PE Sale of Portfolio Company to a SPAC

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-09-15

Posted by Douglas P. Warner and Dianna Lee, Weil, Gotshal & Manges LLP, on Sunday, September 15, 2019
Editor's Note: Douglas P. Warner is a partner and Dianna Lee is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum.

SPAC activity has enjoyed a healthy uptick in recent years. More SPACs went public in 2018 than in any year since 2007, raising more than $10 billion in capital to deploy towards new investment opportunities. Private equity sponsors are increasingly finding themselves on the opposite side of the table from SPACs as the owner of a portfolio company considering a sale to a SPAC. A sale to a SPAC makes sense for certain portfolio companies, though it does raise certain issues for sellers that do not exist in a regular sale process and there have been some high profile “busted” sales of portfolio companies to SPACs. This article highlights certain key considerations for private equity sponsors in navigating a potential sale to a SPAC.

Is your Portfolio Company a Suitable Candidate for being a Public Company?

A sale to a SPAC is fundamentally an alternative to an IPO in terms of an exit strategy for your portfolio company. Like an IPO and unlike a regular way sale process it is unlikely you will be able to cash out 100% of your equity stake in the sale. You will therefore need to determine that your portfolio company is a suitable candidate for the public trading markets and that there will be enough investor support so that the company will trade well and allow you to sell the remainder of your equity stake in the company at an attractive valuation. Selling to a SPAC will also require that your company satisfy certain public disclosure requirements as part of the approval process for the transaction, akin to the level of information disclosed in an IPO prospectus, which includes preparing financial statements that meet certain SEC requirements.