SPAC FAIRNESS OPINION
Posted on May 1, 2022 4:00am PDT
A SPAC is special purpose acquisition company designed to expedite a merger
of a target seller into a publicly traded entity. The incredible expansion
of SPAC funds has somewhat saturated U.S. markets; these funds are now
broadening into foreign markets.
De-SPAC mergers must be consummated within two years of initiation, a short
window to apply the funds and trigger an IPO. SPAC is a funded sponsor
shell company with no operating entity. The investors are free to vote
against any proposed acquisition or redeem their shares and opt out of
the SPAC. Similar to a reverse merger into a public shell, the issuer
of the SPAC receives an expedited SEC review process; thus, the process
is simpler and less expensive.
Recent SEC guidelines require registrants and their independent auditors
to evaluate any error previously filed in financial statements and amend
them, as necessary. To preclude or mitigate the threat of potential litigation,
a SPAC should retain an independent financial advisor to perform a fairness
opinion. Though not required by law, the opinion by a reputable firm protects
the board, management, and shareholders. The board can rely on the fairness
opinion to show they complied with their “duty of care.” In
effect, a credible opinion serves as an additional insurance policy against
a lawsuit(s).
Operating companies acquired via a de-SPAC and the SPAC itself should be
very circumspect about their forward financial statements. These projections
must be vetted and thoroughly documented and supportable. Current SEC
rule changes eliminate the prior safe harbor for forward-looking statements.
In effect, if the current financials of the operating firm can justify
a de-SPAC merger, cash flow projections should be avoided.