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Investors and Sponsors Still Facing Off Regarding Excise Tax

excise tax

Investors and Sponsors Still Facing Off Regarding Excise Tax

Feb 6, 2023 Headline Post, INTEL by Kristi Marvin

Just when you think the excise-tax issue might be getting close to being resolved… and then a new log gets thrown onto the fire.

In the ongoing discussion of the 1% excise tax issue, there seemed to be some consensus being built among investors and teams that it was verboten to ask investors to pay for it. As such, many SPACs had gone to the trouble recently of putting out filings explicitly stating that any excise tax the SPAC “might” be subject to, would not be paid from the funds held in trust or any interest earned thereon.

However, Anzu Special Acquisition Corp. I (NASDAQ: ANZU) presented a new wrinkle to this issue last week, when it filed to explain its redemption and excise tax procedure. Specifically, it stated that it plans to set aside 1% of interest in the event of a liquidation at its extension vote, “just in case“.

This is odd for a number of reasons, but foremost because the guidance put out by Treasury at the end of December specifically gave relief to complete liquidations. To wit:

(i) Complete liquidations.

(A) General rule. Except as provided in section 3.04(4)(a)(v) of this notice, a distribution in complete liquidation of a covered corporation or a covered surrogate foreign corporation (as appropriate) to which § 331 or § 332(a) applies is not a repurchase by the covered corporation or the covered surrogate foreign corporation.
 (B) Distributions during taxable year of complete liquidation and dissolution. 18 If a covered corporation or a covered surrogate foreign corporation (as appropriate) completely liquidates and dissolves (within the meaning of § 1.331-1(d)(1)(ii)) during a taxable year (that is, has a final distribution in complete liquidation to which § 331 applies during that taxable year), no distribution by that covered corporation or covered surrogate foreign corporation during that taxable year is a repurchase…

 

To be fair, the Notice put out by Treasury is in the middle of comment period, at the end of which Treasury could make additional changes.  But, there is reasonable consensus that any comments on the guidance are not in regard to this issue of complete liquidations.  Instead, the comments are around what happens in a partial redemption, which was never addressed in the original Notice.

Nonetheless, Anzu has stated that:

“…in the event that a liquidation of ANZU occurs as a result of the inability to extend the Charter at the upcoming Stockholder Meeting currently scheduled for February 9, 2023, while the Treasury Department and IRS guidance remains interim and subject to comment, ANZU will direct American Stock Transfer & Trust Company (the “Trustee”) to deposit, to the extent sufficient income is available, 1% of the total funds held in the Trust Account, which is approximately $0.10 per share, into a separate cash account for the benefit of the holders of ANZU stock at the time of the liquidation. No funds will be utilized for taxes payable other than funds from interest income. ANZU management will instruct the Trustee hold the potential 1% excise tax in escrow in a cash account until such time as the Treasury and IRS regulations regarding the IR Act is:”

    • no longer subject to a comment period,
    • published in the Federal Register as a final rule, and
    • effective as of the date published in the Federal Register.

Furthermore, Anzu also states:

“ANZU also confirms that

(i) the proceeds placed in the trust account (the “Trust Account”) in connection with ANZU’s initial public offering, as well as any interest earned thereon, will not be used to pay for any excise tax payable pursuant to the Inflation Reduction Act of 2022 (the “IR Act”), provided that ANZU has completed an initial business combination, and

(ii) ANZU will not reduce the amount payable from the Trust Account to redeeming stockholders at the closing of the business combination in order to cover any excise tax under the IR Act.”

From what we can interpret, whether ANZU pays the tax from trust or not depends on if Anzu liquidates or completes. Meaning, if it liquidates at the extension vote, it takes 1%. If it completes a business combination, it doesn’t.

But nowhere does it address what happens if the extension vote passes and Anzu also incurs redemptions at the extension vote. Meaning, will investors who redeem at this week’s extension vote only receive $10.04 and have to wait and see if Anzu completes a business combination to receive the remaining $0.10? That could potentially be much longer than the six months Anzu is current asking for.

The other item of note is that at Anzu’s extension vote, which is to be held on Thursday, February 9, Anzu will not be contributing any additional funds to its trust in order to extend to September 30. In the current environment, it is extremely challenging to keep funds in trust without suffering huge redemptions with a SPAC making large contributions to trust. SPACs without contributions, like ANZU, can expect significantly more losses.

But more importantly, the issue at hand is not really an issue of redemptions, but of the actual vote. As we’ve noted previously, investors are angry enough about the issue that the chatter is now “automatic no-vote” if a SPAC does not explicitly state the tax does not come from interest or funds held in trust. This has the potential to see a SPAC liquidate by vote.

With that in mind, the statement by Anzu appears to be a bit of game theory hoping investors would rather an eventual $10.14 by voting yes on an extension so ANZU can complete a combination (and investors avoid the 1% tax) rather than $10.04 by liquidation. Except…Treasury appears to have already given relief to complete liquidations (see above) and investors are asking why the hold back at all? And further to that, investors are also asking, regardless of whether a SPAC completes or liquidates, why are investors even paying for it to begin with?

Regardless, the current choice is $10.14 to extend or $10.04 to liquidate.  So, is ANZU injecting enough motivation with an additional $0.10 per share to get investors to vote yes?

This has ultimately become a game of chicken for sponsors and investors. Investors are running at full tilt towards a potential no vote and liquidation, while sponsors have tied a stick of dynamite to the trust values.  The thing is, Sponsors have a lot more to lose. Investors won’t be happy about losing $0.10 per share, but it won’t kill them.  A no vote does kill a SPAC and the attendant at-risk capital.

 

ByKristi Marvin