The Backlash Against SPACs Has Begun As Lawsuits Pile Up

More than two dozen shareholder class actions were filed with New York and Delaware courts in the past two years.

In the US, SPACs have taken the market by storm, raising more than $100 billion in capital via 498 initial public offerings as of October 2021.

SPACs are special purpose acquisition companies set up for the sole purpose of raising capital through an IPO with the aim of buying or merging with an existing company.

However, a sharp decline in market performance of many of them and a backlash from regulators and public investors have triggered a wave of lawsuits, forcing SPAC boards and potential acquisition targets to reassess their approach to risk management and transaction valuation.

More than two dozen shareholder class actions were filed with New York and Delaware courts in the past two years, according to official records. The actions focus on misleading or false statements in the SPAC disclosure. For example, sponsors of Churchill Capital III, a prominent SPAC, have been sued in connection with the acquisition of MultiPlan, a healthcare analytics company. The lawsuits generally target SPAC directors, but they can also target the company and its board members for supporting the transaction.

This new litigious trend has already changed the way SPACs and their boards manage the de-SPACing, or actual IPO, transaction. First, it has accelerated the use of fairness opinion by the board. The fairness opinion, which is provided by an independent financial adviser, serves as a litigation mitigation tool, as it shows a high level of valuation diligence.

Second, since many of the claims involve inaccuracies around conflict of interest, especially relationships between SPAC sponsors and the target company’s ownership structure, the more recent “going public via SPAC” transactions include more comprehensive disclosures.

Third, regulators, and consequently claimants, have expressed their concern recently about projections related to target companies and their financial performance. Since often the projections are based on abstract estimates, SPACs now tend to use independent investigators and audit firms to exercise high-quality and independent due diligence on the company, its management and financial future.

Finally, from a legal perspective, SPAC directors are now making sure that their insurance policies cover them against such litigation risks, and they also tend to engage litigation specialists in addition to the traditional corporate counsels early in the process as they consider a target and throughout the de-SPAC process.