Mergers, Acquisitions and International Financial Regulation: Analysing Special Purpose Acquisition Companies (Daniele D’Alvia, Routledge 2021), reviewed by Milos Vulanovic

In the hearings related to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, the US Attorney for the District of Utah stated regarding blank check companies (BBCs) initial public offerings (IPO): “[We] find no evidence that these offerings provide any benefit to the US economy or capital formation”. After more than thirty years, this sentence has been remarkably reversed and permanently silenced. In the US, Special Purpose Acquisition Companies (SPACs) make up two-thirds of all IPOs. After raising in 2020 a stunning $83 billion in capital, the momentum carried over into 2021 with over $100 billion raised. Today, SPACs are one of the mainstream financial products of Wall Street, although they have been around since the 1990s.

A SPAC is a cash-shell company that offers on the primary market units composed of shares and warrants. Their sole purpose of existence is to find a suitable target company to merge with. The book “Mergers, Acquisitions and International Financial Regulation: Analysing Special Purpose Acquisition Companies” by Daniele D’Alvia is the first book on SPACs from a comparative point of view . Indeed, the Nobel Laureate Prof. Finn Kydland has expressed a special endorsement for this book by defining the book as the first one to use a comparative perspective in SPAC’s studies. This is not surprising if we consider that D’Alvia is the award-winner of the Colin B. Picker Prize by the American Society of Comparative Law for a paper he wrote back in 2017 on the international financial regulation of SPACs, and today published on the Journal of Banking Regulation (2019). By the way, three years before the “SPAC-boom”. The paper and the book argue that the evolution of the American financial regulation of SPACs has established international corporate and listing standards to be followed (the escrow account, the winding up procedure, the corporate purpose of the SPAC, etc.). Every day we read about a new SPAC reform globally. From London to Milan to Singapore to India, those are practical instances of legal transplants in Watson’s comparative law theory. D’Alvia goes a step further. In his view, the American financial regulation of SPACs is not only an example and a source of legal transplants at global level. This would represent only a descriptive role of the law. By contrast, the ‘beauty’ of SPACs rests with D’Alvia’s definition of the ‘uncodified-codification’ process from meanings outside of the law. In the case of SPACs, this process involves market practices and sponsors’ behaviours: for example, the fractional warrant structure, the structure of the sponsor’s at-risk capital, the de-coupling mechanism between redemption right and voting right, or the tender offer. Those are not listing requirements: they are not even compulsory corporate structures because a market practice necessarily starts out-of-the-law. And yet such market practices are often auto-imposed features followed by many SPACs globally to be more reliable and investor-friendly. Furthermore, the implementation of such ‘uncodified’ features can be rich of new legal meanings depending on the jurisdiction where such an implementation takes place (look at the disputed role of the sponsors’ initial shares). This is the real revolution of this paper and this book: to reverse the common wisdom of Sacco’s legal formants and Watson’s legal transplants and to venture beyond the law.

The book is divided into six chapters. The first one explains the background of SPACs, namely the reasons allowing to understand where the SPAC-mania is originating. In D’Alvia’s words it is the investors’ “fear of missing out” that has always dominated financial markets, and specifically markets in times of crisis such as the new unfolding crisis following the Covid-19 pandemic. SPACs are financial innovations that since 2020 have been generating discussions among academics and policymakers. Are SPACs the next bubble to burst? Are they equivalent to disruptive synthetic financial products that have been responsible for the inception of the last Global Financial Crisis in 2007? D’Alvia’s answer in a nutshell is negative. This is because SPACs have remarkably acted against debt in D’Alvia’s view. Indeed, SPACs are the centre of a new equity-era where stock markets as opposed to bond markets are dominating the scene, and SPACs – specifically – are allowing emerging companies and growing companies to get listed.

In Chapter 2, the Author is illustrating the historical evolution of SPACs from an economic and regulatory point of view under American securities rules. Here, we understand that modern SPACs listed today on NYSE or NASDAQ are mainly informed by a self-regulatory approach that is trying to replicate as well as to add new and diversified corporate features based on the original lines set forth in Rule 419 issued by the Securities and Exchange Commission (SEC). Indeed, Rule 419 was rather addressed to BCCs listed on the penny stock market (PSM). BBCs are not SPACs. Nonetheless, once Rule 419 was adopted by the SEC in 1990s, BBCs disappeared from the PSM, and in 2003 SPACs started adopting their new name, and to be listed on unregulated Over-The-Counter (OTC) Bulletin Board in compliance with some corporate standards established under Rule 419. For instance, IPO proceeds should have been kept on trust, the duration of the SPAC was settled and finite, the target company had to be valued at least 80% of the proceeds held on trust, etc.. This voluntary compliance with Rule 419 makes SPAC a primary example of self-regulation. Until 2005, SPACs were only permitted to trade on the OTC Bulletin Board, then on regulated markets in 2008 (NYSE and NASDAQ), and finally in November 2010 on the NYSE AMEX.

SPACs are underpinned rather than undermined by uncertainty. Indeed, this book dedicates a very interesting and fascinating Chapter 3 on risk and uncertainty in financial markets. Frank Knight’s core message of “Risk, Uncertainty, and Profit” is re-evaluated this time with reference to financial markets and SPACs. D’Alvia claims that SPACs are money creation vehicles underpinned by uncertainty to seek profit maximisation, and in doing so they are investment vehicles conceived as a managerial rationality tool to deal with financial risks, which are in turn innate to any financial instrument.

SPACs are not only an American invention, they are a compelling evolution of capitalism that is developing around the globe. Chapter 4 is dedicated to a specific analysis in comparative law terms between US, Europe and Asia in order to discover whether market practices in SPACs are regulated or standardised by the law. As opposed to Malaysia that has taken a soft law approach by issuing Equity Guidelines, the US and Europe seems focused on a hard law conception of market rules established by each individual Exchange (from NYSE to London Stock Exchange or Euronext). Definitively, the main intake is that SPACs live on self-regulatory practices: the public statement of the ESMA (the European Securities and Markets Authority) in Europe seems to confirm this approach by leaving Exchanges free to decide the best SPAC law framework, as long as it fulfils common features that each Exchange at European level should implement to protect retail investors and to make SPAC transactions more transparent by virtue of specific market disclosures. As opposed to the European approach, the London SPAC Reform is much more stringent and SPAC sponsors are obliged to follow specific requirements imposed by the Financial Conduct Authority if they do not want their SPAC’s shares to be subject to a suspension of trade at the moment of the target company’s takeover. Chapter 4 is rich in examples and is particularly relevant to test future regulatory changes and practices on the SPAC’s “promote”.

Finally, Chapters 5 and 6 are respectively dedicated to the De-SPAC transactions and to consolidating remarks on financial markets, regulation, and SPACs. Chapter 5 is very useful for practitioners because it outlines the potential fields of SPAC litigation and how to mitigate litigation risk as well as how to structure a PIPE (private investment in public equity) transaction. It is claimed that SPAC sponsors have to particularly apply a due diligence standard of care in examining potential targets and in merging with them. Chapter 6 is consolidating this understanding: it confirms that SPACs are “without law” and, therefore, the factual application of specific standards of care or market practices on the side of the sponsor as well as in respect of targets is particularly relevant to secure better performance of the SPAC in economic terms as well as a more reliable corporate structures and transactions for SPAC investors.

You might agree or disagree with D’Alvia’s views on SPACs and with this book in particular, but one thing you cannot do is to ignore this work. It is pioneering a complex subject with unusual clarity and it is opening the eyes of regulators, lawyers, policymakers, financial operators, bankers, scholars and students alike by demystifying a very important and emerging topic, and probably the new legitimate alternative to traditional IPOs and acquisition models in the years to come.

Posted by Milos Vulanovic (EDHEC Business School)