C5 Acquisition Corp (CXAC) Sets Up Fight Over Liquidation Payment

C5 Acquisition Corp (NYSE:CXAC) filed an 8-K yesterday tipping off that the Sponsors never made their last extension contribution to the Trust back on September 11.  What’s worse, they don’t intend to now that they have announced they are going to liquidate. This sets up a fight between investors, Sponsors, the Board and Continental (the Trustee).

As background, C5 Acquisition Corp. priced a $250 million IPO in January of 2022 ($287.5M with over-allotment), with Cantor and Moelis as underwriters.  It originally had 15 months to find an acquisition, but extended its completion deadline back in May of this year to December 31, 2023 by making a contribution of $320,000 per month to the trust account.

However, C5 announced yesterday that they terminated its previously disclosed letter of intent with an unnamed company and would be liquidating its trust and redeeming its public shares. Unbeknownst to shareholders, the Sponsor never made the required $320K contribution amount on September 11, to extend to October 11. And according to yesterday’s 8-K, they don’t intend to, thereby short-changing investors one-month’s worth of previously agreed to contributions.

The Company stated that it “is considering its recourse against the Sponsor to fund such amount, but there can be no assurance that such amount will be collected.” 

This is problematic for a number of reasons, but primarily for investors that were expecting an extra month’s worth of contributions in their liquidation value.  If investors had known a loss of one month’s contribution was a possibility, would they have voted “yes” to extend back in May? Furthermore, if they had known about the missing contribution earlier, as in closer to the expected date of September 11 that a contribution had not been made, investors could have theoretically sold their shares instead (assuming they could find a buyer).

This sets up a bad precedent, not the least of which is because we currently have ~96% of announced deals in extension and ~81% of searching SPACs. Going forward, will investors be willing to give Sponsors the ability to extend their timelines if missed payments are a potential outcome?

We’ll have to wait and see how this develops, but in the long run for the Sponsors, coming up with $320K might be a whole lot cheaper than investor lawsuits and associated lawyer fees.