SPAC Attack: An Examination of SPAC Director Compensation and Its Legal Implications

Abstract

Special Purpose Acquisition Company (“SPAC”) directors are compensated with economic ownership of founders shares, shares which have value if the SPAC combines with an operating business and which expire worthless if that does not occur. By analyzing the public filings of the 248 SPACs that IPOed in 2020, I create a dataset of SPAC director compensation, which is the first of its kind. I find that a director of the median SPAC receives approximately 30,000 founders shares (estimated value $300,000) and a director of the average SPAC receives approximately 40,000 founders shares (estimated value $400,000). I then demonstrate how the current director compensation subjects SPACs and their directors to greater litigation risk under Delaware law. Specifically, SPAC directors may not be considered independent under Delaware law because of the structure and quantum of compensation via founders shares. Furthermore, under Delaware law, if SPAC directors are not independent, legal claims surrounding the SPAC merger may be examined under the exacting entire fairness standard rather than the deferential business judgement rule because potential procedural safeguards of the SPAC, such as the shareholder vote, may not be sufficiently “cleansing.” Finally, I propose changes in SPAC director compensation to improve director independence.