Is SPAC Sponsor Compensation Evolving? A Sober Look at Earnouts

43 Pages Posted: 3 Feb 2022 Last revised: 17 Sep 2022

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: January 31, 2022

Abstract

SPACs have been widely criticized for imposing high costs on SPAC shareholders and for the incentive they create for sponsors to enter into mergers that are bad deals. Some SPACs adopt sponsor earnouts, which reduce a sponsor’s compensation unless specified post-merger share price targets are met. The claim in favor of earnouts is that they respond to these two flaws in the basic SPAC design. We find, however, that earnouts as currently structured have a minimal impact on either cost or incentive misalignment. We further find that there are inherent limits to what an earnout can accomplish. At best, a well-structured earnout, when coupled with a substantial investment in a merger by a sponsor, can deter a sponsor from proceeding with a merger that would be a seriously bad deal for shareholders. It will not deter a deal that is simply bad. We conclude with a proposal for more accurate disclosure of earnouts.

Keywords: SPAC, Securities Law, Executive Compensation

JEL Classification: G00, G30, G34, K2, K22

Suggested Citation

Klausner, Michael D. and Ohlrogge, Michael, Is SPAC Sponsor Compensation Evolving? A Sober Look at Earnouts (January 31, 2022). Stanford Law and Economics Olin Working Paper No. 567, NYU Law and Economics Research Paper No. 22-10, Available at SSRN: https://ssrn.com/abstract=4022611 or http://dx.doi.org/10.2139/ssrn.4022611

Michael D. Klausner

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael Ohlrogge (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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