa (2011), p 57; Thompson (2010), pp 6–7. In fact, SPAC registration statements include risk disclosures pointing out to this possibility. See, for example, Hydra Industries Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the Securities and Exchange Commission on October 24, 2014: ‘If we seek stockholder approval of our initial business combination, our sponsors, directors, executive officers, advisors and their affiliates may elect to purchase shares from public stockholders, which may influence a vote on a proposed business combination and reduce the public “float” of our common stock.’

  35. Studies actually show that market reaction to the announcement of the deal proposal is a better indicator of the outcome of the deal. Those targets whose announcement leads to a positive market reaction seem to be value creating while those targets that get a negative market reaction turn out to be value destroying. Jenkinson and Sousa (2011), pp 42 et seq.

  36. See, for example, the Barington/Hilco Acquisition Corp. Form S1 Registration Statement as filed with the SEC on November 13, 2014, ‘Securities Offered’: ‘Our management believes that investors in similarly structured blank check offerings, and those likely to invest in this offering, have come to expect the units of such companies to include one share of common stock and another security which would allow the holders to acquire additional shares of common stock. Without the ability to acquire such additional shares of common stock, our management believes that the investors would not be willing to purchase units in such companies’ initial public offerings.’

  37. See, for example, Arowana Inc. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on March 13, 2015. Arowana offered to the public ‘7,200,000 units, at $10.00 per unit, each unit consisting of one ordinary share, one right and one redeemable warrant’, where ‘Each right entitles the holder to receive one-tenth (1/10) of a share upon consummation of our initial business combination.’ For other similar right issues, see Barington/Hilco Acquisition Corp. Form S1 Registration Statement as filed with the SEC on November 13, 2014; CB Pharma Acquisition Corp. Form S1 Registration Statement as filed with the SEC on December 11, 2014; Hydra Industries Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the Securities and Exchange Commission on October 24, 2014. In the Barington/Hilco Acquisition Corp. offering, the company initially experimented with issuing units including only the right to receive one tenth of a share beside the common stock and omitted warrants. However, it seems that this proposal was not received favourably by potential investors, as the S1 statement was later amended to include warrants in the unit. See Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on February 4, 2015.

  38. Feldman (2006), p 187. For example, See Quinpario Acquisition Corp. 2 Registration Statement Amendment No. 3 to Form S-1 as filed with the SEC on January 8, 2015: ‘The warrants will become exercisable on the later of 30 days after the completion of an initial business combination or 12 months from the closing of this offering.’ If the business combination is completed in the first year following the IPO, then warrant holders would have to wait until the expiry of the year. If the business combination is completed in the second year following the IPO, then warrant holders would have to wait until the expiry of 30 days after the completion of the business combination. In either alternative, warrants cannot be exercised before the completion of the business combination.

  39. See, for example, 57th Street General Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on May 14, 2010: ‘The units will begin trading on or promptly after the date of this prospectus. The shares of common stock and warrants comprising the units will trade separately on the fifth business day following the earlier to occur of the expiration of the underwriters’ over-allotment option (which is 45 days from the date of this prospectus), its exercise in full or the announcement by the underwriters of their intention not to exercise all or any remaining portion of the over-allotment option.’

  40. See, for example, Information Services Group Inc. Form S1 Registration Statement as filed with the SEC on January 29, 2007, ‘Public stockholders who convert their common stock will be paid as soon as reasonably practicable their conversion price following their exercise of conversion rights and will continue to have the right to exercise any warrants they own’. Also see Barington/Hilco Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on February 4, 2015: ‘Public stockholders who convert their shares will still receive one-tenth of a share for each right held (provided that we will not issue any fractional shares to the extent that the number of rights held by a holder is not divisible by ten) and continue to have the right to exercise any warrants they may hold if the business combination is consummated.’

  41. See, for example, 57th Street General Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on May 14, 2010: ‘If we are forced to redeem or liquidate before the completion of a business transaction and distribute the trust account, our public stockholders may receive less than $10.00 per share and our warrants will expire worthless.’

  42. Feldman (2006), p 188.

  43. ‘A SPAC IPO investor essentially owns a riskless zero-coupon bond with an option on a future acquisition.’ Lewellen (2009), p 3. Also, Jenkinson and Sousa (2011), p 42; Lakicevic et al. (2014), p 164.

  44. See, for example, Arowana Inc, Form S1 Registration Statement as filed with the SEC on March 13, 2015; Barington/Hilco Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on February 4, 2015; CB Pharma Acquisition Corp. Form S1 Registration Statement as filed with the SEC on December 11, 2014.

  45. See, for example Arowana Inc. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on March 13, 2015: ‘Each right entitles the holder to receive one-tenth (1/10) of a share upon consummation of our initial business combination.’

  46. See, for example Arowana Inc. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on March 13, 2015: ‘Notwithstanding the foregoing, no additional consideration will be required to be paid to us by holders of the rights to receive the additional shares upon consummation of our business combination unlike the case with the redeemable warrants (which require the payment of additional consideration to receive the shares underlying such redeemable warrants).’

  47. See for example, Barington/Hilco Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on February 4, 2015: ‘Public stockholders who convert their shares will still receive one-tenth of a share for each right held (provided that we will not issue any fractional shares to the extent that the number of rights held by a holder is not divisible by ten) and continue to have the right to exercise any warrants they may hold if the business combination is consummated.’

  48. See, for example: Hydra Industries Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the Securities and Exchange Commission on October 24, 2014: ‘If we are unable to complete an initial business combination within the required time period and we redeem the public shares for the funds held in the trust account, holders of rights will not receive any such funds in exchange for their rights and the rights will expire worthless.’

  49. Berger (2008), p 70; Jenkinson and Sousa (2011), p 38.

  50. Lakicevic et al. (2014), p 155.

  51. Hale (2007), p 70; Jenkinson and Sousa (2011), p 39; Lakicevic and Vulanovic (2013), p 389; Boyer and Baigent (2008), p 14; Lewellen (2009), p 4.

  52. The average gross proceeds in 161 SPAC IPOs in the US between 2003 and 2009 is calculated at 126.4 million USD. Lakicevic and Vulanovic (2013), p 390. Another study by Lakicevic et al. (2014), p 155, based on 184 SPAC IPOs between 2003 and 2012 shows this figure to be 127.8 million USD. According to a study on SPAC IPOs between 2003 and 2006, management received shares at a median price of 1.4 cents, compared to a median issue price of USD 5.25, which resulted in an annualised return for management of almost 1900%. Jog and Sun (2007), pp 16–17.

  53. Berger (2008), p 70. According to one study, ‘the founders’ contribution represents 2.76 percent of total funds that a SPAC keeps in its escrow accounts’. Lakicevic and Vulanovic (2013), p 390. Another study shows that the level of financial commitment of the SPAC founders has increased over time, compared to the initial SPAC practice. See Lakicevic et al. (2014) p 156. Also see this presentation by law firm EGS specializing in SPACs, summarizing recent developments: http://www.egsllp.com/pub/files/SPACPPP2015.pdf.

  54. Berger (2008), p 70; Rodrigues and Stegemoller (2014), p 895; Riemer (2007), p 959.

  55. However, some prospectuses can provide that SPAC management can exercise their liquidation rights for shares that they may have acquired post-IPO.

  56. Berger (2008), p 71. More recent SPACs allow shares to be released earlier than 1 year after the closing of the business combination and even earlier, if the share price reaches a certain level. See, for example, Barington/Hilco Acquisition Corp. Form S-1 Registration Statement as filed with the SEC on November 13, 2014, p 3.

  57. Berger (2008), p 71.

  58. Findings indicate that ‘the continued involvement of the SPAC sponsors as shareholders and board members has an impact on the long term performance of SPAC acquisitions’ and that long-run returns may be significantly higher if one of the SPAC sponsors is appointed as a CEO of the merged company. Dimitrova (2016), pp 28–29.

  59. Feldman (2006), p 190. Dimitrova (2016) calls this phenomenon ‘The perverse incentives of SPACs’. Rodrigues and Stegemoller (2014), pp 893–894, point out that this risk is commonly mentioned in SPAC prospectuses, warning investors of a conflict of interest between the managers and shareholders that might occur when determining the terms, conditions and timing of a particular business combination. The market also seems to react negatively to SPACs that announce deals towards the end of the term. See Tran (2010) who finds that SPACs that announce their targets 15 months after the IPO (which is the median announcement time for SPACs studied) as opposed to before, exhibit lower announcement returns and that deals announced closer to the 24-month deadline are less likely to be approved by shareholders. He concludes that these results may support the concerns that time pressure coupled with the management compensation scheme might prompt the SPAC management into making unsuitable acquisitions. Tran (2010), pp 27 et seq.

  60. See, for example, 57th Street General Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the SEC on May 14, 2010: ‘Since our sponsor owns shares of our common stock and warrants which will be released from escrow if a business transaction is successfully completed and since our sponsor may own securities which will become worthless if a business transaction is not consummated, the members of our board of directors that have an interest in our sponsor may have a conflict of interest in determining whether a particular target business is appropriate to effect a business transaction.’

  61. Castelli (2009), p 259, fn. 180; Riemer (2007), p 966; Ignatyeva et al. (2013), p 64. See Rodrigues and Stegemoller (2014) for a detailed comparison of PE funds and SPACs, especially regarding management compensation.

  62. Private equity funds are usually structured as limited partnerships, with PE management as general partners and investors as limited partners. Cornelius (2011), p 19; Metrick and Yasuda (2010), p 2304; Hudson (2014), pp 9 et seq.

  63. Hudson (2014), p 11; Stoff and Braun (2014), p 66.

  64. Hudson (2014), p 26; Cornelius (2011), p 21. According to Demaria (2013), p 93, this figure is around 1.5–2.5%.

  65. Hudson (2014), pp 26 et seq.; Cornelius (2011), p 22; Stoff and Braun (2014), p 65; Demaria (2013), p 94; Metrick and Yasuda (2010), p 2311. It is estimated that the total amount of remuneration received by PE buy-out fund managers including fixed and variable fees corresponds to around 17.8% of the total investment. Metrick and Yasuda (2010), pp 2327–2328.

  66. Demaria (2013), p 94; Stoff and Braun (2014), pp 65–66. Stoff and Braun find that due to a decrease in fund returns over time, the importance of carried interest in the fee structure is decreasing while the importance of the management fee is increasing, thus raising concerns in the industry that managers may be more incentivized to increase the size of the funds rather than to work on profitability. The authors also report observing newer fund term structures with decreased management fees (0.5–1%) and higher carried interest (30%).

  67. The pre-agreed return amount, which is called the ‘hurdle rate’, is typically 8%. Hudson (2014), pp 26 et seq; Stoff and Braun (2014), p 66; Demaria (2013), p 94.

  68. Rodrigues and Stegemoller (2014), pp 893–894.

  69. Private equity funds normally have a life span of 10 years and invested companies are held for around 4–7 years before exit. See Cornelius (2011), p 19.

  70. Rodrigues and Stegemoller (2014), p 894, give the example of ‘Empeiria Acquisition Corp’. See Prospectus dated June 15, 2011, p 90. A more recent example is FinTech Acquisition Corp. See Prospectus dated February 12, 2015, p 90.

  71. Rodrigues and Stegemoller (2014), p 894.

  72. Italy1 Investment S.A. Prospectus dated 24 December 2010.

  73. Such as through share or asset sale or merger or consolidation.

  74. In the worst-case scenario, i.e. if none of the targets are reached in 5 years, this would correspond to the nominal sum of around 25,000 Euros, since the total number of sponsor shares in this company are 3.75 million, of which two-thirds would make 2.5 million shares.

  75. See the Prospectus dated 11 April 2014 of Nomad Holdings Ltd, a BVI company listed in the London Stock Exchange.

  76. See announcement released on 1 June 2015 by Nomad Foods Limited.

  77. ‘Holders of our Founder Preferred Shares are entitled to receive an annual dividend, payable in Ordinary Shares or cash, at the sole option of the Company. Provided our volume weighted average ordinary share price is above $11.50 for the last 10 trading days of the 2015, the amount of the first dividend will be equal to 20% of the increase in the market price of our Ordinary Shares over our initial public offering price of $10.00 multiplied by 140.2 million shares. In subsequent years, the annual dividend amount will be calculated based on the appreciated stock price compared to the highest price previously used in calculating the Founder Preferred Share dividends. Dividends are paid for a duration of 7 years (which may be extended by the Board), as long as Founder Preferred Shares remain outstanding. Each Founder Preferred Share is convertible into one Ordinary Share at the option of the holder.’ See Nomad Foods Limited, Investor Relations Statements.

  78. ‘In addition to providing long term capital, the Founder Preferred Shares are intended to incentivize the Founders to achieve our long-term, strategic objectives. The Founder Preferred Shares are structured to provide a dividend based on the future appreciation of the market value of the Ordinary Shares thus aligning the interests of the Founders with those of the Company’s shareholders on a long-term basis.’ See Nomad Foods Limited, Investor Relations Statements.

  79. See, for example, WL Ross Holding Corp. Form S1 Registration Statement as filed with the Securities and Exchange Commission on May 9, 2014: ‘The per-share amount we will distribute to investors who properly redeem their shares will not be reduced by the deferred underwriting commissions we will pay to the underwriters.’

  80. Dilution is seen as a factor contributing to negative performance of SPACs post acquisition. See Ignatyeva et al. (2013), p 74.

  81. For example, see AR Capital Acquisition Corp. Form S1 Registration Statement as filed with the Securities and Exchange Commission on September 23, 2014: ‘Our sponsor paid an aggregate of $25,000, or approximately $0.003 per founder share, and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share (allocating all of the unit purchase price to the common stock and none to the warrant included in the unit) and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to you and the other investors in this offering.’

  82. Lakicevic and Vulanovic (2013), p 392.

  83. See, for example, the calculation presented in the AR Capital Acquisition Corp. Registration Statement (see above) which is based on the worst-case scenario where all redeemable shares are redeemed: ‘At August 1, 2014, our net tangible book value before this offering and excluding deferred offering costs was $(115,999), or approximately $(0.01) per share of common stock. After giving effect to the sale of 30,000,000 shares of common stock included in the units we are offering by this prospectus, the sale of the private placement warrants and the deduction of underwriting commissions, other fees payable and estimated expenses of this offering, our pro forma net tangible book value at August 1, 2014 would have been $5,000,010 or $0.56 per share, representing an immediate increase in net tangible book value (as decreased by the value of the approximately 28,538,399 shares of common stock that may be redeemed for cash and assuming no exercise of the underwriters’ over-allotment option) of $9.45 per share to our initial stockholders as of the date of this prospectus and an immediate dilution of $10.00 per share or 100% to our public stockholders not exercising their redemption rights. Total dilution to public stockholders from this offering will be $9.44 per share [emphasis added].’

  84. Lakicevic and Vulanovic (2013), pp 392–393; Berger (2008), p 73. The recent practice of granting rights to receive bonus shares may also have similar effects.

  85. See for example, Global Eagle Acquisition Corp. Schedule 14A Proxy Statement dated January 16, 2013: ‘If our public stockholders exercise their right to redeem shares of our common stock in connection with the Business Combination, PAR and Putnam Capital Spectrum Fund and Putnam Equity Fund (these two Putnam funds are collectively referred to herein as “Putnam”) have separately agreed to purchase from us at the closing a number of shares of our common stock equal to the number of shares redeemed, at a purchase price of $10.00 per share, up to a maximum of 4,750,000 shares for PAR and 2,375,000 shares for Putnam. We refer to these agreements as the “Backstop Agreements”.

  86. According to Lakicevic et al. (2014), p 154, Table 2, the mean warrant strike price for SPACs that conducted an IPO between 2003 and 2008 is lower than the mean unit offer price, while for the period between 2009 and 2012 the warrant strike price is higher.

  87. See, for example, Quinpario Acquisition Corp. 2, Amendment 3 to Form S1 Registration Statement as filed with the SEC on January 8, 2015: ‘We structured each warrant to be exercisable for one-half of one share of our common stock at a price of $5.75 per half share, as compared to warrants issued by some other similar companies which are exercisable for one whole share, in order to reduce the dilutive effect of the warrants upon completion of a business combination as compared to units that each contain a warrant to purchase one whole share, thus making us, we believe, a more attractive merger partner for target businesses. However, this unit structure may cause our units to be worth less than if they included a warrant to purchase one full share.’

  88. See, for example, Hydra Industries Acquisition Corp. Amendment No. 5 to Form S1 Registration Statement as filed with the Securities and Exchange Commission on October 24, 2014.

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The author would like to thank Dr. Carsten Gerner-Beuerle, Dr. Felix Steffek, Mr. Batuhan Özşahin and the participants of the Vanderbilt Law School 18th Annual Law and Business Conference for insightful discussions and their valuable feedback and Mr. Kerem Çelikboya for his kind assistance with referencing.

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    Gül Okutan Nilsson

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Okutan Nilsson, G. Incentive Structure of Special Purpose Acquisition Companies. Eur Bus Org Law Rev 19, 253–274 (2018). https://doi.org/10.1007/s40804-018-0105-7

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