Fairness Opinions and SPAC Reform

This paper assesses the emerging regulatory framework for special purpose acquisition companies (SPACs). According to this framework, mergers of SPACs, known as de-SPACs, must be “fair” to public (or unaffiliated) SPAC shareholders, and transaction participants face heightened liability risk for disclosure errors. In this environment, third- party fairness opinions have been regarded as a de facto requirement for de-SPACs.

A study of all fairness opinions used in de-SPACs from 2019 to 2023 shows that these opinions suffer profound methodological problems and fail in their intended purpose. To be fair to public shareholders, a de-SPAC should represent value to these shareholders of at least $10 per share, the amount they would receive if they chose to redeem. This requires a pro forma assessment of the post-merger entity’s value, accounting for the effects of dilution, an assessment that will be highly contingent. Nevertheless, most opinions borrowed from the public mergers & acquisitions (M&A) playbook by addressing fairness to the SPAC, rather than to public shareholders, adopting assumptions that often produced implausible valuations while also being unresponsive to fiduciary concerns. Other opinions reflected poor practices, drawing either mistaken or ambiguous conclusions. Another set of opinions expressly purported to address the position of public shareholders. On their face, therefore, they were responsive. But, with one exception, these opinions failed to perform analyses to address the position of public shareholders. While the challenges of assessing fairness to public shareholders can be overcome, fairness opinions should be greeted with skepticism.

The article argues in favor of other features of the emerging regulatory framework that would heighten incentives for complete and accurate disclosures of deal value to investors. With stronger incentives to assure complete and accurate disclosures, investment banks, SPAC sponsors, and target companies would be less likely to stand behind de-SPACs in their current form. Incentivizing complete and accurate disclosures, then, should lead to changes in transaction terms and structures that will result in greater fairness to public shareholders.