Consultations:
The special purpose acquisition company (SPAC) market has exploded. According to CNBC, funds raised via U.S. SPACs totaled $87.9 billion at the end of the first quarter of 2021, exceeding the $83.4 billion issuance in 2020. However, despite their popularity, SPACs come with certain risk factors, including risks that can impact a company’s executives and board of directors.
The following presents three of the most common issues associated with SPAC litigation risks.
1. Complex Valuations
If for some reason share valuations—or the deal in general—is considered unfair, legal action could be taken against a company and its board.The fact is,properly valuating shares to ensure that an acquisition is fair to SPAC shareholders is a complex task. This responsibility typically falls on the shoulders of the directors and board members in the form of a fairness valuation. According to Ernst & Young, because valuation dynamics are challenging even for the most experienced board directors, a fairness opinion can help to provide documentation to shareholders as to the fairness of the transaction’s terms and that the SPAC board has performed its fiduciary duty.
2. Due Diligence Best Practices
A typical SPAC transaction requires several disclosures as part of the due diligence process. According to the American Bar Association (ABA), due diligence is a common theme in many of today’s SPAC litigation and enforcement actions. A recent ABA survey of pending SPAC cases shows that plaintiffs often allege due diligence failures that either led to material misstatements or omissions in the at-issue disclosure documents or that were components of a breach of a defendant’s fiduciary duties — typically, the duty of care.
3. Breach of Fiduciary Duties
It is not uncommon for SPAC-related lawsuits to involve breaches of fiduciary duties. According to the ABA, the majority of SPAC-related lawsuits allege breaches of fiduciary duties by directors and/or officers, as well as claims against the SPAC, the target company (and its board/officers), and/or others for allegedly aiding and abetting fiduciary duty breaches by the SPAC board.
Companies that are considering a transition into the public domain by way of a SPAC must consider implementing various levels of risk management and mitigation. A good place to begin is with a directors and officers (D&O) liability insurance policy.
The recent popularity of SPACs makes it worth examining the litigation risks for directors and officers of these companies. If you are a SPAC in need of D&O insurance or would like to learn more about this vital coverage, contact the experts at Oakwood D&O. We have over 15 years of experience specializing in all aspects of management liability, with an ardent focus on directors and officers.
Get in touch – email Eli Solomon, CEO, at eli@oakwooddno.com or call (323) 686-7519.
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