SPACs are on fire. Scholars and commentators have pointed out the flaws of SPACs, including the various agency problems they generate (Klausner 2021),and their utilization by sophisticated investors to take advantage of unsophisticated investors (Spamann 2021). These claims are supported by the under-performance of SPACs relatively to market benchmarks, which reached a negative gap of 15% during 2021 (Randewich 2021).
In a new Essay titled SPACtivism, we suggest a modified version of the SPAC, that would enable its transformation from an investment vehicle that disrupts capital markets to one that may enhance their integrity and efficiency. Our version, we dub ‘the Activist SPAC’ is limited to acquisitions of shares in public corporations, as opposed to the merger and acquisition of private companies by conventional SPAC. The Activist SPAC is intended to improve the performance of the target public company and change its course of action. The focus of Activist SPACs on public companies enables it to overcome many of the problems that plague conventional SPACs. The public information regarding the value of the asset it acquires restraints the ability of sophisticated investors to take advantage of unsophisticated investors by executing deals with highly inflated values for the sole purpose extracting their promote.
The Activist SPAC is directed at transforming the nature and scope of shareholder activism. At present, direct investment in activism is reserved for affluent individuals and other professional investors—the only two groups that are qualified to invest in activist hedge funds. The public at large is barred from entering the activist arena. The current model comes at a triple price: first, as critics argue, activism in its current form is slanted toward short-term engagements. Second, the current scope of activism is in fact relatively modest. Activist engagements reach but 2.3 percent of the public companies traded on US markets. Third, retail investors cannot directly share in the excess profits stemming from activism.
The introduction of the Activist SPAC can change this reality. The Activist SPAC would allow interested retail investors to invest in a corporation dedicated to activist engagements. To ensure the success of the enterprise, the future target of the investment would not be made public at the time of the investment. This is the main regulatory reform required for enabling Activist SPACs to exist. Once the Activist SPAC buys a toehold position in the target and announces its plan, the investors would receive an opportunity to get their money back should they choose to do so or go along with the activist plan. As we show in the Essay, the use of Activist SPACs can transform the character of corporate activism by rendering it more attuned to long-term objectives and enhancing its ability to pursue ESG goals. To unlock these benefits we present a blueprint for the introduction of Activist SPACs, analyze the requisite economic parameters and detail the legal and regulatory steps that must be taken to enable Activist SPACS. Innovation is the lifeblood of financial markets. The Activist SPAC may well mark their future path.
Gideon Parchomovsky is the Robert G. Fuller, Jr. Professor of Law at the University of Pennsylvania Carey Law School; Wachtel, Lipton, Rosen & Katz Professor of Corporate Law, the Hebrew University Faculty of Law.
Sharon Hannes is the Dean and professor of law at the Tel Aviv University’s Buchmann Faculty of Law.
Adi Libson is a lecturer in the Law Faculty of Bar-Ilan University.
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