Life After SPACs: A Return to the Private Life

From 2020 through 2022, the world witnessed a boom in special purpose acquisition company (“SPAC”) deals with many companies looking to capitalize on public interest in the tech and life science sectors by going public through a SPAC transaction. However, SPAC deals have since lost momentum, and many companies that went public through the SPAC route are now reevaluating the costs and benefits of being a public company. These companies have experienced significant drops in share prices and dilution from subsequent capital raises at lower share prices, while also weathering the significant cost of complying with public company reporting obligations, shareholder litigation and various other burdens of being public. Some of these companies are at a crossroads; they must decide whether to stay public or to end the public chapter of their lives and go private. For those considering the go-private route, there are a number of considerations boards, companies and their investors should bear in mind. 

Companies and investors considering such a go-private transaction should pay particular attention to key strategic considerations and map out the transaction process and timeline before committing to such a route. These key strategic considerations include (1) understanding fiduciary duties and implementing safeguards to mitigate litigation risks, (2) structuring the transaction to increase the likelihood of success, (3) complying with securities regulations and related disclosure requirements, and (4) positioning the company financially to succeed as a private enterprise following the closing.

1. Fiduciary Duties and Litigation Risk

Go-private transactions are often challenged in state court based on claims for breaches of fiduciary duties. Under Delaware law, where a significant number of post-SPAC companies are incorporated, when a controlling stockholder acquires a company (whether or not it is a go-private transaction), Delaware courts will apply an entire fairness standard to their review of the transaction (as opposed to the more deferential business judgment standard) unless certain procedural safeguards are followed. In entire fairness review, the court evaluates the fairness of both the transaction price and transaction process (including how the board evaluated the transaction and obtained stockholder approval) to determine whether the board or controlling stockholder has breached its fiduciary duties. This is particularly relevant for post-SPAC companies going private, as the acquiror is likely to be a consortium of existing stockholders that, taken together, may constitute a controlling stockholder group, particularly if some of those existing stockholders have representatives on the company’s board of directors. Controlling stockholders can mitigate this litigation risk by agreeing with the company to implement certain procedural safeguards at the outset of the transaction. These processes and procedures include (among others) (i) forming a special committee of the board, comprised solely of independent and disinterested directors, empowered to negotiate with the controller, solicit alternative offers, and evaluate and recommend to the full board whether to accept or reject the transaction (or to negotiate better terms), and (ii) obtain a fully informed “majority-of-the-minority vote” of its stockholders. Such procedural safeguards can shift the court’s evaluation framework for the transaction from entire fairness to the more deferential business judgment standard. 

Likewise, in the context of a Delaware corporation without a controlling stockholder, if a member of the company’s board sits on both sides of the transaction (e.g., the board member is also affiliated with the acquiror or a member of the acquiror consortium), the court would likely also apply the entire fairness standard of review to the transaction, whether or not it is a go-private transaction. Again, the Delaware courts have laid out procedures to reinstitute the business judgment standard. Notwithstanding the interested director, if the transaction is approved by a fully informed special committee comprised solely of independent and disinterested directors, a majority of independent and disinterested directors (accounting for appropriate interested director recusals) or a fully informed “majority of the minority” stockholder vote, Delaware courts would likely apply the business judgment standard of review instead of entire fairness to the transaction. 

While claims for fiduciary duty breaches are among the most common challenges to go-private transactions, boards, companies and their investors should also be prepared for other potential types of claims, including those under federal securities laws. 

2. Structure

Companies and investors should also consider the appropriate transaction structure for a go-private transaction. There are two principal options: (i) a one-step merger or (ii) a two-step merger, which is structured as a tender offer followed by a back-end merger. Various factors play into the structural decision, such as speed to completion and flexibility in deal terms.

A two-step structure may lead to a faster closing than a one-step merger because the stockholder vote required to complete a one-step merger requires the filing, and potential review by the Securities and Exchange Commission (“SEC”), of a proxy statement, followed by a stockholder solicitation period and a stockholder meeting. This process can take several months, depending in part on whether the SEC reviews the proxy statement. On the other hand (and assuming the company is a Delaware corporation), an all-cash tender offer can be completed in as few as 20 business days following the mailing of a tender offer statement to the company stockholders, with the second step merger closing immediately following the expiration of a successful tender offer in which the company meets a specified minimum tender threshold. Generally, in a two-step merger, the SEC endeavors to complete its review of the tender offer statement, and the corresponding company recommendation statement, on an expedited basis to enable the parties to maintain their initial tender offer expiration date. 

While a two-step merger may be completed more quickly than a one-step merger, parties may be sacrificing flexibility for speed if they choose the former. Two-step mergers must comply with specific tender offer rules that do not apply to one-step mergers, such as the “best price rule.” The best price rule generally requires that, subject to certain exceptions, the consideration offered to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder in the tender offer. In a two-step merger, the transaction parties may also lose some flexibility as it relates to the amount and the form of transaction consideration. For post-SPAC companies in particular, the acquiror will likely want company management to “roll” some or all of its equity in the public company into the new private company, as opposed to cashing out its equity for the deal consideration. The securities in the new private company that company management receives could be viewed as additional or different consideration compared to what public stockholders receive in the tender offer. To address this risk, company management typically commits not to tender in the offer itself but to roll all of its equity only after the completion of the tender offer but before the second-step merger’s completion. As a result, some tender offer transactions involving management rollovers require management to sign non-tender and support agreements before the merger agreement’s execution. However, plaintiffs have in the past challenged such an approach in court, which means that, however meritorious the defense may be, any such challenges could still represent a substantial investment of time and money and otherwise distract from or even disrupt the deal itself. Parties choosing the two-step merger approach should factor this into upfront deal planning. 

3. Securities Laws Regulation and Disclosure Obligations

Under federal securities laws, companies participating in go-private transactions are subject to disclosure obligations that can be extensive and time-consuming, sometimes even requiring the parties to disclose a potential transaction before execution of the definitive agreement. Parties should be particularly sensitive to disclosure obligations under Section 13(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), which requires any public company stockholder that beneficially owns more than 5% of any voting class of equity securities of such company registered under Section 12 of the Exchange Act, to disclose any plans, proposals or contracts for such securities, and to disclose any material changes to its ownership within two business days. If a consortium of existing stockholders of a post-SPAC company is contemplating a go-private transaction, disclosure of this intent (which may be deemed a material change to the information in the filing) may be required shortly after the consortium forms its intent to do so, such as at the time that the acquiror consortium delivers a letter of intent to the company or at the time the members of the consortium form a group within the meaning of Section 13(d). Acquirors should also be aware that even if no single member of the acquiror consortium owns the requisite percentage interest in the company to trigger a Section 13(d) filing, the formation of an acquiror consortium may create a reporting “group” that would require aggregation of the securities held by all of the consortium members, which could cause the consortium to cross the Section 13(d) filing threshold, triggering a Section 13(d) filing requirement. 

In addition, Rule 13e-3 of the Exchange Act imposes additional disclosure obligations on parties seeking to go private if the acquiror, or any member of the acquiror consortium, is an affiliate of the company. This is particularly relevant for post-SPAC companies, because the acquiror in such a go-private transaction is likely to be a company affiliate. Rule 13e-3 disclosure obligations are rigorous and even require that materials prepared internally and by certain outside advisors (e.g., financial advisors) be publicly disclosed in a Schedule 13e-3 filing. As a result, the company should prepare its board materials with an eye to potential public disclosure. Given the extensive disclosure requirements in a Rule 13e-3 go-private transaction, parties should pay particular attention to the process and background of the transaction, including initial discussions, negotiations and decision-making as the parties move through the transaction process. Parties should be prepared to factor these enhanced disclosure obligations of Rule 13e-3 into their process map and timeline for the transaction and budget for the related time, money and compliance resources. 

4. Financing

Post-SPAC companies and their investors contemplating a go-private transaction must also consider the capital requirements for such a transaction. Beyond simply ensuring appropriate capital to fund the merger consideration itself, the parties must also ensure that the newly minted private company will have sufficient operating cash to run the post-closing business. As part of the go-private process and in particular if existing stockholders will be part of the acquiror consortium, the parties should consider concurrently negotiating financing to fund the post-closing operation of the business. Mapping out the financing aspect of a go-private transaction at the outset can be difficult, however. The buyer must balance paying a premium on the company’s trading price, which may be necessary to complete the acquisition, with convincing a sufficient number of public company investors to forego the cash merger offer in favor of rolling their equity of the public entity into the new private one. Further complicating this analysis, if the public company is strapped for cash, the company must also consider and negotiate other avenues to make sure it has sufficient resources to operate its business through the closing of the go-private transaction; this may require restructuring its operations at the outset of go-private negotiations to reduce its cash burn and raising additional capital for pre-closing operations. Assuming the need for speed of execution of the transaction, members of the acquiror consortium may need to provide most, if not all, of such financing for pre-closing operations. 

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While the opportunity to capitalize on the public market via a SPAC transaction has opened up opportunities for some, other post-SPAC companies may need to consider steering their ship back toward the safer (and less costly) harbor of life as a private company. To navigate these waters, a company and its investors should map out a realistic plan and timeline with reasonable specificity and assumptions before committing significant resources to pursuing such a transaction. While this client alert is not an exhaustive discussion of every consideration for such a transaction, it provides a framework for companies, boards and investors to evaluate the feasibility of returning such a company to the private market if the parties otherwise believe that there is a worthwhile underlying business or technology and a compelling long-term investment opportunity to justify the cost, time and resources required to consummate a successful go-private transaction and create a viable private business post-closing. 

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nate P. Gallon, an O’Melveny partner licensed to practice law in California, Noah Kornblith, an O’Melveny partner licensed to practice law in California, and Kevin Togami, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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