Counsel for Target’s in de-SPAC Transactions

Strategic legal guidance for target companies in de-SPAC transactions. Anthony, Linder & Cacomanolis provides expert analysis of Subpart 1600 disclosure mandates, co-registrant liability under the 2024 SEC rules, and the impact of the lost PSLRA safe harbor.

Counsel for the Target: Navigating the New Era of de-SPAC Liability

The 2024 SEC regulatory overhaul has fundamentally repositioned the private target company in a de-SPAC transaction. No longer a mere participant in a merger, the target is now a primary actor in the federal registration process. Anthony, Linder & Cacomanolis provides sophisticated counsel to target boards and management teams, navigating the heightened disclosure standards of Subpart 1600 and the expanded liability profile created by the target’s status as a co-registrant. Our approach focuses on “IPO-level” diligence to protect the target and its fiduciaries from the risks inherent in the transition to the public markets.

The Target as Co-Registrant: Liability and Signing Requirements

The most profound change under the 2024 rules (specifically Rule 145a and the amendments to Forms S-4 and F-4) is the designation of the target company as a “co-registrant.” This structural shift has immediate and significant legal consequences for the target’s leadership.

Mandatory Signatures and Section 11 Exposure

Prior to the 2024 rules, only the SPAC and its officers/directors were required to sign the registration statement. Now, the target company, its principal executive officer, its principal financial officer, and a majority of its board of directors must sign the Form S-4 or F-4.

• Direct Securities Act Liability: By signing the registration statement, the target and its fiduciaries become subject to the strict liability provisions of Section 11 of the Securities Act. This means they are liable for any material misstatement or omission in the registration statement, regardless of whether the target was the source of that specific information.
• Elevated Standard of Care: This co-registrant status effectively eliminates the “arms-length merger” defense. Target management must now perform the same level of “due diligence” on the SPAC’s disclosures and the combined company’s projections that an issuer would perform in a traditional IPO.

Subpart 1600: Target-Specific Disclosure Mandates

The new Subpart 1600 of Regulation S-K mandates a series of granular disclosures from the target’s perspective, ensuring that the target board’s rationale and the deal’s fairness are transparent to public shareholders.

Item 1605: Background and Material Terms

Item 1605 requires a detailed chronological description of the background of the business combination. For the target, this includes:

• Log of Negotiations: Disclosure of all material meetings and discussions between the target and the SPAC, including who initiated the contact and the specific deal terms discussed at each stage.
• Alternative Transactions: If the target board considered other merger partners or traditional IPO paths, the reasons for choosing the specific SPAC must be detailed.

Item 1606: Board Belief as to Fairness

Item 1606 requires the target board to disclose its belief as to whether the de-SPAC transaction and any related financing are fair or unfair to the target’s shareholders.

• Substantiating the Belief: The board cannot merely state that it is “neutral.” It must disclose the material factors upon which the fairness belief is based. This requirement has led to the now-standard practice of the target board obtaining its own third-party fairness opinion to insulate its decision-making process.

The Loss of the PSLRA Safe Harbor for Projections

Historically, de-SPAC transactions utilized the safe harbor provided by the Private Securities Litigation Reform Act (PSLRA) to share aggressive financial projections with the market. The 2024 rules have explicitly removed this protection.

• “IPO-Style” Liability: The SEC amended the definition of “blank check company” to ensure that de-SPAC transactions are treated like traditional IPOs. As a result, any forward-looking statements or projections included in the S-4 or F-4 are now subject to full liability under the federal securities laws.
• Verification and Diligence: As counsel for the target, we insist on a rigorous “basis and assumption” audit for all projections. Under Item 1609, the target must disclose the material bases and assumptions underlying its projections and must verify that those projections still reflect management’s view as of the time of the filing.

Critical Risks for the Target Board

Navigating a de-SPAC involves several unique risks that are not present in a traditional M&A transaction or a standard IPO.

Redemption Risk and the “Minimum Cash” Trap

SPAC shareholders have the right to redeem their shares for cash from the trust account. High redemptions can leave the combined company with significantly less capital than originally projected.

• Operational Viability: A “successful” closing with 90% redemptions may leave the target with the costs of being a public company but without the cash to execute its business plan. We advise boards on the negotiation of “minimum cash” closing conditions to protect the target from this outcome.

Public Readiness and PCAOB Compliance

The target must be “publicly ready” the moment the deal closes. This includes having PCAOB-audited financial statements for the required periods.

• The Super 8-K Deadline: Within four business days of closing, the “Super 8-K” must be filed, containing all the information that would be required in a Form 10. Failure to meet this deadline or having deficient audits can lead to immediate trading halts or delisting notices from the exchange.

Authority Through Technical Depth

Our expertise in representing target companies in de-SPAC transactions is grounded in years of experience managing the complex intersection of private company growth and public company regulation. We invite target boards and their leadership teams to explore our extensive library of insights at our corporate website and our specialized blog site, www.securitieslawblog.com, for detailed analysis of the 2024 SEC rules and the evolution of co-registrant liability.

Schedule an Executive Strategy Consultation

The transition from a private target to a public co-registrant requires an authoritative partner who can manage the technical risks of the de-SPAC process. Anthony, Linder & Cacomanolis invites you to engage in a high-level strategy consultation to evaluate your transaction structure and ensure your fiduciaries are protected.

Schedule an executive strategy consultation with our senior partners to discuss your target representation needs by calling 877-541-3263 or visiting our contact page.