My co-author Mike Stegemoller and I have a new article on SPACs up on SSRN.  Usually I have an acceptance before I post on SSRN, but we've been sitting on this data for a while and wanted to share it and get some feedback.  Here's the abstract:

This article tells the story of a new business form—the special purpose acquisition corporation (SPAC).   The promoters of a SPAC begin by forming a shell corporation with no assets or operating history. They then take the company public on little more than a promise that the promoters will strive to complete the acquisition of a target in the near future.  Investors in the SPAC also receive the benefit of bonding mechanisms that provide assurances that their money will not be misapplied.

The SPAC story is important because the emergence of a distinctive corporate form is a rare event.  It also is important because SPACs are a species of private equity firm, and the private equity industry now manages hundreds of billions of dollars.  Despite its importance, this industry has eluded close study in the past because of the traditionally non-public nature of venture capital firms and leveraged buyout funds.  SPACs, however, are public companies and therefore subject to SEC reporting requirements.  This legal reality has had a significant, if unintended, effect.  Because SPACs are publicly held, we have been able to gather data on the details of the investment contracts they offer and on the changes in those contracts that have developed over time.  Information of this sort has not previously been available in the secretive world of private equity, and this paper reports this groundbreaking data.

New as the SPAC form is, it casts light on a longstanding question at the heart of corporate law: Why do shareholders vote? The traditional law-and-economics response is that shareholders vote because they are the corporations’ residual claimants: standing “last in line,” they have the incentive to maximize firm value.  As it turns out, early SPACs provided shareholders with a robust veto right on proposed acquisitions.  Our data, however, reveal an evolution away from the shareholder vote in favor of protecting outside investors through use of a form of managerial cash bonding that provides a “walk-away right” to shareholders who object to the proposed acquisition.  In fact, the most recent SPACs eliminate the right to a shareholder vote entirely.  SPACs thus offer evidence that there may be no “grand unified theory” of the shareholder vote.  The importance of the shareholder franchise is contingent and contextual.  Voting is just one of a variety of potential strategies shareholders can employ to mediate principal-agent conflicts.  In the case of SPACs, the vote proved less valuable than the right to walk away.

Comments welcome!

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