March 4, 2021

SPACs: SEC Guidance a Road Map for De-SPAC Plaintiffs?

This Goodwin memo reviews how SPAC litigation continues to evolve, and notes that de-SPAC transactions are becoming attractive targets for the plaintiffs bar. That’s no surprise – I mean, how could they not? After all, as Willie Sutton put it when asked why he robbed banks, “that’s where the money is.”

One aspect of the the memo’s take on evolution of SPAC litigation that came as a bit of a surprise to me is the contention that the SEC’s recent disclosure guidance has provided a roadmap for plaintiffs in SPAC litigation. This excerpt explains:

The SEC’s SPAC Guidance also provides plaintiffs’ firms with guidance about the unique structural components of SPAC transactions, particularly as they relate to disclosures of potential conflict of interests, that will likely inform demand letters and lawsuits moving forward. With respect to SPAC IPOs, the SEC raised a number of questions focusing on the incentives of SPAC sponsors in light of the limited timeframe set for completion of an initial business combination; deferral of underwriting compensation and other underwriting related fees and services; fees and services to directors, officers and related parties; issuances of securities to SPAC sponsors and affiliates; voting control by the SPAC sponsor; other planned financing transactions; and related matters.

In the context of the deSPAC transaction, the SEC highlighted the importance of disclosures surrounding financing undertaken concurrent with the deSPAC transaction and the terms of, and participation by affiliates in, such financings. The SEC’s SPAC Guidance also emphasized disclosures surrounding potential conflicts between SPAC sponsors, directors and officers, and the interests of public shareholders in connection with the target company selected.

In addition to disclosure claims, the memo says that structural terms of SPACs, highlighted in the SEC’s guidance, can make these transactions more prone to potential conflicts of interest. Plaintiffs can be expected to target those conflicts, and contend that because that the interests of SPAC sponsors are not sufficiently aligned with stockholders, the business judgment rule should not apply.

The memo suggests that these factors make process considerations even more important for de-SPAC transactions than they are in other M&A settings, and includes a number of recommendations designed to help boards and sponsors ensure the integrity of that process and reduce litigation risk.

John Jenkins