The past 18 months have seen a number of developments in North American capital markets, with trends such as the rise of meme stocks and the self-proclaimed retail investor revolution dominating many headlines. Another interesting, if less novel, trend that emerged in 2020 was a resurgence of special purpose acquisition corporations (“SPACs”). In 2020, more than half of all initial public offerings (“IPOs”) in the U.S. were SPACs, and the pace of U.S. SPAC IPOs doesn’t seem to be slowing down in 2021; as of this writing, there have been a reported 412 SPAC IPOs in the U.S., raising over USD$121.3 billion.
SPACs have not been as prominent in the Canadian landscape, with the number of Canadian SPACs declining over the last two years. However, the size of SPACs in Canada has been increasing in recent years, with a fourfold increase in the average value of Canadian SPACs in 2020 relative to 2016, and the largest Canadian SPAC in 2020 raising USD$293.1 million. In addition, U.S.-listed SPACs have recently made significant acquisitions in Canada. As such, it can be expected that SPACs will continue to play an active role in Canada in the coming years, and the looming prominence of SPACs may spur an increase in shareholder activism: SPACtivism.
Brief Overview of SPACs
A SPAC (also known as a “blind pool” company) is a publicly listed shell company, the purpose of which is to raise capital in order to acquire an existing operating company. Often, SPACs acquire privately held companies, which then become public following a business combination with the SPAC. In that way, SPACs can serve as an alternative to the traditional route of the IPO.
To create a SPAC, the founders and initial investors of the SPAC file a prospectus under the rules of the applicable exchange. Once listed, the public funds raised by the SPAC are placed in escrow, and the SPAC must acquire an operating company or assets within a maximum of 36 months (often referred to as a “de-SPAC Transaction”), failing which the escrowed funds must be returned to the SPAC’s securityholders.
SPACtivism: Opportunities for Activists
SPACtivism could arise in various ways. Firstly, the SPACs themselves could be targets for activists. For example, in 2009 there was a trend of activist investors targeting SPACs trading at less than the value of their escrowed funds, in order to block their de-SPAC Transactions and turn a quick profit through the forced liquidation of the SPACs. With SPACs becoming more prominent in North American capital markets, it may be challenging for some SPACs to find an appealing target for a de-SPAC Transaction, and if that difficulty (or any other factor that might depress the price of a SPAC’s securities) causes a SPAC to trade at a discount to the value of its escrowed funds, we may again see activists seize the opportunity to tap into the SPAC’s liquidation value.
Secondly, SPACtivism may arise through activists targeting the entity that results following the de-SPAC Transaction. For example, researchers have found that for a large majority of SPACs, the share price post-merger has declined, potentially exposing the newly-public companies to activist scrutiny. Similarly, recent research by Lazard shows that from the beginning of 2020 to Q1 2021, activist short campaigns brought against SPAC targets were commenced on average just 61 days following the de-SPAC Transaction, highlighting that some entities resulting from de-SPAC Transactions may be seen as low-hanging fruit to activists.
Activism against the resulting entity following the de-SPAC Transaction may also arise due to the environmental, social and governance (“ESG”) practices of the targets acquired by SPACs. As the recently-private companies acquired by SPACs don’t go through the same prospectus offering process as many other public companies, some of these companies’ ESG practises may be more vulnerable to close scrutiny from activist investors.
Lastly, there has been a recent trend in the U.S. of notable shareholder activists who have listed SPACs and raised significant capital. These prominent activists are well versed in convincing public companies of what actions they should take, in some cases through sophisticated activist campaigns and proxy fights. It remains to be seen how these activists will utilize their SPACs, but it is easy to imagine how shareholder activism may be coupled with a SPAC to achieve a desirable result – for example, by pressuring a company to spin-off an underperforming division into a de-SPAC Transaction.