October 22, 2020
SPACs: Sponsor Liability Risks
One thing that’s been conspicuously absent during 2020’s SPAC craze has been a discussion of some of the liability risks that go along with a “de-SPAC” merger transaction. This recent Cleary Gottlieb memo fills the void. The memo addresses the risks for SPAC sponsors in connection with a de-SPAC, reviews recent litigation against SPAC sponsors, and offers some advice on actions sponsors can take to mitigate their risks. This excerpt lays out the memo’s key takeaways:
– In the “de-SPAC” transaction, when a SPAC acquires its target, the SPAC and its sponsors are potentially liable under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 for misleading statements included in a proxy statement or in other public statements. The SPAC and its sponsors may also be liable under Section 11 of the Securities Act of 1933 if that de-SPAC transaction includes a registered offering.
– Investors have sought to hold SPACs and their sponsors liable for a variety of alleged misstatements, including about the financial outlook of the target companies and the level of due diligence performed by the SPAC.
– The best ways for a SPAC sponsor to mitigate these risks are to perform sufficient due diligence on the target and to be cautious with language in the proxy statement.
– John Jenkins