SPAC Governance: In Need of Judicial Review

18 Pages Posted: 23 Nov 2021

See all articles by Michael Klausner

Michael Klausner

Stanford Law School; European Corporate Governance Institute (ECGI)

Michael Ohlrogge

New York University School of Law

Date Written: November 19, 2021

Abstract

This paper analyzes the relationship between the economic structure of a SPAC, its corporate governance, and judicial review of SPAC mergers (or "deSPACs"). The core challenge for SPAC governance is to address the inherently conflicting interest of a sponsor and public shareholders. SPACs respond to this conflict by holding proceeds of their IPOs in trust and by granting public shareholders a right to redeem their shares for a pro-rata portion of that trust. For the redemption right to be effective, however, a SPAC's board must provide shareholders with accurate and complete information regarding the merger. Doing so may conflict with the interests of the SPAC’s sponsor, which will profit substantially even in a deal that is bad for SPAC investors. The independence of a SPAC's board is thus necessary for a SPAC to be governed in the interest of shareholders. Unfortunately, SPAC directors often have financial ties to a sponsor and are compensated in ways that align their interests with those of the sponsor. Where this is true, and where SPAC shareholders file suits alleging a breach of the duties of loyalty and candor, a court should affirm that the board has a duty to provide shareholders with the information they need to exercise their redemption right, and review the conduct of the sponsor and the board under an entire fairness standard.

Keywords: SPAC, governance, judicial review

JEL Classification: K22, K41, G00, G30, G34,

Suggested Citation

Klausner, Michael D. and Ohlrogge, Michael, SPAC Governance: In Need of Judicial Review (November 19, 2021). Available at SSRN: https://ssrn.com/abstract=3967693 or http://dx.doi.org/10.2139/ssrn.3967693

Michael D. Klausner (Contact Author)

Stanford Law School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Michael Ohlrogge

New York University School of Law ( email )

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New York, NY 10012-1099
United States

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