The grumblings are getting louder…
The 1% excise tax on share buybacks is still causing ripple effects throughout the SPAC ecosystem. It’s a game of whack-a-mole where the issue never goes away, or like a SPAC virus that keeps spawning variants.
For those unfamiliar with the 1% excise tax situation, it was first introduced in August of 2022 as part of the Inflation Reduction Bill. The tax was originally intended for “share buybacks” in the more traditional sense, but redemptions, unfortunately, are technically considered a form of share buyback as well. Which initially meant that SPACs were thought to be subject to the excise tax on any and all redemptions. Treasury subsequently put out guidance clearing up “complete liquidations”, which wouldn’t be subject to the tax, but there still remains a gray area in regards to partial redemptions at extension or completion votes.
Which brings us to the current issue sponsor teams are trying to wrap their arms around. A few SPACs, such as Armada, initially tried to include language in their proxy stating that there would be “a decrease in the per-share price at which public shares will be redeemed from cash held in the Trust Account” due to the tax. However, this language was removed in short order after shareholders pushed back.
Subsequent to this, a number of SPACs have filed supplements to their proxies stating explicitly that they would not be using funds held in trust to pay for the tax in an effort to protect their votes and trusts. However, there are still quite a few SPACs that are holding fast to keeping this excise language included.
As an example, Lionheart III Corp. (Nasdaq: LION), which held their completion vote on January 30th to combine with advanced materials company Security Matters (ASX:SMX), had the following language included in its proxy:
“Because the Company is a publicly-traded Delaware corporation, the Company may be a “covered corporation” within the meaning of the IRA, and it is possible the Excise Tax will apply to any redemptions of Company Public Shares after December 31, 2022, including redemptions occurring in connection with the Business Combination, unless an exemption is available. Consequently, the value of your investment in our securities may decrease as a result of the Excise Tax. Further, the application of the Excise Tax in the event of a liquidation is uncertain absent further guidance.”
The proxy goes on to say that it won’t be using the funds held in trust from the IPO to pay for the excise tax, but rather they would use the interest earned on the trust instead. However, to investors that’s like saying, I’m not cutting a pound of flesh from your right arm, I’m just going to use your left arm. Well, you’re still missing a pound of flesh no matter where you’re slicing.
Interestingly, LION’s vote passed, but the redemption numbers tell an interesting story. That is, LION suffered an enormous amount of redemptions. 99.54% to be exact with only 57,559 public SPAC shares remaining post-vote. Keep in mind that LION had 12,500,000 public shares heading into the vote and the average % redemptions for all shareholder votes within the prior three months is 86%. In fact, it is the tenth highest percentage of redemptions for SPACs going back to 2009 out of 476 completed combinations.
But what about the actual vote itself? In general, the shareholder vote isn’t talked about much since it’s nearly always a “yes” vote. That’s because a shareholder can vote “yes” or “no” and still redeem and have their capital returned. But investors, in general, do not like to vote “no” because it would risk a liquidation and in that scenario investors would still receive the redemption value on the share, but…they would lose their warrants (warrants are cancelled in a liquidation). As a result, the vast majority of votes are overwhelmingly voted yes.
However, in LION’s case, a more sizable amount did, in fact, vote no. Keep in mind that the Founder Shares vote too and they are an automatic yes vote. In Lion’s case, the founders held 3,400,000 Class B shares. If we remove those Class B shares, 10,190,229 public SPAC shares participated in the vote, of which 29% voted against the transaction. That’s nearly one-third of shareholders voting no, which is quite size-able in the context of a SPAC vote.
Which brings us to today and the additional votes we have scheduled in the next few weeks. There has been enough grumbling within the investor community that there is a real possibility we get a full fledged “no” vote at one of the next meetings that still includes excise tax language. Or more specifically, language that allows a sponsor to dip into funds in trust to pay the tax.
This would be a highly unusual move since it would require investors to forgo their warrants in the event they bust a deal and force a SPAC to liquidate. But, there is SPAC precedent. As mentioned in a previous post, something similar happened with Hunter Maritime. And for those of us who were around in the summer of 2019 when the first 1/4 warrant SPAC filed to IPO, you’ll remember “Peak SPAC” where SPAC investors silently protested by refusing to buy the IPO.
As a side note, protesting over a quarter warrant might seem quaint given all that has happened between then and now, but at that time, a quarter warrant SPAC was viewed as a very, very major term in SPAC Land.
Nonetheless, the point being that when investors become focused on something they feel is critical to their investment, they will push back. And now, the next SPAC on deck with a vote that includes language reducing trust values for the tax is Inflection Point Acquisition Corp. (Nasdaq: IPAX). IPAX has a vote currently scheduled for February 8th, at which time they will be looking to complete their combination with Intuitive Machines.
However, IPAX has already secured a non-redemption agreement with Kingstown 1740 Fund L.P., an affiliate of the Sponsor, pursuant to which Kingstown agreed not to redeem the 2,900,000 Cayman Class A Shares held by it. The sponsor holds 8,243,750 Class B shares that are an automatic yes vote too.
A majority of the shares that show up to vote is what is need to pass, which means that assuming all shares participate in the vote, only 28.7% of public shares need to vote yes. If only 75% of shares show up to vote, only 16.2% of shares are needed to vote yes to pass. Meaning, IPAX has a head start by getting to include both their founder shares and the non-redemption agreement in the “yes” column, but as we’ve seen, investors have been known to flex their muscles from time to time.
Either way, this will be one of the more interesting votes to watch. Stay tuned.