IPO

Recent Developments Highlight SPAC Securities And Shareholder Litigation Risks

As the wave of SPAC IPOs and de-SPAC transactions continues to build, so too has the scrutiny of these transactions from the SEC and the shareholder plaintiff’s bar.

On April 8, 2021, the SEC gave its clearest warning yet among a series of recent signals that it plans to intensify its review of de-SPAC transactions. Most recently, the SEC raised the possibility that statements in a de-SPAC transaction proxy statement fall within the IPO exclusion to the Private Securities Litigation Reform Act (“PSLRA”) safe harbor for forward-looking statements.

Meanwhile, a SPAC shareholder recently filed suit in the Delaware Court of Chancery alleging that the SPAC’s board and sponsors breached their fiduciary duties in approving a de-SPAC transaction, and argued that the claims should be reviewed under Delaware’s demanding entire-fairness standard due to conflicts posed by the board’s and sponsors’ receipt of founder shares. Together, these developments highlight the litigation uncertainties for SPACs and reinforce the importance of adequate disclosures, a robust diligence process, and the careful consideration of any material conflicts.

In the meantime, these developments place greater pressure on SPAC participants to (i) have a robust diligence process with respect to de-SPAC M&A, particularly as it relates to developing the target’s forecast, and, (ii) similar to a traditional IPO process, diligence and carefully consider all disclosures, particularly as they relate to any conflicts and relationships between the parties and materials risks with respect to the forecast.

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