- SPACs used to be a small segment of the market, but elite law firms have flocked to the sector in 2020. They stand to make millions on deal advice.
- Such companies often pay around $300,000 for legal advice on their IPOs, and the eventual merger often results in legal fees that can be 3 to 5 times what it cost to go public, attorneys say.
- Underwriters, sellers and investors often have to retain their own lawyers, creating more work for the fees aren’t often disclosed.
Special purpose acquisition companies have taken 2020 by storm, and it’s not just the banks that are cashing in.
Law firms stand to collect more than $30 million in fees from the roughly 99 blank check companies that have announced IPOs so far in 2020, like Bill Ackman’s Pershing Square Tontine and Michael Klein’s two new billion-dollar Churchill Capital SPACs. And they could bill about three to five times as much — or $90 million to $150 million — when the companies eventually complete their mergers, according to securities filings and lawyers involved in such deals.
Those figures are a far cry from the $800 million-plus that big banks have reportedly made from underwriting such deals, and they are dwarfed by the $39 billion that SPACs have raised in their initial public offerings so far this year, according to SPAC Research. But they are a compelling reason for law firms to tout their abilities and results with such vehicles.
“Typically, if we are pitching a client to do their IPO work, we’re really pitching that SPAC to do their full lifecycle work,” said Josh DuClos, a partner at Sidley Austin. “The more time-intensive, cost-intensive events of the SPAC [follow the IPO]. That’s where more of the work and fees are being generated.”
From backwater to big bucks
When a SPAC is formed, it consists of a trust fund full of investor cash and a team of executives who are charged with finding an acquisition target, usually in two years. Public investors buy shares and warrants, and the SPAC sponsor, or organizer, gets 20% of the shares. Once a deal is struck, investors vote on the transaction, and if it fails to garner enough support, the trust fund refunds money to investors and the SPAC is dissolved.
In the 1990s, SPACs were something of a backwater, associated with scandals and flops, that only a handful of investment banks would underwrite. But they have roared to prominence this year, with elite law firms and bulge-bracket banks behind them. While smaller firms like Ellenoff Grossman & Schole and Graubard Miller that have long specialized in SPACs have stayed busy, they have been joined in the IPO league tables by firms like Kirkland & Ellis and Ropes & Gray whose blank-check IPOs could be counted on one hand as recently as 2018.
Of course, law firms’ work on SPACs doesn’t stop and start with IPOs. Many lawyers will tell you that they have worked on blank-check transactions for years in roles that might not be tabulated in a league table, counseling investors, lenders and targets of the business combinations, called de-SPACing transactions, that mark the end of a SPAC’s life as an empty shell.
But 2020 has been different. Multiple billion-dollar blank check companies have gone public, and it’s common for big names in banking and investment to announce plans to raise SPACs of $500 million or more. Lawyers are helping clients cobble together complex structures and navigate cross-border acquisitions, and big, sophisticated companies like Airbnb are talked about as potential acquisition targets alongside companies like DraftKings and the spaceflight company Virgin Galactic that have already gone public through SPACs.
Regulatory changes and innovations in the marketplace — like allowing investors to cash in their shares once a merger candidate is announced without voting “no” on the deal, reducing the risk of derailing the close — have made SPACs more attractive, lawyers said. According to a report from June, 82 SPACs closed a deal since 2015 compared to just nine that have liquidated, a failure rate that compares favorably to the larger universe of deals going back to 2003.
The SPAC landscape “has changed drastically over the last six months,” said Pam Marcogliese, a corporate lawyer at Freshfields Bruckhaus Deringer, which has guided clients through several mergers involving SPACs. “The kinds of companies that were involved in SPAC transactions were not historically the kinds of clients that firms like Freshfields would represent. … Moving forward, the world has changed.”
Another major change that has created more work for lawyers has been the growing use of PIPEs, or private investments in public equity. SPAC sponsors will often seek big investors like family offices and sovereign wealth funds to invest alongside them, enabling them to negotiate stakes in bigger targets than a SPAC would be able to afford with just funds raised from an IPO and providing some third-party validation of the deal’s fundamentals, attorneys said.
Earlier this year, the SPAC Churchill Capital Corp. III, which had raised $1.1 billion, revealed that it would take the private equity-owned health care services company Multiplan Inc. public in a deal that valued it at $11 billion, the biggest de-SPACing yet. The deal also drew attention because of the huge PIPE component: $2.6 billion.
SPAC investors are also taking smaller stakes in companies than the term “acquisition” would suggest. Shareholders in the $414 million SPAC Social Capital Hedosophia Holdings Corp. II, which earlier this week said it had reached a deal to invest in real-estate website Opendoor and take it public, are expected to own just 6.6% of the combined company, which is valued at $4.8 billion, according to an investor presentation.
“The biggest mistake is that people think the SPAC is designed to acquire the business,” said Alan Annex, a Greenberg Traurig shareholder who co-chairs the firm’s corporate practice. “It’s not — it’s designed to take a company public.”
Interest in SPACs comes as IPO process called ‘broken’
The growing interest in SPACs comes as large, private equity- and venture-backed companies have voiced discontent with the timeline and pricing process for normal IPOs. Silicon Valley investor Bill Gurley has called IPOs “structurally broken,” and he and other investors have urged startups to consider SPACs and direct listings as alternatives.
For Franco Tenerelli, the general counsel of residential builder Landsea Homes, the decision to merge with LF Capital Acquisition Corp. announced last month was driven primarily by timing. His company had been in talks with several SPACs earlier this year, and though talks were interrupted by the pandemic, Landsea felt the best fit with LF, which raised $155 million in its 2018 IPO.
The fees Landsea would have paid its outside counsel would have been similar whether it had opted for a SPAC merger or a traditional IPO, he said, but the LF deal could be arranged much more swiftly. Gibson Dunn, the company’s lawyers, deployed a “small army” to help the process move quickly, he said.
“Real estate is notoriously cyclical,” he said. “You don’t know when that [public] window is going to be open and you don’t know how long it’s going to be open.”
The biggest component of any public offering tends to be underwriting fees, but legal fees can be sizeable, too, although they are broken up. A conventional IPO can cost $1 million or more, according to John Coffee, a professor at Columbia Law School and an authority on corporate law. SPACs, in their prospectuses, have generally put the legal fees involved in going public in the $200,000 to $400,000 range.
But the IPO is also only the first big event in a SPAC’s legal life, with the second being a merger with an operating company. Securities filings are typically not nearly as clear about the legal budget for such transactions, and they can vary widely, but are typically three to five times as high for the merger as for the IPO, according to two lawyers who have worked on such deals.
Lawyers are also called in to advise the underwriters of an IPO, and several attorneys interviewed for this story said they increasingly found themselves called upon by potential SPAC targets. And the more parties that are involved, the more lawyers have to be called in; Churchill’s deal with Multiplan spun out work for Weil Gotshal & Manges, Kirkland, Simpson Thacher & Bartlett and Ropes, advising not just the buyer and the target, but also the target’s private-equity owner and a sovereign wealth fund investor.
Howard Ellin, an M&A partner at Skadden, said somewhere between a quarter and a third of his time in recent months has been spent on SPAC-related transactions. And given the investment timelines of such companies, even if IPOs stopped tomorrow, M&A work could keep corporate lawyers busy for another two years. But there’s no sign that work is slowing down.
“We’re seeing a huge amount of activity that’s coming as we head into the fall,” said Paul Tropp, the co-head of Ropes & Gray’s capital markets group in New York. “I’m on more live transactions at this point than I have ever been at any time in my career.”