Exit, Voice, and Reputation: The Evolution of SPAC
Usha Rodrigues & Mike Stegemoller
This Article tells the story of a new type of business—the special purpose acquisition corporation (“SPAC”). The promoters of a SPAC begin by forming a shell corporation with no assets. They then take the company public on little more than a promise that they will strive to completetheacquisitionofatargetinthenearfuture. Wepresentthefirst empirical study of the SPAC contract design, and use a hand-collected dataset to trace its evolution over the past nine years.
While SPACs are a new form, their contract design borrows heavily from private equity’s playbook. Private equity managers famously (and sometimes controversially) receive 20% of their funds’ profits, and funds typically last only ten years. From the traditional 20% incentive compensation to a short investment shelf life, SPAC entrepreneurs tried to transfer many hallmarks of the private equity contract to the public market.
Reputational constraints got lost in translation. The private equity fund model is built on repeat business, and reputation is a crucial contractual gap filler. In contrast, SPACs are one-shot deals. Without managerial reputation to rely on, investors demanded increasing amounts of “skin in the game” from SPAC managers, and placed more conditions on managerial claims to 20% of the profits. On the other hand, without the force of reputation constraining investors, a supermajority vote created a powerful holdout right, which shareholders used to exploit SPACs until the form evolved to eliminate it. Our study of SPACs—by demonstrating the ways in which parties contract for credibility in the absence of long-term relationships between investors and managers—thus underscores the importance of reputation to the relational dynamics in traditional private equity.
Aside from making private equity publicly tradable (with its concomitant loss of reputation as gap filler), SPACs’ chief innovations were in the classic governance mechanisms of voice and exit. SPACs evolved from granting investors a supermajority vote to eliminating the vote altogether. At the same time, they granted investors an even stronger walk- away right. Thus, the SPAC story, new as it is, casts light on an old governance question: the relative value of voice and exit.