It’s all about de-SPACing – How to know what investors will eventually find out

Wednesday, November 11, 2020

As SPACs grow in popularity and acceptance, scrutiny on target companies in reverse mergers continues to increase. Recent news on acquisition target companies in SPAC deals that may not have been as advertised or key executives with skeletons in their closet that have come to light after a business combination has been completed have swiftly impacted share price. SPAC advisors and promoters must have a way to get better insight into the potential risks of an acquisition target company and its management with confidence before the completion of a business combination.

SEC chairman Jay Clayton’s comments in late September 2020 on the importance of disclosure and transparency in SPAC transactions raised the possibility that the regulatory body will take a deeper look at SPACs in the near future. Due diligence is a key driver of adequate disclosure and transparency. Completing sufficiently in-depth due diligence on the target company and its management team as early as possible in the de-SPACing process is crucial to uncovering potential risks and mitigating them before they create issues for investors.

Vetting an executive’s representations and bona fides, understanding that person’s litigation history, as well as finding any sins of omission are fundamental. Unearthing a pattern of disputes over the years or a rocky track record with prior business ventures must happen as early as possible because they will eventually become known. However, vetting the claims of a target company requires more than what is available in public records. Often the best intelligence regarding the veracity of a company’s claims comes directly from former employees and business associates. Similarly, allegations of untoward behavior by a senior executive are usually not found in public records, but depend on discreet interviews with sources who have direct knowledge of management and their personalities. A senior executive’s history of making subtle but misleading claims may not always make it into court cases or media reports but would be known to those sources. For this reason, human intelligence is increasingly being employed in background due diligence for SPAC business combinations.

Ultimately, advisors, promoters, and investors want a smooth SPAC deal with no surprises or blow-ups after the transaction. Proper due diligence, including on-the-ground reputational intelligence, early in the process is key to making that happen.

 
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Shanti Salas, Vice President, Strategy, Exiger Diligence

Shanti Salas is Vice President, Strategy, based in Silver Spring, Maryland, at Exiger Diligence, a specialized research division that delivers the firm’s global public records research and investigative due diligence capabilities.

Lara Pedrini, Vice President, Business Development

Lara Pedrini is Vice President, Business Development, based in Exiger’s New York office.