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Special purpose acquisition companies (SPACs) are created by sponsors who raise capital in an initial public offering (IPO) and use those proceeds to acquire a private company and take it public. And while SPACs have grown in popularity over the past year, they are not without certain legal risks.
There is a potential for lawsuits throughout the life cycle of a SPAC transaction – but despite the challenges, excellent opportunities remain in the SPAC market. The key is to understand the issues, be diligent and mitigate potential risks with the right Directors & Officers liability insurance.
The following are 3 common legal risks involving SPACs:
1. Bankruptcy lawsuits
If a company that is publicly traded through a SPAC goes bankrupt, the directors and officers can be subject to lawsuit. In addition, board members that become directors and officers of the operating company they just acquired, could be at even greater risk compared to other members of the board. According to the American Bar Association (ABA), this is due to the way SPACs are structured when it comes to the incentives provided to SPAC sponsors, who in many cases, are also the SPAC’s board members.
2. Securities class action suits against the SPAC-funded operating company
Post-SPAC-merger companies have become a growing target of securities class action lawsuits. A notable example would be the 2020 case of Akazoo, a music streaming company that was publicly traded through a reverse merger with another corporation that was a SPAC. The plaintiffs alleged that Akazoo made false and misleading statements about its revenue, profits, etc., that resulted in shareholders buying securities at artificially inflated prices.[1]
3. The target company underperforms
A type of SPAC M&A lawsuit that commonly occurs is when the plaintiffs are not satisfied with how the transaction turned out. A critical element of these lawsuits has to do with allegations that shareholders only learned about issues regarding the target company after the merger was completed, according to the ABA.
Aren’t sure what’s covered under your D&O liability insurance policy? Then it’s time to give Oakwood D&O a call. We have more than 15 years of experience specializing in all aspects of management liability, with a razor-sharp focus on D&O insurance.
Get in touch! Email Eli Solomon, CEO, at eli@oakwooddno.com or call 323-686-7519. You can also follow Oakwood D&O on LinkedIn.
