When Endeavor Acquisition (AMEX: EDA) filed its definitive proxy statement onNov.
28, 2007, it knew that there wasn’t much time left to complete the acquisition of American
Apparel. Endeavor acknowledged that there were “growing time constraints” and
Endeavor needed to “secure the full cooperation of [American Apparel CEO Dov] Charney…
to ensure the successful completion of the transaction.” Indeed, Endeavor was
facing a tough race against the clock. Even though Endeavor had filed its preliminary
proxy statement with the SEC in June, it wasn’t until the end of November that it had
cleared SEC approval. Endeavor then had only 17 days left to complete the deal, and if
it didn’t, its founders stood to lose millions of dollars and their efforts during the prior
two years would have been all for naught.
Rather than jeopardize the
deal, Endeavor sweetened
the deal for Charney—to the
tune of an extra 5,000,000
shares of common stock for
him, an increase of 15% from a deal that
was already agreed upon. However, there
have been numerous other SPACs (special
purpose acquisition companies) that encountered
difficult situations during the
lengthy SEC review process. By all accounts,
Endeavor worked out for everyone
involved. Endeavor’s post-merger stock,
even in the current bear market, has continued
to trade above Endeavor’s IPOprice
of $8. Nonetheless, SPAC professionals
sought to determine if there are ways to reduce
or eliminate such a review process
and be able to bring a better deal to stockholders.
SPACS IN A NUTSHELL
Endeavor was a specified purpose acquisition
corporation, commonly known
as “SPAC.” A SPAC is a newly formed
company, organized by a group of executives,
with the sole purpose of going
public and using the proceeds of the offering
to acquire a business.
Since 2003, 153 SPACs have successfully
completed IPO offerings, and these
offerings have raised over $21 billion. Of
those 153 SPACs, 46 have acquired a business
and an additional 34 have announced
proposed targets. Of these 34 potential
business combinations, 26 are currently
under the SEC review process or awaiting
shareholder approval.
SPACs typically raise between $50 million
and $500 million to fund their acquisition
strategies. The SPAC has a finite
life of no more than 24 months (which
can be extended up to 12months) to identify
and conclude an acquisition. Pending
an acquisition, 99% or more of the IPO
funds are held in a trust account with a
major money center bank. In addition, the
acquisitions are subject to approval by the
public stockholders of the funded SPAC.
SPACs have recently surged in popularity
as an alternative to traditional
acquisition vehicles owing to their ability
to raise capital through the public equity
markets to fund takeover acquisitions
of private companies. The
increasing list of well-known bankers—
from UBS to Deutsche to Citigroup—
have been jockeying to underwrite
SPAC IPOs. Recently, the NASDAQ
and NYSE have proposed rule changes
to allow SPAC listings, which further
indicates that SPACs have gained widespread
acceptance within the financial
and investment communities.
FAST-TRACKING THE SEC PROCESS
Because SPACs are subject to the
same regulatory requirements as other
public companies, there is a larger degree
of transparency, as they are required
to file certain disclosure documents
with the SEC. Traditionally, all
SPACs filed preliminary proxy materials
with the SEC for review and approval,
a process that has taken six months or
more although recently ascending down
to three or four months. However, a recent
development in the program is that
a “foreign private issuer” is exempt
from the SEC proxy review process. A
qualifying “FPI” SPAC may simply file
its proxy materials (which satisfies local
laws only) after it is mailed to stockholders
in the United States.
An FPI is any foreign issuer whose
majority of outstanding voting stock is
held directly or indirectly by non-U.S.
residents or any foreign issuer who does
not have the following: (i) a majority of
its executive officers or directors who
are U.S. citizens or residents; (ii) a majority
of its assets located in the United
States; and (iii) its business administered
principally in the United States.
WHAT’S IN IT FOR ME?
Structuring a SPAC as a foreign private
issuer has the tremendous benefit
of essentially extending the time frame
in which the SPAC has to complete a
business combination. Because of the
limited time frame for a SPAC to obtain
stockholder approval and complete
its business combination, the delay
caused by the SEC review process
can have a significantly adverse economic
effect on the SPAC and, in the
extreme case, jeopardize whether
stockholders ever get to vote on the
proposed transaction.
Potential target companies are aware
of the limited time frame, and can use
the pressure of the limited time frame
to exact a higher acquisition price. Further,
there exists a class of professional
investors who also use the pressure created
by the limited time frame to exact
a form of “green mail” on SPACs when
it seeks stockholder approval. Further,
because of the extended approval
process, most SPACs are unable to propose
more than one business combination,
and this can negatively impact the
ability of the SPAC management team
to review potential target companies
and negotiate favorable terms. The
elimination of the SEC review process
may enable the SPAC to present a second
business combination, thus
strengthening the SPACs bargaining
position at the negotiating table—both
with target businesses and potential
green-mailers.
What’s good for the SPAC is good
for SPAC stockholders, too. If executed
properly, SPAC investors should continue
to receive the same level of disclosure
in proxy materials as if it was
subject to SEC review, because, among
other reasons, underwriters and issuers
alike would be wise to avoid potential
liability by preparing proxy materials
on par with SEC standards, all the while
receiving the benefits that come with
by-passing SEC review. Just how much
of a benefit would this have for SPAC
investors? At the very least, significant
professional fees incurred during the
SEC review process would be saved
and possibly, under the right set of circumstances,
save the SPAC 5,000,000
shares of common stock—and that’s
not exactly pocket change.
— By Stuart Neuhauser and Brian Lee
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