Top 10 Practice Tips: PIPE Transactions By SPACs

• Published date: 02 November 2020
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Securities, Shareholders
• Law Firm: Mayer Brown
• Author: Ms Anna T. Pinedo, Brian D. Hirshberg and Ryan Castillo

This practice note discusses ten practice points that can help you, as counsel to a special purpose acquisition company (SPAC) or its placement agent, execute a private investment in public equity (PIPE) transaction alongside a SPAC business combination transaction.

For additional information on SPACs, see Special Purpose Acquisition Companies and Market Trends 2019/20: Special Purpose Acquisition Companies (SPACs). For additional practical guidance on PIPEs, see PIPE Transactions and Market Trends 2019/20: PIPEs.

A SPAC is a public shell company that uses proceeds from its initial public offering (IPO) to acquire a private company within a designated time frame. Recently, merging into a SPAC has become an attractive alternative for many private companies in lieu of undertaking a traditional IPO or direct listing. Following an announcement of a proposed business combination, the SPAC must offer its public investors the option to either redeem their common stock for the original purchase price or to sell their common stock to the SPAC in a tender offer. This redemption option inherently creates uncertainty as to the amount of cash available to the combined company following the initial business combination. Many SPACs have recently mitigated this concern by issuing new securities to institutional accredited investors in a PIPE transaction that is contingent upon the closing of the initial business combination. The capital raised in the PIPE transaction generally will be used to provide additional capital for the operating company to deploy following the consummation of the business combination. Below are ten practice tips to consider when representing a SPAC in a PIPE transaction:

1. Set out roles and responsibilities in engagement letter. The SPAC will often seek to engage one or more of the same investment banks that assisted the SPAC with its IPO as the placement agents for a PIPE transaction. Generally, due to the need to wall cross investors and maintain the confidentiality of the process, it will be preferable to have a sole placement agent. Notwithstanding the prior relationships with the SPAC, the bank selected as placement agent should follow its normal practice for a private placement engagement and enter into its customary form of PIPE engagement letter with the SPAC (the acquiring company in the business combination), subject to addressing some special issues applicable to SPACs.

The engagement letter documents the fees and expenses to be paid by the SPAC in connection with the PIPE transaction. Given that there may be various investment banks advising the SPAC on capital markets advisory matters or on merger and acquisition introductions, and these banks may have certain fee arrangements in place, it will be important to address any other existing arrangements. If the engagement is not on an exclusive basis, the letter should acknowledge the inclusion and role of the other engaged agent(s) in the PIPE transaction and specifically allocate compensation between the agents to avoid any unintended overlap or dispute. Engagement letters with multiple placement agents often limit compensation to a percentage of the proceeds received from investors that were actually introduced to the SPAC by the particular agent. The private company target may also have banking relationships and may also have pre-existing commitments to include an adviser in the PIPE process. Usually the PIPE placement agent will want to consider a fee tail. The fee tail should be addressed in the engagement letter as well. There may also be a right of first refusal or a right of first offer included in the letter relating to future offerings undertaken by the combined company.

Generally, a PIPE engagement letter would include certain representations and warranties from the issuer relating to the accuracy of the diligence and other materials provided by the issuer to the placement agent. It may make sense to ensure that the private company target be included in such representations since the PIPE placement agent will rely on the diligence materials furnished by the private company target as well as the investor presentation, term sheet, or other materials prepared by the private company target to solicit potential PIPE purchasers.

Most form engagement letters will include a broad securities indemnification provision wherein the issuer indemnifies the placement agent and certain related parties in connection with losses arising in connection with the transaction. A SPAC will be limited in its ability to provide meaningful indemnification provisions given that the SPAC's proceeds from its IPO will have been deposited into the trust account, and the trust account cannot be accessed other than for limited purposes. Again, this may be another reason for joining the private company target as a signatory to the engagement letter. Another approach that may be considered is including the SPAC sponsor as a signatory to stand behind the indemnity and also for purposes of broader fee tail coverage.

2. Consider deal structure. Ideally, the public announcement of the execution of the initial business combination agreement will be timed to coincide with the public announcement of the PIPE transaction. In order to facilitate a combined public announcement, definitive commitments for the PIPE transaction must have been received concurrent with the execution of the business combination agreement. The commitment from the PIPE investors would be irrevocable but conditioned on the consummation of the business combination by a specified...