As described in a recent article published by University of Cambridge’s Judge Business School, 2020 was the year of the Special Purpose Acquisition Companies or more commonly known as SPACs1.
The evidence to support this statement is undeniably conclusive too – according to financial markets data provider Refinitiv, January to October 2020 saw a staggering 165 SPACs listed2. To put this into perspective, that’s nearly double the number of global SPAC IPOs issued in 2019 and five times that of 20153.
With the pandemic bringing a wave of financial uncertainties to the investment sector, SPACs are proving to be a popular way of injecting the needed funds into capital craving companies. The rapid rise of these entities has seen the D&O insurance market inundated with requests for cover to provide the necessary protection for the relevant board members and stakeholders.
In the article, we explore what it means for companies in the UK and internationally that find themselves as a target of these blank-cheque juggernauts, whilst delving into the insurance implications of a SPAC merger.
Understanding SPACs: a fast track to going public or a set back?
When it comes to going public, there are several avenues companies can take to make this happen. To understand the reasons behind the increase in SPAC IPOs, we must cast our memories back to pre-pandemic, where the most common route to going public was still done through a traditional IPO. An often time-consuming process, a traditional IPO involves roadshows, heavy scrutiny of financial statements and lengthy pitch meetings with investors. Adding to this, the red-tape involved in preparing a company for launch and abiding by any listing and securities laws, is also an onerous one.
Following the 2020 global lockdown, financial uncertainty hit the markets and traditional IPO processes became even more drawn out and challenging especially when shifting to virtual roadshows and meetings. With investors looking for streamlined and efficient routes to going public, SPACs quickly became a popular choice due to them typically taking less time when compared to traditional methods. Reversing into a SPAC has certainly proved too hard to resist for some and will continue to do so in the coming months. After all, they are already a listed entity - and ready to trade.
Undoubtedly, raising money via a SPAC provides a great level of efficiency for stakeholders on both sides of the transaction, but they are also fraught with potential pitfalls and litigation. Whether you are a director of a successful medium-sized family-run company minding your own business, or the founder of the next billion-dollar tech unicorn looking to float, the journey from a private to public company is always an interesting one, and should not be taken lightly.
SPACs have existed in one form or another since early as the 1980s4, and are often classed as ‘blank cheque companies’, with investors contributing capital without any prior knowledge of how the funds will be used. As for acquisition targets, a certain level of caution should always be taken with SPACS, as a ‘blank cheque’ is exactly that, and there is a reason not many people sign them. Considering the unknown nature of where funds end up, there is much evidence of SPAC shareholders taking umbrage with the decisions their sponsors have made5, and this litigation is not just limited to the SPAC, but also affecting the boardrooms of the target company.
Going from a private to public company does not just happen overnight. The increased levels of corporate governance, coupled with heightened regulatory scrutiny and reporting requirements means a similar level of due diligence should be carried out by a company as it would do if preparing for a traditional IPO.
Insurance implications for SPACs
Just as expanding into new territories has a bearing on D&O policies and placements, so too does becoming a listed firm. From tax treatment to licensing issues, all changes in exposure have to be taken into consideration and it is important to engage early with a specialist broker and insurer that have experience in this form of risk management.
Assuming the SPAC’s insurer will also absorb the coverage of the target company (especially as they have underwritten and charged for the SPAC IPO) seems rational – but it is an assumption that contains a level of oversight. Businesses are constantly evolving and differences between post-acquisition operations vs. operations when the SPAC launched and bound their policy is often a cause of concern for insurers.
When putting this into context, there have been instances where a SPAC management team experienced in a specific sector decide to diversify and target an area they have little or no prior experience in. From an insurance perspective, the underwriter may argue that the altered risk profile is not what they signed up for, nor is it reflected in the current policy.
It is not just the on-going cover the de-SPAC company needs to carefully consider. Given the multiple businesses and territories involved – insurance implications such as the previous private company policy and the need for any local policy placements will also need to be factored in. Coverage requirements and availability differ from country to country, so utilising both a specialist broker and insurer with a global footprint provides the company peace of mind that their coverage mitigates the full risk profile they face.
We are already seeing examples of claims against SPAC and de-SPAC companies, as detailed in the case study below.
Whether you are actively seeking a route to market via a SPAC or traditional IPO, or worried about the implications of becoming a target of a SPAC – please contact us and speak to our specialist team for advice.
SPAC / de-SPAC Class Action Case Study
Shareholder files a securities class action lawsuit against individuals who served as pre-merger board members of a listed SPAC, as well as a pre-merger board member of the target company acquired, alleging that the defendants made false or misleading statements or failed to disclose lost sales and revenues to a competitor in the run up to the de-SPAC.
This lead to an inflated price being paid for the target company, with the claimant seeking damages for alleged material misrepresentations and omissions, that if included in published merger documents, would have resulted in a request for redemption rather than de-SPAC approval.
1. https://www.jbs.cam.ac.uk/insight/2020/the-rise-of-the-special-purpose-acquisition-company/
2. https://www.cnbc.com/2020/11/23/what-are-spacs-2020-saw-record-number-of-shell-companies-listed.html
3. https://www.cnbc.com/2020/11/23/what-are-spacs-2020-saw-record-number-of-shell-companies-listed.html
4. https://www.marketwatch.com/story/2020-is-the-year-of-the-spac-yet-traditional-ipos-offer-better-returns-report-finds-2020-09-04
5. https://www.dandodiary.com/2020/12/articles/securities-litigation/spac-acquired-company-hit-with-post-acquisition-securities-suit/
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