The Corporate Law Reckoning for SPACs

Abstract

The ascendance of SPACs in U.S. capital markets has attracted intense regulatory scrutiny from federal officials, especially the SEC. This Article examines SPACs through a different lens: Despite all their novelty and complexity, SPACs are organized as standard Delaware corporations. As this Article demonstrates, SPACs have exhibited a striking disregard of corporate law. The standard SPAC adopts a governance structure that, for a public corporation, is highly unusual: All corporate control is vested in the hands of a single shareholder (known as the sponsor), who suffers from a deep conflict of interest with public stockholders but nevertheless acts free of any conventional disinterested constraints. The SPAC industry has kept its collective head in the sand on what this model means for SPAC fiduciaries: under existing Delaware law, the standard SPAC very likely triggers the entire fairness test, and very likely for all the reasons it can be triggered. SPACs have also failed to comply with basic corporate statutory requirements in ways that are positively bizarre for large commercial transactions.

SPACs now face a corporate law reckoning, forcing Delaware to examine the SPAC in light of basic corporate expectations. This Article argues that the normative touchstone in that examination should be to enforce privately-ordered bargains. For a SPAC that elected to organize as a corporation, in Delaware, and sold shares of common stock to the public, the core attributes of the privately-ordered bargain are deceptively simple: (1) the mandatory loyalty obligation for fiduciaries and (2) the limited ways to satisfy that obligation short of a judicial inquiry. In particular, the SPAC redemption right should be irrelevant to the judicial standard of review, as homebrewed remedies cannot abrogate the loyalty demand or excuse the absence of any disinterested decision-makers. Thus, the most searching form of judicial review should apply to the one business decision that a SPAC makes—its business combination.

Delaware and the federal government should act symbiotically in responding to SPACs. Before imposing substantive external regulations on SPACs, the SEC and Congress should wait for a clearer picture from Delaware about the vehicle’s internal regulation. And for the time being, Delaware should resist any legislative calls to fashion a new statutory structure for the SPAC, especially in light of the looming federal response and the still-unfolding picture of sponsor behavior during the 2020-21 boom. Federal officials should fashion SPAC rules that are explicitly cognizant of Delaware’s fiduciary protections, as SPACs that live up to the basic expectations of the Delaware corporate form will give rise to far fewer problems under federal securities laws. Thus, for example, the SEC might allow the registration of SPAC shares only if the entity is incorporated in Delaware or might restrict exchange rules in similar fashion.

Keywords: SPACs, corporate law, fiduciary duty, statutory requirements, Delaware, equity capital markets, IPO, disclosure regulation

JEL Classification: K22