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 relative to market benchmarks, which reached a negative gap of 15 percent during 2021 (Randewich, 2021).
In a new essay, we suggest a modification to 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, which we dub “the Activist SPAC,” would be limited to acquisition of shares in public corporations rather than the merger and acquisition of private companies by a 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 them to overcome many of the problems that plague conventional SPACs. The public information regarding the value of the asset the Activist SPAC acquires restrains 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 designed to transform 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 only 2.3 percent of the public companies traded on U.S. 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 our 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.
This post comes to us from Sharon Hannes at Tel Aviv University, Adi Libson at Bar-Ilan University – Faculty of Law, and Gideon Parchomovsky at Hebrew University of Jerusalem – Faculty of Law and University of Pennsylvania Carey Law School. It is based on their recent essay, “SPACtivism,” available here.