In a deSPAC Transaction, Why Should the Target Company Demand a Sponsor Support Agreement?

Currently, our firm is advising a target company on a significant deSPAC transaction. This process involves merging with a Special Purpose Acquisition Company (SPAC) to go public—a path that, while lucrative, comes with its unique set of challenges and risks. One pivotal way to mitigate these risks and ensure a smooth transition is the implementation of a Sponsor Support Agreement (SSA). Let’s explore why such an agreement is essential for any target company entering into a business combination with a SPAC.

Securing Commitment

The very nature of SPACs, often created as blank check companies, means their sponsors might be evaluating multiple potential targets at any given time. A Sponsor Support Agreement ensures that once a target is chosen, the SPAC’s sponsors remain committed to the deal. This prevents them from backing out or shifting their focus to other prospects should market conditions change or more attractive opportunities arise.

Alignment of Interests

An SSA serves to align the interests of the SPAC sponsors with those of the target company by enforcing certain behaviors and restrictions. This can include lock-up periods, where sponsors are restricted from selling their shares for a designated period post-merger, ensuring they remain invested in the success of the company. It can also dictate how sponsors vote their shares, tying them to the fortunes of the company and ensuring decisions are made with the long-term success of the enterprise in mind.

Risk Mitigation

DeSPAC transactions are complex and carry inherent legal, regulatory, and financial risks. A well-crafted SSA can help mitigate these risks by including warranties and indemnities that protect the target company from potential liabilities that might not yet be apparent. This contractual layer of protection is crucial, as it ensures that any unforeseen challenges do not disproportionately impact the target.

Operational Continuity

The integration process post-merger can be one of the most challenging phases of a deSPAC transaction. An SSA can include provisions that oblige the SPAC sponsors to support not just the closure of the transaction but also the critical post-merger integration phase. This could cover aspects like operational support, financial assistance, and even maintaining key management personnel—ensuring the company continues to operate smoothly without disruption.

Conclusion

In the dynamic landscape of SPAC mergers, a Sponsor Support Agreement is not merely beneficial—it is a strategic imperative. For our client and others like it, insisting on such an agreement is a critical step in safeguarding their interests and securing a committed partnership with their SPAC sponsors. It is a tool that not only aligns interests but also solidifies the foundation for a successful venture in the public market.

For companies on the verge of a deSPAC transaction, understanding and implementing a robust SSA can be the key to not just surviving but thriving in the competitive public arena.

We are committed to providing strategic, tailored advice that anticipates and addresses the unique challenges of each transaction. If you are considering a deSPAC transaction or need expert guidance on ensuring your interests are fully protected, do not hesitate to reach out to us. Let our expertise pave the way for your successful merger and continued growth in the public domain.