A developing market for owners of cannabis businesses looking for a potential buyer are SPACs, special purpose acquisition companies. SPACs raise money in public offerings with the purpose of acquiring companies, usually in a specified range of industries or located in a particular geographic area. The SPACs cannot have a particular target in mind at the time of the public offering. Among some of the more recent SPACs with a cannabis industry focus, MTech Acquisition Corp. closed a public offering for $57.5 million in February 2018, and Cannabis Strategies Acquisition Corp. closed a CDN $134.75 million (approximately US $103.78 million) public offering in Canada in December 2017. This post looks at some of the issues involved that are unique to being acquired by a SPAC.
- The SPAC has a deadline for closing acquisitions. Unlike other types of companies, SPACs must consummate an acquisition within a certain period of time or return the funds raised from public offerings to the investors. This may provide additional leverage to a targeted business approached by a SPAC coming close to its deadline.
- The SPAC must acquire companies with a certain minimum value. Generally the minimum value is 80% of the money the SPAC is holding in escrow from the proceeds of its public offering. If the SPAC is pursuing a target below this threshold, it can acquire multiple businesses with a combined value above the threshold. Having to arrange multiple simultaneous closings would obviously complicate the acquisitions process and add a greater degree of uncertainty for a prospective target as to whether the transaction will be completed.
- The acquisition may be more likely to require stockholder approval than an acquisition by a non-SPAC. Depending on the structure of the acquisition and the nature of the proposed acquirer, an acquisition by a non-SPAC may not require stockholder approval. As SPACs are public companies they would generally have to prepare a proxy statement to obtain stockholder approval, which proxy statement is subject to review by the applicable securities authorities.
- Public stockholders in the SPAC will have the right to redeem their shares in connection with an acquisition. This right can be exercised in connection with a stockholder vote, or, in lieu of requiring a stockholder vote for an acquisition, some SPACs instead provide for making a tender offer for stockholder shares. To the extent that a SPAC proposes to acquire a business with cash as a substantial component of the purchase price, the SPAC’s ability to pay the purchase price could be substantially impaired if significant number of stockholders elect to redeem and the SPAC is otherwise unable to make up the shortfall.
- If the purchase price includes stock, there may be rights affecting the value of the stock. Generally, stock in a SPAC in a public offering is sold together with warrants with an exercise price at a premium to the initial offering price of the shares. Depending on the valuation of any stock included in the purchase price in an acquisition, the exercise price of the warrants may be greater or less than the value of the stock issued to a target.
As an illustration of the potential difficulties in an acquisition by a SPAC, in July 2017 it was announced that the publisher of High Times was going to be acquired by a SPAC, Origo Acquisition Corp. The merger has yet to be consummated, and Origo has scheduled a stockholder meeting for June 12 looking for approval to extend the time that Origo has to close a transaction before having to dissolve.
In conclusion, while SPACs offer some benefits to potential sellers including: a strong incentive to close on deals, a substantial pool of cash (virtually all of the proceeds from their IPO) which may limit any need to obtain outside funding to complete an acquisition, and the ability to potentially issue publically tradeable stock as part of the purchase price for an acquisition, there are also a number of potential obstacles in closing a transaction with a SPAC that should be accounted for by any business looking to sell itself to a SPAC.