August 27, 2021

PSTH Lawsuit: SPACs, SPARCs, Profs & Fig Leaves

The aftershocks from the Pershing Square Tontine Holdings lawsuit continue to reverberate through SPAC-land.  Shortly after the complaint was filed, Bill Ackman announced plans to dissolve PSTH. Ackman – whose picture appears next to the definition of the word “mercurial” in the dictionary – reiterated his belief that the suit is meritless, but said that “the nature of the suit and our legal system make it unlikely that it can be resolved in the short term.”  He also said that the lawsuit was likely to chill interest from potential De-SPAC partners.

Ackman’s decision to dissolve PSTH hinges on the SEC’s approval of an offering by a new entity, Pershing Square SPARC Holdings.  What’s the difference between this entity and PSTH? According to this Institutional Investor article, “[t]he primary difference between Ackman’s SPARC and a traditional SPAC is that the SPARC does not require investors to put up any money until it has identified a merger target.” The SPARC also wouldn’t be subject to the two-year time limit that applies to SPACs.

Ackman’s announcement immediately prompted triumphal crowing from Professors Jackson & Morley:

“We are gratified to see that just two days after we filed our lawsuit, the world’s largest SPAC is now offering to mail back over $4 billion worth of checks to investors,” they said in an emailed statement Friday. “This validates the strength of our claims — and the urgent need to enforce existing investor protections in this industry.”

Some of their fellow academics have also called this a win for the profs, with some even going so far as to suggest that the lawsuit may portend the doom of the SPAC industry. But whatever its consequences for SPACs generally, my guess is that Bill Ackman is positively giddy about the fig leaf the lawsuit has provided to him – and that’s probably the best explanation for his quick decision to liquidate. It’s pretty apparent that the sheer size of PSTH was making it difficult to find a suitable De-SPAC merger partner, and the lawsuit gave him an opportunity for a graceful exit before time ran out on his SPAC.

Jackson and Morley certainly have the courage of their convictions – according to this WSJ story, they followed up their lawsuit against PSTH with filings against two other SPACs premised on the same alleged violations of the Investment Company Act. The profs say that their lawsuits are “based on extensive research into the laws governing investment managers.” That’s undoubtedly the case, but practitioners don’t seem as impressed with their allegations. In fact, this excerpt from their recent memo on the filing indicates that the folks at White & Case are downright dubious about them:

The complaint misstates both the law and what PSTH, like all SPACs, proposes to do. As noted above, to be an investment company under Section 3(a)(1)(A) of the ICA, a company must do more than merely invest in securities. Investing in securities must be the company’s primary business to fall within Section 3(a)(1)(A).

The purported basis in the lawsuit for its allegation that PSTH’s primary business is investing in securities is the fact that, prior to the consummation of a business combination or liquidation, PSTH, like all SPACs, is required to deposit all of the gross proceeds from its IPO into a trust account, which may only be invested in United States “government securities” or in certain money market funds which invest only in direct US government treasury obligations. This argument was rejected long ago by the SEC.

The memo goes on to lay out in detail the argument that the complaint’s Investment Company Act allegations are without merit. This Winston & Strawn memo takes a similar position.   As for the plaintiffs, it looks like we may have to wait for their response to a motion to dismiss to find out whether they’ve got some bombshell arguments supporting their allegations – or if they’ve just “released the Kraken.”

John Jenkins