The recent boom in the formation of Special Purpose Acquisition Companies ("SPACs"), both onshore and offshore, is leading to an increase in litigation (primarily shareholder/investor lawsuits) to resolve disputes between investors, directors and other related parties.
SPACs' recent increase in popularity can be attributed to them being used as a way to transition private companies into public, in a way which mitigates the increased market volatility risk of an IPO. This briefing touches on some of the key issues likely to arise in this context.
A SPAC is an entity which is formed and listed on an exchange with no specific business purpose except to raise capital for a future purpose, which is undefined. Once listed (the NYSE and Nasdaq permit listings of SPACs from the majority of offshore jurisdictions including the Cayman Islands) the SPAC will usually have around 2 years to obtain financing and complete the intended transaction (once identified). In the event that the transaction is not completed during this time frame, the SPAC is required to be dissolved once the funds are repaid to the investors. The Cayman Islands have seen a steep rise in the number of SPACs being incorporated as, if they are domiciled in Cayman, they offer competitive advantages (tax, legal and regulatory) in comparison to Delaware.
SPAC – conflicts between stakeholders
As one would expect, various contractual obligations exist between the investors, sponsors and directors of the SPAC in addition to a potential target entity once the object of the SPAC is identified. Directors of a SPAC are likely to have indemnification rights and may also enjoy remunerative arrangements linked to the success of the venture. In this context it is, therefore, easy to see how conflicts may arise between the duties owed to the SPAC and their own self-interest which may lead to disputes with the investors. For example, it is in the interests of the sponsors of the SPAC to find and close a deal with a target quickly, although the interests of the investors may well be to wait for the best deal. In an effort to guard against this risk, many SPACs are seeking to enhance objectivity by forming "special committees".
Recent law suits have arisen in New York and Delaware concerning alleged violations of the federal securities laws and claims against directors of SPACs for misrepresentation (including false and misleading disclosures in SEC disclosure statements) and breach of fiduciary duty. Subsequently, the SEC has produced some guidance which should assist in managing potential conflicts between sponsors, investors, directors and the target company. Clearly, going forward, those involved will want to ensure they have sound advice on the materials to be disclosed to investors and the target company, the materials to be filed with the SEC, the constitution of any special committees and guidelines for the governance of the board of directors.
Given the marked increase in the incorporation of Cayman based SPACs, it is likely that disputes may arise and may require Cayman specific advice on directors' fiduciary duties and conflicts which are materially different to the laws of the US. Indeed, in many cases the Cayman firm which advised on the creation of the SPAC will not be able to continue to act due to inherent conflicts and independent advice will be required.
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