Finance Monthly - August 2023

clawback provisions as part of the purchase consideration. A large part of this increase is due to the economic climate (e.g., higher interest rates, inflation, recessionary fears) throughout 2022 and the unfavorable de-SPAC performance over this same time period. Given these factors, SPACs have been attempting to mitigate their risks: from potentially over-valuing the target or from execution risks associated with the target’s financial projections. Consequently, we have adopted option pricing methods to quantify the economics of such provisions. This is important – because if the earnout portion is material to the overall purchase consideration, the earnout could potentially overdilute existing shareholders in the future and significantly reduce their rate of return on their investment. This is a concept that our clients often struggle with, because they incorrectly believe that the future performance of the company, post de-SPAC, will automatically cover the earnout and any dilution. A simple question we usually pose is: “is an investment in a company with an earnout provision the same as an investment without an earnout provision?”. The answer is obviously “No” due to the potential for dilution. This will usually help them understand that the earnout does not have a non-zero value and that our approach to this piece of the analysis is appropriate and required. How have investors’ expectations and demands regarding fairness opinions for SPACs changed in the past two years? Prior to the SEC proposed rules, less than approximately 15% of SPAC transactions obtained a fairness opinion. From our casual observations, it seems that the current picture is that most legal advisors to SPAC boards are encouraging their clients to obtain an independent fairness opinion. Although there is no formal requirement for a fairness opinion currently, the proposals by the SEC were enough to create ‘best practices’ as if the proposed rules were enacted. What potential implications or future trends regarding fairness opinions for SPACs can be anticipated? We anticipate the need for independent fairness opinions to remain relatively constant for SPACs given that they are now perceived as a ‘best practice’ by many. We could also see a significant uptick in demand if the SEC’s proposed rules described above become final. While these rules do not explicitly require a fairness opinion, Item 1606(a) of the proposed rules would require a statement from the SPAC as to whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to the SPAC’s unaffiliated security holders, as well as a discussion of the basis for this statement. Additionally, SPACs and their boards are beginning to see the fairness opinion process as an unbiased independent check on the value of the potential target, which provides them additional comfort when deciding whether or not to approve the transaction. If performed in an independent, unbiased manner, we view the fairness opinion as a ‘value-add’ to the transaction process versus a hindrance. In this respect, the “need” to have a fairness opinion converts to a “want”. Finance Monthly. Banking & Financial Services 41

RkJQdWJsaXNoZXIy Mjk3Mzkz