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Article | Executive Pay Memo North America

Differentiating between SPAC mergers and traditional IPOs

ABCs of SPACs, Part II

Executive Compensation|Mergers and Acquisitions

By Josephine Gartrell , Heather Marshall , Robert Hermenze and Shannon Williams | March 9, 2021

A review of the executive compensation process for companies going public via a SPAC

A special purpose acquisition company (SPAC) is a blank check company that seeks investors that are bullish on its sponsor (i.e., the management team). But beyond that, what else do potential investors know? Often, not much.

SPAC executives may or may not identify a target industry in their disclosures, but even if they do, they are not necessarily bound to said industry. Once a target company is identified by a SPAC, it will go public through an initial business combination — often a reverse merger — whereby the target merges with the publicly traded SPAC; however, in accordance with the rules applicable to SPACS, investors do not know who the target is when they invest. Once they know who the target is, their recourse for not wanting to invest in the target consists of redemption rights (see the previous article, “The ABCs of SPACs,” for more on this). Without exercise of redemption rights, SPAC investors will own stock in a public company, which, just like a traditional initial public offering (IPO) company, must adopt an executive compensation (EC) philosophy and programs that align with the needs of executives, shareholders and stakeholders. Regardless of how a company goes public, ultimately the company will have to explain its EC programs to multiple stakeholders.

Following is a short overview of a few of the practical differences between a SPAC merger and a traditional IPO that affect EC planning and decisions. These practical differences are important, as several of them affect the core EC planning projects that must be completed when a company goes public.

Development and adoption of a committee charter and other SPAC matters: Before a SPAC can go public, it must compose a board of directors as well as committees of the board, including a compensation committee. As with any public company, the compensation committee must be made up of independent directors in accordance with applicable law and exchange rules. One of the responsibilities of the compensation committee is to publish a compensation committee charter for the SPAC. However, similar to other disclosures in the SPAC’s Form S-1, the charter typically reads as boilerplate language that an acquired operating company would need to revise following the de-SPAC transaction in order to make it meaningful to its short-term goals and long-term objectives. Note, “de-SPACing” is the final stage of the initial business combination — when the “blank check” SPAC acquires or merges with the target. Compare this charter adoption process with a traditional IPO, and one would note that a private company going through the traditional IPO process must initiate and execute the development and adoption of a charter from the ground up.

Similarly, according to Securities and Exchange Commission (SEC) regulations, the “blank check” SPAC must develop director compensation plans and executive governance policies before going public. These also must be revisited (and likely modified or redesigned) to ensure they adapt to the nature of the evolving company — specifically, to ensure market competitiveness of director pay and compliance with governance best practices.

S-1 filing: As noted above, the SPAC Form S-1 filing process is significantly truncated compared with a traditional IPO because the SPAC has no historical financials, is not an operating company and is often classified as an emerging growth company. Some important factors for investors to consider prior to the initial business transaction are the expertise, experience and performance of the sponsor; the terms of the trust account; and any disclosed strategy on the part of the sponsor.

Once the SPAC identifies a target and negotiates an initial business transaction, the target company does not need to file a Form S-1. Instead, prior to any solicitation, the SPAC will file, depending on the circumstances related to the transaction, a proxy statement (if shareholder vote is required), information statement (shareholder approval is not solicited) or tender offer materials (Form S-4) (shareholder vote is not required) in order to consummate the de-SPACing transaction. All require similar information, the difference being the result that is sought from the disclosure. When the SPAC acquires or merges with the target, the role of the SPAC is complete, and the target company is public. Four business days after the de-SPACing transaction is completed, a “Super 8-K” must be filed with the SEC.

The target management team should be prepared to operate as a public company. While many of the EC planning considerations for companies going public through de-SPACing versus traditional IPO are different, similarities remain. During a traditional IPO, the typical pre-transaction EC project list begins with developing an EC strategy, including a compensation philosophy, selection of a peer group and approval flow. The work done for EC benchmarking and incentive plan designs is nearly identical for companies going public via SPAC transactions, the major distinction being that the target company involves the SPAC partner in the approval flow. In addition, due to the shortened de-SPACing transaction period versus a traditional IPO process, the management team of the target company has a corresponding shorter timeline for understanding how to operate as a public versus private company and preparing to do so upon closing.


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