MIND THE (SPAC) GAP
Nov 12, 2020
As this article goes to print, there have been over 170 SPAC IPOs in 2020. To say that SPAC transactions are “the hot thing” would be an understatement. With their increasing popularity, however, we are also starting to see an increase in securities liability claims and other potential claim scenarios that can arise from missteps made during the lifecycle of the SPAC/deSPAC process. This article is not intended to provide an in-depth analysis of the SPAC/deSPAC business combination process. Instead, after a brief overview of the process itself, we will turn to a description of various SPAC/deSPAC-related Directors and Officers liability insurance structures we have seen in the marketplace, and the ways in which these structures should respond to securities claims arising during the lifecycle of the business combination process. Specifically, we will zero in on coverage concerns we have encountered in certain D&O programs placed in connection with the deSPAC portion of the process and how such concerns should be addressed.
Brief Overview of SPAC/deSPAC Process:
A SPAC (short for Special Purpose Acquisition Company) is a non-operating company that goes public solely to raise cash that will ultimately be used to purchase a private operating company (or companies) or assets (collectively referred herein as a “target company”) at a future date (usually within 2 years of the IPO). With cash in hand, SPAC executives begin their search for a target company. Once such target company is identified, the parties enter into an agreement to consummate the transaction whereby the two entities will combine into one publicly traded company (referred herein as the “combined company”). In some instances, additional cash is required to finalize the transaction. The SPAC can raise that cash in a number of ways, the most popular being a PIPE transaction whereby sophisticated private investors buy in to the SPAC and help supplement the purchase price of the target company. The timeframe between the identification of a target company and the completion of the merger is commonly referred to as the deSPAC process.