Considerations for SPACs to Select the Jurisdiction of the Surviving Corporation After the Business Combination Closing

In the evolving landscape of Special Purpose Acquisition Company (“SPAC”) transactions, one critical post-business combination decision is selecting the appropriate jurisdiction for the surviving corporation. This decision has broad implications for governance, investor perception, tax treatment, and regulatory compliance. Below, we explore the considerations a Cayman Islands SPAC should weigh when determining whether to redomicile to the United States, and, if so, whether Delaware or Nevada is the preferred jurisdiction.

1. Redomiciling a Cayman SPAC with a U.S. Target

It has become common practice for a Cayman SPAC acquiring a U.S. target to redomicile to the United States upon closing of the de-SPAC transaction. Cayman Islands law readily permits this process through a statutory continuation mechanism, making the redomiciliation relatively straightforward from a legal perspective.

Pros of Redomiciling to the U.S.:

• Enhanced Access to Capital Markets: A U.S.-domiciled company may enjoy greater visibility and liquidity on U.S. exchanges.
• Broader Institutional Investor Interest: Institutional investors are generally more inclined to invest in U.S.-based entities, particularly those not subject to foreign private issuer (“FPI”) exemptions.
• Valuation Benefits: Being a U.S.-based company can improve perceived legitimacy and valuation, especially for companies operating in growth sectors.
• Brand Recognition: There is intangible brand value associated with being a U.S.-listed company, which may increase investor confidence.

Cons of Redomiciling:

• Increased Regulatory Scrutiny: U.S. domestic companies are subject to stricter SEC reporting and compliance standards.
• Higher Compliance Costs: Without FPI status, the surviving entity must meet more extensive disclosure obligations.
• Loss of Regulatory Flexibility: FPI status permits use of home country practices, which are generally more lenient; domestic companies do not enjoy such flexibility.

That said, even FPI status can be navigated strategically. Some SPACs covenant not to utilize available exemptions to appease U.S. investors, which can reduce the perceived regulatory gap. Ultimately, redomiciling is a business decision that should also factor in tax implications, for which consulting tax counsel is essential.

2. Choosing Between Delaware and Nevada

If the SPAC elects to redomicile to the U.S., the next key decision is selecting the state of incorporation—most commonly between Delaware and Nevada.

Delaware:

• Established Legal Framework: Delaware is known for its sophisticated Court of Chancery, extensive corporate law precedents, and high degree of predictability in corporate litigation.
• Shareholder Protections: It offers robust protections for minority shareholders and clear fiduciary standards for directors and officers.
• Preferred by Institutional Investors: Due to its strong governance reputation, Delaware is often viewed favorably by large investors and analysts.

Nevada:

• Tax-Friendly Environment: Nevada imposes no state corporate income tax and offers generally lower annual fees compared to Delaware.
• Director and Officer Protections: Nevada law provides greater indemnification protections and stronger privacy safeguards.
• More Flexibility for Controlling Shareholders: Nevada’s more permissive governance framework allows greater operational flexibility, which may be advantageous for rapid decision-making.

However, for minority shareholders, Delaware’s legal infrastructure provides stronger protections. Nevada’s leniency toward controlling shareholders may lead to less recourse in governance disputes, which is a potential concern for investors holding minority stakes post-transaction.

3. Conclusion

In conclusion, while remaining a Cayman Islands entity with FPI status is legally permissible, market trends—and investor expectations—generally favor redomiciling to the U.S. for a SPAC targeting a U.S.-based company. Between Delaware and Nevada, the choice hinges on the business’s long-term priorities: Delaware offers institutional credibility and legal certainty, while Nevada provides cost savings and operational flexibility.

SPAC sponsors and their counsel should carefully weigh these considerations in light of investor strategy, governance preferences, and tax implications. Each choice carries trade-offs, and selecting the right jurisdiction is an essential step in setting the stage for post-combination success. Our team has extensive experience advising SPACs through all stages of the de-SPAC process, including jurisdiction selection—please feel free to reach out to us to discuss your specific situation.