Buyer, and Seller, Beware: SPACs, deSPACs and D&O

Not since the mid- to late-1990s have there been as many companies going public. We are seeing an unprecedented number of new publicly traded companies – but now with a twist.

The explosive popularity of SPACs is giving private companies unparalleled access to the public markets, and funding respective business growth, in numbers not seen since the fabled IPO market of the Dot-Com era – and the numbers are remarkable. In 2020, 248 SPACs raised in excess of 0bb and 2021 is off to a robust start with over 170 SPAC public offerings.

The torrid pace of SPAC IPOs presents a great opportunity for investors, entrepreneurs, and of course, plaintiff attorneys. Like the growth of SPAC offerings, shareholder litigation and regulatory attention has increased. The suits we have reviewed generally allege, amongst other claims, a lack of sufficient proxy statement disclosures and false or misleading statements by the operating companies’ management team.

So, where does a company’s D&O policy come into play?

As always, you should understand how your private company D&O policy would respond in the case of litigation. We have seen that pronouncements made by the operating company’s team before the company has completed the process may be pushed back to the private company D&O policy. However, private company D&O policies specifically exclude coverage for public company claims, creating a potential gap in coverage for these costly and time consuming proceedings.

What can you do to understand how your D&O policy will respond in the case of a suit?

1. Review your policy to make sure you have the access to coverage should you be caught up in a claim arising out of a  SPAC/deSPAC transaction.
2. Evaluate the limits you are currently buying. If you are sued and coverage is available, the costs will be more in line with public company litigation. What that translates to you is more legal costs and a longer time in litigation.
3. Multiple companies are being named in these suits: the SPAC, the private target, the combined company.  Inquire about the limits and retentions being purchased by all parties.
4. If you are being acquired by a SPAC, carefully review and consider the indemnification obligations.  As the surviving entity, you could be funding the SPAC’s retention and any damages in excess of their D&O limits, on top of your costs to defend any suit.

Understanding requirements and setting expectations properly is of critical importance. The ABD Team is always available and eager to discuss these topics with you. Contact us today.