Top 10 Practice Tips: PIPE Transactions By SPACs – Shareholders

This practice note discusses 10 practice points that can help
you, as counsel to a special purpose acquisition company (SPAC) or
its placement agent, execute a private investment in public equity
(PIPE) transaction alongside a SPAC business combination
transaction. A SPAC is a public shell company that uses proceeds
from its initial public offering (IPO) to acquire a private company
within a designated timeframe. Following an announcement of a
proposed business combination, the SPAC must offer its public
investors the option to either redeem their common stock for the
original purchase price or to sell their common stock to the SPAC
in a tender offer. This redemption option inherently creates
uncertainty as to the amount of cash available to the combined
company following the initial business combination. SPACs often
seek to mitigate the redemption concern by issuing new securities
to institutional accredited investors in a PIPE transaction that is
contingent upon the closing of the initial business combination.
The capital raised in the PIPE transaction generally will be used
to provide additional capital for the operating company to deploy
following the consummation of the business combination.

The 2023 SPAC market has slowed significantly, following a
strong 2021 market consisting of 613 SPAC IPOs that closed, which
raised an aggregate of over $163 billion. In 2022, there were 86
SPAC IPOs closed, which raised an aggregate of $13 billion. In
2023, as of May 31, 2023, there were 15 SPAC IPOs closed, which
raised an aggregate of $2 billion. There are also 46 SPAC IPOs
pending, which are expected to raise an aggregate of $5 billion.
See SPACresearch.com (Nasdaq Monthly Monitor, accessed on May 31,
2023). As the SPAC market has cooled, PIPE transactions, a
financing tool used to facilitate de-SPAC transactions, have also
encountered difficulties. A changing landscape for SPACs calls for
an extra measure of flexibility and a willingness to consider
alternatives in connection with structuring the accompanying SPAC
PIPE transaction.

For more information on SPACs and PIPE transactions, see Special Purpose Acquisition Companies and PIPE Transactions.

1. Set Out Roles and Responsibilities in the Engagement
   Letter. The SPAC will often seek to engage one or more of
   the same investment banks that assisted the SPAC with its IPO as
   the placement agents for a PIPE transaction. Generally, due to the
   need to wall cross investors and maintain the confidentiality of
   the process and for efficiency purposes, it will be preferable to
   have a lead placement agent who will take charge on form documents.
   Notwithstanding the prior relationships with the SPAC, the bank
   selected as lead placement agent should follow its normal practice
   for a private placement engagement and enter into its customary
   form of PIPE engagement letter with the SPAC (the acquiring company
   in the business combination), subject to addressing some special
   issues applicable to SPACs.

   The letter documents the fees and expenses to be paid by the SPAC
   in connection with the PIPE transaction. Given that there may be
   various investment banks advising the SPAC on capital markets
   advisory matters or on M&A introductions, and these banks may
   have certain fee arrangements in place, it will be important to
   address any other existing arrangements. If the engagement is not
   on an exclusive basis, the letter should acknowledge the inclusion
   and role of the other engaged agent(s) in the PIPE transaction and
   specifically allocate compensation between the agents to avoid any
   unintended overlap or dispute. Engagement letters with multiple
   placement agents often limit compensation to a percentage of the
   proceeds received from investors that were actually introduced to
   the SPAC by the particular agent. The private company target may
   also have banking relationships and may also have pre-existing
   commitments to include an adviser in the PIPE process. Usually, the
   PIPE placement agent will want to consider a fee tail. The fee tail
   should be addressed in the engagement letter as well. There may
   also be a right of first refusal or a right of first offer included
   in the letter relating to future offerings undertaken by the
   combined company.

   Generally, a PIPE engagement letter would include certain
   representations and warranties from the issuer relating to the
   accuracy of the diligence and other materials provided by the
   issuer to the placement agent. It may make sense to ensure that the
   private company target be included in such representations since
   the PIPE placement agent will rely on the diligence materials
   furnished by the private company target as well as the investor
   presentation, term sheet, or other materials prepared by the
   private company target to solicit potential PIPE purchasers.

   Most form engagement letters will include a broad securities
   indemnification provision wherein the issuer indemnifies the
   placement agent and certain related parties in connection with
   losses arising in connection with the transaction. A SPAC will be
   limited in its ability to provide meaningful indemnification
   provisions given that the SPAC’s proceeds from its IPO will
   have been deposited into the trust account, and the trust account
   cannot be accessed other than for limited purposes. Again, this may
   be another reason for joining the private company target as a
   signatory to the engagement letter. Alternatively, include the SPAC
   sponsor as a signatory to stand behind the indemnity and also for
   purposes of broader fee tail coverage.

   As a result of SEC proposed rules (discussed below), counsel for
   the placement agent should expand the indemnity provision to cover
   any untrue statement or alleged untrue statement of material fact
   contained in any proxy statement and/or registration statement on
   Form S-4 filed in connection with the business combination.
   Further, the SPAC and the target company might be required to
   deliver customary comfort letters, legal opinions and
   “negative assurance” letters to the SPAC IPO underwriter
   in connection with the deSPAC transaction. The SPAC might also be
   requested to provide an officers’ certificate, delivered as of
   the closing of the business combination, signed by its Chief
   Executive Officer and/or the principal financial or accounting
   officer, to the effect that the signers have carefully examined the
   registration statement, each preliminary prospectus, the prospectus
   and any amendments, as well as each electronic road show used in
   connection with the offering of the Securities, and the information
   contained therein is true and accurate as of the date of the
   business combination closing. The certificate should also cover any
   projections contained in the registration statement: certifying
   that those projections were determined in good faith and on a
   reasonable basis and reflect the current estimates of the
   consolidated financial position of the Company as of the date of
   such certificate. For a related template, see Officer’s Certificate (PIPE
   Offering)




2. Consider Timing of Announcement. Ideally, the
   public announcement of the execution of the initial business
   combination agreement will be timed to coincide with the public
   announcement of the PIPE transaction. In order to facilitate a
   combined public announcement, definitive commitments for the PIPE
   transaction must have been received concurrent with the execution
   of the business combination agreement. The commitment from the
   PIPE investors would be irrevocable but conditioned on the
   consummation of the business combination by a specified date
   (preferably at least six months following the initial announcement
   of the business combination). The PIPE investor would bear the
   pricing risk between signing of the subscription agreement and
   closing. Any shareholder approval requirement that is triggered by
   applicable stock exchange rules due to the size of the PIPE
   transaction may be addressed by adding a proposal to the proxy
   statement prepared to seek approval of the business combination
   from the SPAC’s shareholders.

   Alternatively, the parties may instead publicly announce the
   execution of the business combination agreement in advance of
   obtaining the PIPE financing commitment. In this case, the PIPE
   market process would commence at a time when all the details
   relating to the business combination are already public. In either
   event, the PIPE transaction may be structured to have proceeds
   delivered shortly after execution of the securities purchase
   agreement into an escrow account with the release subject to
   consummation of the business combination or paid following receipt
   of shareholder approval of the business combination (and PIPE
   offering if applicable) and concurrent with the closing of the
   business combination.

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Originally published by Practical Guidance

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