Executive Drama at Digital World Acquisition Corp. (DWAC) Provides New Source of Risk

Digital World‘s (NASDAQ:DWAC) saga-length journey gained a new chapter this week as the team added several new pages to the “Risk Factors” section of its amended S-4, each concerning internal fights that could potentially derail the deal’s close.

The first threatening call from inside of the house is coming from Digital World’s former chairman and CEO, Patrick Orlando. He shepherded Digital World to the public markets in September 2021 and sent the other SPAC he steered, Benessere, into an early liquidation before doing so was fashionable.

This was presumably at least in part so he could devote his full focus to Digital World and its combination with Trump Media and Technology Group (TMTG) that had then been pending for a year. But, just five months later, Orlando was forced out as CEO of Digital World.

The SPAC took the unusual step of saying it “terminated” Orlando, although a fellow Board member praised him in the press release, and Orlando remained a Board member despite relinquishing the chairmanship. He also has remained a controlling affiliate of Digital World’s sponsor and owns a majority of its promote shares.

That is now a problem.

According to the filing, Orlando has recently been asking for additional compensation in the form of common shares, but Digital World has refused and the relationship has become “strained”.

Now, the SPAC says, “[W]e believe a significant risk exists that Mr. Orlando may be uncooperative in approving any amendments to the Merger Agreement that may become necessary and/or in voting the Founder Shares in support of the Business Combination. In addition, Mr. Orlando may use his control over the Sponsor and the majority of the Founder Shares as leverage to raise further demands in exchange for performance of his contractual obligation.”

This could lead to further delays to Digital World’s already long-delayed closing, and while Orlando’s hold on 14.8% of the SPAC’s outstanding shares would be unlikely to swing the approval vote towards a rejection, those risks would increase should he be issued more shares with voting rights.

But, that’s not all.

Digital World’s drawn-out process has been expensive and Orlando is refusing to issue working capital loans from the sponsor to help keep the SPAC afloat. Raising additional outside financing for working capital purposes would also normally change the conversion ratio for Digital World’s promote. That ratio current stands at 1.34 but Orlando has suggested it should be 1.69, which would result in issuing 4,959,375 shares to the sponsor rather than 2,443,750.

At Digital World’s last closing price of $45.32, this 2,515,625-share difference is itself worth about $114 million, which is dilution in theory to be borne by public shareholders.

All of this provides useful context as to why Digital World agreed to very investor-friendly terms for $50 million in convertible notes last week. These notes convert to units at $8 per unit, which converts into a share and half a warrant, and the SPAC will also issue 3,050,000 warrants to investors at a $11.50 exercise price. But, Digital World may have felt compelled to agree as the terms also allowed the SPAC to draw on $10 million of those funds immediately.

Although there is clearly real money at play here between the Digital World team and its own erstwhile leader, the tenor of the dispute does seem strikingly personal. As the filing acknowledges, the tug-of-war could now endanger the health of the golden goose.

This is not the only new risk that has emerged from within, however.

TMTG also has outstanding disputes with multiple organizations concerning past services agreements that Digital World and and TMTG now consider void. Nonetheless, United Atlantic Ventures (UAV) is among those that once had a contract that it claims would allow it to appoint two directors to the combined company’s Board and receive $1 million in reimbursements for expenses.

With these terms left unfulfilled, UAV has threatened legal action and has suggested February 6 that it may try to enjoin the consummation of the business combination.

All in all, Digital World has little time for additional delays as both its transaction deadline and the three-year anniversary of its IPO is coming up in September. Simultaneously, this new information suggests it also has little cash to spare to swiftly settle away its legal claims.

These may not all be surprises for SPAC watchers tracking Digital World’s infamously buzzy and wobbly process to this point. A firm majority of respondents to SPACInsider‘s recent Let’s Settle This poll expressed pessimism that the combination would come to a close this year.

It is now up to Digital World’s new CEO Eric Swider to navigate these treacherous waters with the presidential election now less than nine months away.