The SPAC period is simply across the nook and associated litigation is on the rise Bilzin Sumberg

Special Purpose Acquisition Companies (SPACs) have been so prevalent over the past year or two that an increase in SPAC-related litigation seems inevitable. In fact, the rise is already beginning. After a quick look at SPACs, this article lists some of the top areas of litigation risk for these companies and the people who regulate them.

SPACs have no commercial activities at the time of their inception. These are Shell companies that raise capital through an IPO in order to merge with a private operating company and go public. The private company’s listing on the stock exchange is often referred to as a “De-SPAC transaction”. The IPO funds will be held in an escrow account until this De-SPAC transaction. After the target has been selected, the planned merger will be submitted to a shareholder vote. Prior to a merger, shareholders can choose to redeem their shares if they do not agree to the objective or terms of the transaction.

SPACs are increasingly used, largely because they can reduce the time and expense (including a significantly lower cost of capital) associated with going public for a private company. However, these vehicles generally have structural time constraints as a SPAC will be liquidated – and investors get their money back with interest – if they fail to identify a suitable acquisition target within a certain period of time, typically two years. Some analysts see a noticeable imbalance between the current number of SPACs and the number of attractive targets. They have raised concerns that the strong structural incentives for SPAC sponsors to close a deal could result in ill-advised mergers and / or allegations by investors that the mergers are against their financial interests.

The US Securities and Exchange Commission has recently shown growing interest in SPACs, particularly with regard to real or potential conflicts of interest that may affect the selection of merger targets by SPACs. The SEC appears to intend to investigate directors, officers, sponsors, and sponsor affiliates for potential conflicts under circumstances the agency deems appropriate. Disclosing conflicts both in the IPO phase and at the time of the De-SPAC transaction, as well as disclosing the scope and results of the due diligence in relation to the merger objective, play a major role in SPAC enforcement measures and in private litigation.

The information on the SPAC itself at the time of the IPO is generally much more limited than for other IPOs (without SPAC). The background and experience of the executives are almost inevitably the core topic of disclosure at this point, as the SPAC is not yet doing business. However, the information at the time of the De-SPAC transaction is not so limited. They must include information on the target company’s operating results and financial projections.

SPACs and their officers, directors, sponsors and affiliates, when sued or threatened with legal action, are most likely to face the following types of claims: allegations of inadequate or misleading disclosure in the IPO or, more likely, related to the de – SPAC transaction; Claims for breach of fiduciary duty; and allegations related to the operation of the acquired company after the merger. We’ll dig deeper into each of these types of litigation in future posts.