What Is an Expense Undertaking Agreement? Cost Arrangements Between SPAC Sponsors and Targets

The SEC’s enforcement action against a SPAC sponsor in Q1 2025 for failing to disclose a side agreement on expense reimbursement has shifted the due diligence calculus for every de-SPAC transaction in the pipeline. The case, In the Matter of Magna Acquisition Corp. (SEC Administrative Proceeding No. 3-22457, 2025), centred on an expense undertaking agreement (EUA) that the sponsor had executed with the target’s pre-existing shareholders—a document the SEC deemed a material “cost arrangement” that should have been filed as an exhibit to the proxy statement. The settlement, which included a USD 1.2 million penalty and a 12-month bar from serving as a SPAC officer, sent a clear signal to sponsors and targets alike: the era of informal side letters on cost allocation is over. For Hong Kong-based family offices and cross-border sponsors structuring Nasdaq-bound SPACs, the EUA is no longer a boilerplate appendix; it is the central document governing who pays for what, and when, in a transaction where legal, advisory, and underwriting fees routinely exceed USD 35 million. Understanding the precise mechanics of these agreements—their triggers, termination provisions, and interaction with trust fund mechanics—is now a prerequisite for any sponsor seeking to avoid a regulatory referral.

The Anatomy of an Expense Undertaking Agreement in a SPAC Context

An expense undertaking agreement is a legally binding commitment, typically governed by New York law, in which a SPAC sponsor agrees to cover specified transaction costs if the de-SPAC business combination fails to close. The agreement is distinct from the sponsor’s general obligation under the SPAC’s charter to fund working capital deficits. Where the charter imposes a fiduciary duty, the EUA creates a contractual obligation with defined triggers, caps, and exceptions. The SEC’s 2025 enforcement action clarified that an EUA is a “material contract” under Item 601(b)(10) of Regulation S-K, requiring exhibit filing even if the counterparty is not a named party to the merger agreement.

Trigger Events and Cost Categories

The standard EUA defines three trigger events: (1) termination of the business combination agreement by either party before the shareholder vote; (2) failure to obtain shareholder approval at the special meeting; or (3) the sponsor’s unilateral decision to abandon the transaction after the target has incurred substantial fees. Each trigger activates a different cost-sharing formula. For example, in the SPAC Magna Acquisition Corp., the EUA obligated the sponsor to pay 100% of the target’s legal and advisory fees—capped at USD 8.5 million—if the target terminated following a material breach by the sponsor. If the target withdrew for convenience, the cap dropped to USD 2.0 million.

Cost categories covered by a typical EUA include: legal fees for outside counsel (US and offshore), financial advisory fees for the target’s investment bank, accounting fees for audit and comfort letters, printing and filing costs with the SEC, and travel and lodging for management roadshows. A 2024 survey by the SPAC Research Institute of 87 de-SPAC transactions found that the median legal fee component in an EUA was USD 4.2 million, with advisory fees adding another USD 3.8 million. These figures have risen 22% since 2022, driven by increased SEC scrutiny of SPAC financial projections under Rule 3-05 of Regulation S-X.

The Interaction with Trust Fund Mechanics

The EUA must be read alongside the SPAC’s trust agreement, typically held by a US-based trustee such as Wilmington Trust or JPMorgan Chase. Under the standard trust agreement, funds may only be released upon: (a) completion of the business combination; (b) redemption of public shares; or (c) liquidation of the trust. The EUA does not create a direct claim on the trust. Instead, it obligates the sponsor to fund costs from its own working capital—usually the proceeds of the sponsor’s initial USD 25,000 capital contribution and any subsequent loans.

This structure creates a liquidity risk for the sponsor. If the target has incurred USD 10 million in fees before the shareholder vote, and the sponsor has only USD 3 million in available cash, the sponsor must either inject additional capital or negotiate a waiver from the target. The SEC’s 2025 action specifically flagged a sponsor’s failure to disclose that it lacked sufficient liquidity to honour its EUA, which the Commission deemed a material omission under Section 14(a) of the Securities Exchange Act of 1934.

Regulatory Treatment Under SEC and HKEX Frameworks

While the SEC is the primary regulator for US-listed SPACs, Hong Kong-based sponsors and targets must also consider the Hong Kong Securities and Futures Commission’s (SFC) Code on Takeovers and Mergers and the Hong Kong Stock Exchange’s (HKEX) Listing Rules. Although a Nasdaq SPAC is not directly subject to HKEX rules, the SFC has issued multiple circulars reminding licensed corporations that their conduct in overseas SPAC transactions falls within the SFC’s enforcement jurisdiction if the sponsor or its affiliates are based in Hong Kong.

SEC Disclosure Requirements for EUAs

The SEC requires that any EUA be filed as an exhibit to the proxy statement or registration statement on Form S-4. The key regulatory references are Item 601(b)(10) of Regulation S-K (material contracts) and Item 1015 of Regulation M-A (business combination agreements). In its 2024 Compliance Disclosure Initiative, the SEC’s Division of Corporation Finance identified EUAs as a “frequent deficiency area,” noting that 34% of reviewed SPAC filings in 2023 omitted either the full text of the EUA or a description of its material terms.

The SEC’s 2025 action against Magna Acquisition Corp. added a new requirement: sponsors must now disclose not only the existence of an EUA but also the sponsor’s financial capacity to perform under it. The order requires that the sponsor file a certification from its CFO, under penalty of perjury, confirming that the sponsor holds liquid assets equal to at least 110% of the maximum potential liability under the EUA. This certification must be updated within five business days of any material change in the sponsor’s financial condition.

Hong Kong SFC and HKEX Considerations

For Hong Kong-based sponsors, the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Chapter 571 of the Laws of Hong Kong) imposes a duty to ensure that all material agreements in a transaction are properly documented and disclosed to investors. Paragraph 16.2 of the Code specifically addresses “conflicts of interest in corporate finance transactions,” stating that a licensed person must not “enter into any arrangement or understanding, whether formal or informal, that may give rise to a conflict of interest without the prior written consent of the client.”

This provision is directly relevant to EUAs. If a Hong Kong sponsor enters into an EUA with a target that is also a client of the sponsor’s advisory arm, the sponsor must obtain the target’s written acknowledgement that the sponsor’s interests under the EUA may conflict with its advisory duties. The SFC’s 2023 thematic inspection of SPAC sponsors found that 8 out of 15 Hong Kong-licensed firms had failed to document this conflict disclosure, resulting in reprimands and fines totalling HKD 4.2 million.

The HKEX’s Listing Rules, while not directly applicable to Nasdaq SPACs, provide a useful benchmark for disclosure standards. Under Rule 14.58, a listed issuer must disclose “any material contract” entered into by the issuer or its subsidiaries in connection with a notifiable transaction. The HKEX has confirmed in its 2024 Guidance Letter GL112-24 that this includes expense sharing agreements between sponsors and targets, even if the sponsor is not a listed entity.

Structuring EUAs for Cross-Border Transactions

The typical cross-border SPAC involves a Cayman Islands or BVI-incorporated SPAC, a US-based trust, and a target company that may be incorporated in Hong Kong, the PRC, or a BVI holding company. The EUA must be structured to accommodate the legal and tax implications of each jurisdiction.

Jurisdictional Considerations and Governing Law

The governing law clause is the most negotiated provision in a cross-border EUA. While New York law is standard for the main agreement, the enforcement of the EUA may require recognition in Hong Kong or the Cayman Islands. Under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap. 319 of the Laws of Hong Kong), a New York judgment can be enforced in Hong Kong if the EUA contains a submission to jurisdiction clause that is “final and conclusive.” However, the Ordinance does not apply to judgments for multiple damages or punitive damages, which are common in US securities litigation.

To mitigate this risk, sponsors and targets often include a Hong Kong or Cayman Islands arbitration clause as an alternative to New York litigation. The Hong Kong International Arbitration Centre (HKIAC) reported in its 2024 caseload statistics that 12% of new arbitrations involved SPAC-related disputes, with the average claim value at USD 14.7 million. The HKIAC’s streamlined procedures under the 2024 Administered Arbitration Rules allow for an expedited award within six months, which is significantly faster than the average 18-month timeline for US federal court proceedings.

Tax Implications of Expense Reimbursement

The reimbursement of expenses under an EUA can trigger Hong Kong profits tax if the target is a Hong Kong corporation and the services giving rise to the expenses were performed in Hong Kong. Under Section 14(1) of the Inland Revenue Ordinance (Cap. 112), any sum “arising in or derived from Hong Kong” is chargeable to profits tax at the standard rate of 16.5%. The Inland Revenue Department (IRD) has issued Departmental Interpretation and Practice Notes (DIPN) No. 21, which clarifies that reimbursement of legal and advisory fees incurred in connection with a Hong Kong target’s listing is generally not taxable if the fees are directly attributable to the listing transaction and not to the target’s ongoing trade or business.

However, if the EUA covers fees for services that are recurring in nature—such as audit fees for annual financial statements—the IRD may treat the reimbursement as taxable income. A 2024 IRD ruling in Case D24/2024 held that a target’s reimbursement of USD 1.8 million in audit fees under an EUA was subject to profits tax because the audit services were required for the target’s ongoing compliance with Hong Kong’s Companies Ordinance, not solely for the SPAC transaction.

Practical Negotiation Points and Common Pitfalls

The negotiation of an EUA is often treated as a secondary item, overshadowed by the merger agreement and the PIPE subscription. This is a mistake. The EUA determines the sponsor’s financial exposure if the deal fails, and a poorly drafted agreement can leave the sponsor liable for costs that far exceed its capital base.

The “Walk Away” Cost and Termination Provisions

The most contentious provision is the “walk away” cost—the amount the sponsor must pay if it terminates the agreement for convenience. Sponsors typically push for a nominal fee, arguing that they have no fiduciary duty to proceed with a transaction that is no longer in the best interests of public shareholders. Targets counter that the sponsor’s decision to walk away after the target has spent months preparing for the shareholder vote represents a wasted investment of time and resources.

In the 2024 de-SPAC between Vertex Growth Acquisition Corp. and Asia Digital Holdings Ltd., the EUA set the walk-away cost at USD 5.0 million, representing 60% of the target’s total estimated transaction costs. The sponsor, a Hong Kong-based family office, agreed to this figure only after the target provided a detailed breakdown of its incurred and committed fees, audited by a third-party accounting firm. This level of documentation is now considered best practice by the SEC, as it provides a verifiable basis for the cost cap.

The “Most Favoured Nation” Clause

A less common but increasingly relevant provision is the “most favoured nation” (MFN) clause, which requires the sponsor to offer the target the same cost-sharing terms that it offers to any other party in the transaction. If the sponsor later enters into an EUA with a PIPE investor or a financial advisor that is more favourable, the target can demand an amendment to its own EUA.

The MFN clause was central to a 2023 dispute in the Delaware Court of Chancery, In re SPAC Sponsor Litigation (C.A. No. 2023-0892-PAF), where the court held that a sponsor’s failure to disclose a side letter granting a PIPE investor a lower cost cap than the target constituted a breach of the implied covenant of good faith and fair dealing. The court awarded the target USD 3.2 million in damages, representing the difference between the two cost caps.

Actionable Takeaways

File the EUA as an exhibit to the S-4 or proxy statement, not as a side letter. The SEC’s 2025 enforcement action makes clear that any cost arrangement between a sponsor and a target, regardless of form, is a material contract under Item 601(b)(10) of Regulation S-K.
Include a sponsor financial capacity certification in the EUA itself. The certification must confirm liquid assets equal to at least 110% of the maximum potential liability, updated within five business days of any material change.
For Hong Kong-based sponsors, obtain the target’s written conflict acknowledgement under SFC Code of Conduct Paragraph 16.2 before executing the EUA. Failure to do so risks a regulatory referral and potential licence conditions.
Negotiate a detailed cost breakdown schedule, audited by a third party, as the basis for any walk-away cost cap. The SEC and Delaware courts have both signalled that unsubstantiated cost estimates will not withstand scrutiny.
Consider a Hong Kong or Cayman Islands arbitration clause as an alternative to New York litigation. The HKIAC’s 2024 rules allow for an award within six months, reducing the enforcement risk and legal costs for cross-border parties.