SPAC litigation and insurance coverage implications
As the summer months 2021 begin, it’s getting harder and harder to open a legal publication without reading about Special Purpose Acquisition Companies or SPACs. Many articles discuss the ever-growing number of SPACs, increasing regulatory scrutiny and anticipated regulations, or the growing number of SPAC-related lawsuits. For this column, we teamed up with our fellow insurance broker at Alliant Insurance Services to co-author a discussion of insurance issues related to the SPAC-related lawsuits. These issues can be complex as claims related to the SPAC can involve three different insurance programs for Directors and Officers (D&O): (1) the insurance policies issued to the SPAC; (2) the insurance policies issued to the existing operating company; and (3) the go-forward policies issued to the public entity after the transaction.
A SPAC, often referred to as a “blank check company”, procures cash from an IPO and places the proceeds from the IPO in an escrow account. SPACs are established by seasoned financial professionals, alternatively referred to as sponsors or founders. The sponsor administers the IPO process, including the selection of management, the lead underwriters to conduct the IPO, the auditors of the SPAC, and the advisor to prepare and file the Form S-1 registration statement with the SEC. The funds raised will then be used exclusively for the acquisition of an existing company as part of a corporate merger transaction (“de-SPAC transaction”), with a listed company being created as a future unit. The SPAC must typically complete this business combination within 18 to 24 months of the SPAC IPO date.