SPAC is neck-and-neck with NFT for the title of “acronym for thing people kind of know about and believe makes you rich.” Since NBC recently documented NFTs, it’s on us here at The Juris Lab to demystify SPACs to the world.
SPAC stands for special purpose acquisition company. It is a species of merger and acquisition. A group of investors will assemble a team to run a SPAC and then allow the public to invest in the SPAC. The invested money is then used by the SPAC team to look for privately held companies to purchase and take public. If the SPAC’s team doesn’t find a good target that the investors approve of, then generally the investors’ money is returned. The process can take a few months or a few years.
SPACs aren’t a new concept, but over the past year and a half their popularity has exploded. Even as other M&A activity has stayed steady or declined, SPACs have surged, suggesting they may be displacing typical M&A activity.
Whatever form M&A takes, there will be litigation. As has been well-documented, the vast majority of public M&A deals are challenged in court. Even aside from M&A deals, securities litigation is a significant threat for any company due to relaxed class certification standards that allow a plaintiff to represent millions of shares of stock. Any company that suffers a drop in stock price can face nine- to ten-digit damages claims. Given the incentives and the market’s trend toward SPACs, courts will inevitably see more litigation focusing on SPACs.
The first crop of SPAC securities lawsuits have already come. Stanford’s Securities Class Action Clearinghouse has identified 21 SPAC-related federal securities lawsuits filed since 2019. (This does not account for state litigation, such as derivative lawsuits filed in the Delaware Court of Chancery.) I decided to take a closer look and see what those federal securities lawsuits look like. In discussing them, I’ve separated them into recent lawsuits (those filed within the last 6 months) and older lawsuits (those filed before October 2020).
- The rate of recent lawsuits (1.66 per month) is more than triple the rate of older lawsuits (0.5), which suggests that the increase in SPAC activity is starting to be felt in courts.
- SPACs are an easy target for a strike suit—a lawsuit filed weeks before shareholders are set to vote on a merger then quickly abandoned or dismissed, usually in exchange for a six-figure payout to plaintiff’s counsel. Only 1/3 of the SPAC lawsuits (7) in the database fit the model of a strike suit. (To determine if a lawsuit was a strike suit, I looked for two criteria: (1) the plaintiff filed the lawsuit prior to a shareholder vote on a merger or acquisition and (2) did not pursue the suit past the merger vote.) We can expect more strike suits as time passes, SPACs identify targets to acquire, and those acquisitions are put up to a shareholder vote.
- Plaintiffs can often choose between different causes of action when suing for securities fraud.In general, those causes of actions include: Section 10(b): Used to sue for any misleading statement, no matter the context, whether an SEC filing, investor call, press release, or some other … Continue reading
- Of the 14 non-strike suits, only 1 suit included a Section 11 or 12 claim; 5 of the suits included a Section 14(a) claim; and all 14 non-strike suits included a Section 10(b) claim.
- The universal invocation of Section 10(b) is unsurprising; its elements generally have the lowest threshold to cross.
- What is a bit surprising is the infrequent invocation of Section 14(a). Because SPACs generally require a shareholder vote on acquiring a target, a proxy must be issued, making them susceptible to Section 14(a) claims. I suspect we are just seeing a time lag in the data. Here’s why. Plaintiffs’ lawyers in securities fraud lawsuits have to go through a court-monitored appointment process before they lead the litigation. So when plaintiffs initially file their complaints, they usually only set out the bare essentials to save time and resources. After all, why put in all the work if you don’t get appointed as counsel. Once appointed, lead counsel will beef up the complaint, often including new causes of action and hundreds more pages of allegations. So the infrequent invocation of Section 14(a) may just reflect that many of these cases still have placeholder complaints. Indeed, of the 9 non-strike suits still on the initial complaint, only 1 includes a Section 14(a) claim. But of the 5 non-strike suits have had an amended complaint filed by lead counsel, 4 include a Section 14(a) claim. I’d wager we will see a shift to more Section 14(a) claims as amended complaints start coming in on the recent cases.
- The biggest takeaway is that while SPACs are booming, we are still very early on in the lifespan of SPAC litigation. SPACs take time to decide on a target. Plaintiffs lawyers take time to file a suit. Courts take time to appoint lead counsel. But the increase in SPAC activity this year means more litigation is likely to come, and these early cases will be all the more interesting for companies and securities litigators to watch.
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In general, those causes of actions include: