Deals involving shareholder-friendly special purpose acquisition companies, or SPACs, have proven difficult to come by, in large part because shareholders not only must approve any acquisition but can also ask for their money back if they don’t like the deal.

But the gang at Gibraltar Growth Corp. has given itself every chance to get its proposed transaction over the line. Gibraltar did this by shoring up the amount of cash the merged entity — Gibraltar plans to acquire LXR Produits de Luxe International for $82.5 million — will have, providing shareholders approve the purchase at an upcoming meeting.

Prior to announcing that acquisition, Gibraltar did a whip around and raised an additional $25 million.

In this way Gibraltar has addressed one of the major weaknesses with a SPAC structure, the possibility that the buyer ends up with insufficient cash balances because investors decide to cash out and not remain as continuing shareholders. Gibraltar said the $25 million raise, means it has a “fully funded acquisition that is not dependent on a minimum redemption level.”

Cam Di Prata, Gibraltar’s co-chief executive, said the $25 million raise will allow the acquired company to grow even “in the unlikely event that we have 100 per cent redemptions.”

“It was structured as a stand-alone financing,” he added, noting that the $25 million raised, part of which came from management and the founders, will allow the company to meet its near-term store expansion targets. (Plans call for store numbers to jump to 122 at the end of this year, and to 205 by the end of next year. It now has 46 stores.)

And it’s a weakness that has been seen in some of the SPACs that have announced qualifying transactions, all of which means that issuers have to raise additional capital — and often not in the best of circumstances.

Consider the situation at Acasta Enterprises, which raised $402.5 million in its mid-summer 2015 IPO. When its qualifying transaction was announced last December, shareholder redemptions were $285 million. But Acasta raised an additional $164 million.

Dundee Acquisition Ltd., the country’s first SPAC, wasn’t so fortunate. Dundee announced its qualifying transaction, the purchase of CHC Student Housing Corp. last August. A few months later the shareholders spoke: almost 100 per cent of them wanted their money back. Earlier this year, Dundee said that, “despite the funds committed to its proposed private placement of up to $50 million, the targeted minimum cash amount of $87.3 million will not be satisfied.” Dundee then looked at other opportunities but it found nothing deemed suitable and on Friday the company will be wound up and shareholders will get $10.04 a share.

Another SPAC, Alignvest Acquisition Corp. also prepared for the possibility of shareholder redemptions: When it announced its qualifying transaction last November, it lined up an additional $61 million of equity capital. Those proceeds were to be used to “absorb redemptions, if any, or to place additional cash on the balance sheet.”

Structuring the acquisition as an all-paper deal was another way whereby Gibraltar sought to minimize the effects of possible shareholder redemption.

Gibraltar’s Di Prata said the acquisition “is a growth play that will unfold over the next three to five years. The condition was that everybody, including Gibraltar, was effectively doubling down. And we told the vendors they had to hunker down, take shares and invest for the long term,” he added, noting that a “guiding principle” was that none of the parties would take cash out.

Financial Post

bcritchley@postmedia.com