Yes, SPACs Do Dilute Investors: A Brief Response to Gulliver and Scott
Several days ago, John Gulliver and Hal Scott announced on this Forum that “No, SPACs Do Not Dilute Investors” This comes after the Chancery Court has concluded otherwise in about a dozen cases, and after the SEC has issued regulations requiring disclosure of the extent to which value has been diluted or otherwise extracted from […]
Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School, and Michael Ohlrogge is a Professor of Law at NYU School of Law. This post is based on a recent paper by Professor Klausner, Professor Ohlrogge, and Emily Ruan, and is part of the Delaware law series; links to other posts in the series are available here.
Several days ago, John Gulliver and Hal Scott announced on this Forum that “No, SPACs Do Not Dilute Investors” This comes after the Chancery Court has concluded otherwise in about a dozen cases, and after the SEC has issued regulations requiring disclosure of the extent to which value has been diluted or otherwise extracted from SPAC shares as of the time of a de-SPAC merger. Gulliver and Scott’s post on the Forum, and their longer version on SSRN, purport to “debunk” the analysis of two articles we published in the past three years, and in doing so, to show that the Chancery Court and the SEC are wrong as well—that the value of pre-merger SPAC shares is of no consequence and need not be disclosed.
To capture the essence of Gulliver and Scott’s story, imagine the following. A company is planning a merger, and before closing, the company’s management, bankers and others suck out 50% of the company’s value for themselves. They are not concerned that the company’s shareholders will lose out, however, because they believe the company’s merger partner will repay what was taken from them. This is essentially Gulliver and Scott’s view of how SPACs and de-SPAC mergers work. Of course, it is now well understood that SPAC shareholders have indeed lost out – losing over half of their investments on average for SPACs that merged between 2019 and 2021 – something that is contrary to Gulliver and Scott’s rosy predictions but is precisely in line with what we forecast in the fall of 2020 when we first released our initial paper (and our blog post on this Forum).
