SPACs v4 - LIVE

INSIDE THE SPAC JOURNEY

Gia Lee, General Counsel at Clover Health, joined us for a discussion on SPAC transactions. We discussed Clover’s SPAC journey and why they decided to go the SPAC route, what was most surprising about the process, and the key takeaways that came about during the deal.

GUIDING CLIENTS THROUGH THE SPAC LIFE CYCLE

Fisker’s Merger with Spartan Energy Acquisition Corp.

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Matthew Gemello

Special purpose acquisition companies (SPACs) have become an attractive alternative to the traditional IPO. The year 2020 saw an unprecedented surge in SPAC activity, igniting an upward trend of private equity firms, venture funds, and operators forming SPACs and private companies seeking to quickly access liquidity through a de-SPAC transaction.

SPACs

SPAC deals are all about speed, and with the ever-evolving deal structures – targets, sponsors, and investors need experienced counsel to identify blind spots. Orrick’s SPAC team offers sophisticated and adept legal counsel to successfully guide clients through all phases of a SPAC transaction. We offer a tech-focused practice, with deep market knowledge, and in-depth experience to get deals done.

Lilium’s Merger with Qell Acquisition Corp.

Volta’s Merger with Tortoise Acquisition Corp. II

WHAT YOU NEED TO KNOW

What is a SPAC?

What is behind the resurgence of SPACs?

How does a SPAC IPO work?

How do SPAC sponsors make money?

What factors do SPAC sponsors consider when targeting companies?

What issues arise between a SPAC and target company during negotiation?

What happens when a target company and SPAC enter into an agreement?

What are other key legal issues in SPAC deals?

What are the risks of a SPAC transaction?

What is the advantage of a SPAC transaction vs. an IPO?

SOC Telemed’s Merger with Healthcare Merger Corp.

Luminar’s Merger with Gores Metropoulos, Inc.

Embark Trucks’ Merger with Northern Genesis Acquisition Corp. II

TOOLS & RESOURCES

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The SPAC Boom – Current Trends and What You Need to Know

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How Do You De-Risk The SPAC Transaction

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Bill Hughes

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Albert Vanderlaan

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Hari Raman

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Ed Dyson

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Ed Lukins

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Niki Fang

What is behind the resurgence of SPACs?

SPACs have seen a resurgence in the markets for three primary reasons: (1) the quality and quantity of SPAC sponsors has dramatically improved, with many institutional investors and/or former executives with significant operational track records entering the space; (2) a virtuous cycle of better SPAC sponsors has attracted higher-quality target companies, which has resulted in better stock market performance; and (3) the presence of substantial demand from institutional investors to participate in a private investment in public equity (PIPE) alongside the de-SPAC merger has greatly increased closing certainty.

What is a SPAC?

A special purpose acquisition company (SPAC), often referred to as a “blank-check company,” is a shell company formed to raise capital through an initial public offering (IPO). Once public, the SPAC targets a privately-held operating company or business to acquire, known as a “business combination” or “de-SPAC merger,” for the purposes of taking the private company/business public.

How does a SPAC IPO work?

Once a SPAC sponsor files a registration statement with the SEC (Form S-1), it will begin negotiating underwriting and ancillary agreements. Once cleared by the SEC, the SPAC management team begins its roadshow to investors, highlighting their experience and sharing the vision for the SPAC. The SPAC will offer units comprising one share of common stock and a fractional out-of-the-money warrant (usually 1/4 to 1/3 of a share, but increasingly smaller as the market continues to evolve) to acquire common stock at a price of $11.50 per share. If the SPAC meets its fundraising goal, the capital will be placed in a trust until the sponsor acquires the target operating company. The capital in the trust account will ultimately be used to fund the acquisition or share redemptions by SPAC stockholders, who have the right to have their invested capital returned through the exercise of their redemption rights around the acquisition date.

How do SPAC sponsors make money?

SPAC sponsors are compensated in founder shares, also referred to as the “promote,” which usually represents 20% of the shares in the SPAC after its IPO. Once the SPAC completes its business combination with a target company, those shares are typically converted into public shares. Sponsors are also sometimes issued private placement warrants to acquire additional shares to fund the operations of the SPAC until a business combination is completed.

What factors do SPAC sponsors consider when targeting companies?

• Industry. Many SPACs have a specific industry or geographic focus, particularly SPACs founded by sponsors with prior operational experience. • Deal Size. Deal size is critical to sponsors and target companies – both to lessen the dilutive impact to the target of the sponsor’s promote and the SPAC stockholders’ warrants, and so that the SPAC’s trust account (together with any PIPE proceeds raised concurrently) meets the capital needs of the target business. • Public Company Readiness. Sponsors examine the readiness of a target to withstand the pressure that comes with being a public company, including reporting requirements, public scrutiny of financial results, and having the necessary internal controls and systems in place. • Market Opportunity. Sponsors seek targets in markets with potential for large growth now and in the future. • Financial Statements. Sponsors review financial statements to ensure they can be timely audited and used in public SEC filings required to complete the transaction. • Management Team. The quality of the management team – including whether it has an experienced, public company-ready CEO, CFO and general counsel – is an indicative measure of whether the target is ready to be a public company.

What issues arise between a SPAC and target company during negotiation?

During negotiation of a SPAC deal, there are a few key points that often arise, including: • Valuation • Sponsor promote and whether it will be subject to forfeiture/earn-in if certain conditions are not met (typically based on whether a certain amount of proceeds are raised in the deal and the post-closing trading price of the stock) • Treatment of employee equity awards • Lock-ups to which the target stockholders will be subject • Dual-class voting structures that provide a target’s founders with enhanced voting control after closing • The composition of the post-closing board of directors of the public company and contractually negotiated rights to seats for the sponsor • Registration rights for the sponsor and certain stockholders of the target • Deal certainty (including closing conditions and whether the respective boards of directors of the SPAC and target are permitted to change their recommendation in favor of the deal) • Representations and warranties and interim operating covenants of the SPAC and target

What happens when a target company and SPAC enter into an agreement?

Following entry into a definitive business combination agreement, the SPAC files a proxy statement, or Form S-4 (dependent on whether there is an exemption to registration available to issue shares to the target stockholders), for approval with the SEC. Once cleared, the parties’ shareholders will vote to approve the acquisition. If the SPAC shareholders do not like the proposed deal, they can vote down the transaction, and/or exercise their redemption rights. Redemptions have no impact on SPAC shareholders’ ability to vote however they wish and redeeming shareholders retain their warrants. If additional financing is required, the SPAC may raise funds from existing or new investors through a PIPE transaction that is committed to by these investors concurrently with the signing of the business combination agreement. After the parties’ shareholders approve both the transaction and the business combination agreement, the merger is effected (resulting in the trust account being broken and the trust funds, net of redemptions, released to the combined company), and the stock ticker will change from the SPAC’s ticker to the new company’s ticker and begin trading on an exchange as a public company.

What are other key legal issues in SPAC deals?

Advisors in SPAC deals typically counsel on issues around: • Compliance with securities laws (including various public filing requirements and navigating the SEC review and comment process) • Public company corporate governance • Public company D&O and other insurance requirements • SPAC due diligence of the target and assessing whether there are any contractual, regulatory, litigation or other red flags that would make the transaction difficult to market and consummate to the public markets • Disclosures made to the PIPE investors in investor presentations, including target projections • Providing appropriate disclosure in the proxy statement, S-4 or other public filings • Negotiating the PIPE offering terms, including closing certainty, protections against offering superior terms to other investors (e.g., MFN clauses), registration rights, and representations and warranties

What are the risks of a SPAC transaction?

From the sponsor’s perspective, the principal risk is that it would not identify a suitable business combination in the required two-year time period. Equally, sponsors must also guard against being perceived to have overpaid for a target, resulting in potential difficulties in successfully marketing a PIPE or avoiding significant redemptions by the SPAC’s shareholders. The principal risk for targets has been closing certainty; since SPAC deals still require relatively long lead times and often involve early- or emerging-stage companies without significant existing capital, an unsuccessful SPAC merger can result in the company needing to quickly raise alternative capital. Moreover, SPAC mergers do not include termination or break fees in the current market, meaning there is usually no practical recourse for the deal failing to close. Targets in SPAC mergers often do not have the benefit of significant ramp time to become public company-ready as they would in a traditional IPO; this can create pressure on the target’s management to quickly adapt after closing the business combination to being a reporting company and immediately put in place various corporate governance and other internal controls.

What is the advantage of a SPAC transaction vs. an IPO?

SPAC transactions are generally viewed as being quicker to complete from start to finish (on average by a few months). Perhaps more important, SPACs allow a target to essentially set its enterprise valuation in direct negotiations with the SPAC sponsor months ahead of the deal closing, and then later boost that valuation through the PIPE fund raise. These two steps provide substantially more assurance to a target that it will raise proceeds at its targeted valuation rather than having to price the IPO immediately before it launches. Finally, SEC rules permit targets to disclose projections as part of the SPAC merger (whereas an IPO does not), which is viewed as particularly advantageous to companies that are still in the early stages of growth and want to present their longer-term growth story to the market.

Orrick advised Fisker (NYSE: FSR), a California based company that manufactures electric vehicles, in its US$2.9 billion sale to Spartan Energy Acquisition Corp., a SPAC sponsored by an affiliate of Apollo Global Management, resulting in Fisker becoming a public company.

Orrick advised Volta Industries (NYSE: VLTA), a leading owner - operator of public electric vehicle charging infrastructure, in its US$1.4 billion merger with Tortoise Acquisition Corp. II, a special purpose acquisition company, resulting in Volta becoming a public company.

Orrick advised Lilium GmbH (Nasdaq: LILM), a global leader in regional electric air mobility, in its US$3.3 billion merger with Qell Acquisition Corp., a special purpose acquisition company, resulting in Lilium becoming a public company.

Orrick advised Alex Rodrigues, co-founder and CEO of Embark Trucks (Nasdaq: EMBK), a leading developer of autonomous software technology for the trucking industry, in the US$5.2 billion merger with Northern Genesis Acquisition Corp. II, a special purpose acquisition company, resulting in Embark Trucks becoming a public company.

Orrick advised Luminar Technologies (Nasdaq: LAZR), the global leader in automotive lidar technology powering the introduction of highway autonomy, in its US$3.4 billion merger with Gores Metropoulos, Inc., a special purpose acquisition company sponsored by an affiliate of The Gores Group and by an affiliate of Dean Metropoulos of Metropoulos & Co., resulting in Luminar Technologies becoming a public company.

Orrick advised SOC Telemed (Nasdaq: TLMD), one of the largest national providers of acute care telemedicine, in its US$720 million merger with Healthcare Merger Corp., a special purpose acquisition company, resulting in SOC Telemed becoming a public company.

Insight

Life Sciences Snapshot: Q3 2020 – Venture Surges and the Rise of SPACs

Aria Energy’s Merger with Archaea Energy and Rice Acquisition Corp.

Orrick advised Aria Energy, a market leader in clean energy production, in its $1.15 billion merger with Archaea Energy and Rice Acquisition Corporation, a special purpose acquisition company focused on the energy transition sector. The combined company is named Archaea Energy and is listed on the NYSE under the ticker symbol “LFG”.

Local Bounti’s Merger with Leo Holdings III Corp.

Orrick advised Local Bounti (NYSE: LOCL), a breakthrough U.S. indoor agriculture company striving to redefine the future of farming, in its US$1.1 billion merger with Leo Holdings III Corp., a special purpose acquisition company, resulting in Local Bounti becoming a public company.

Dave’s Merger with VPC Impact Acquisition Holdings III, Inc.

Orrick advised Dave (Nasdaq: DAVE), a leading banking app with 10 million customers, in its US$4 billion merger with VPC Impact Acquisition Holdings III, Inc., a special purpose acquisition company, resulting in Dave becoming a public company.

Orrick is advising Lilium GmbH, a global leader in regional electric air mobility, in its US$3.3 billion merger with Qell Acquisition Corp., a special purpose acquisition company. Upon completion of the transaction, the combined company will be named Lilium and remain on the Nasdaq under the new ticker symbol LILM.

Lilium’s Merger with Qell Acquisition Corp.

Volta’s Merger with Tortoise Acquisition Corp. II.

Orrick is advising Volta Industries, a leading owner - operator of public electric vehicle charging infrastructure, in its US$1.4 billion merger with Tortoise Acquisition Corp. II, a special purpose acquisition company. Upon completion of the transaction, the combined company will be named Volta, Inc. and remain on the NYSE under the new ticker symbol VLTA.

Fisker’s SPAC Merger with Spartan Energy Acquisition Corp.

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Matthew Gemello

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