Ed’s Note: This article first appeared on the Juris Lab, a “data analysis is the law” forum.
“SPAC” is head to head with “NFT” for “the acronym for things people know and believe will make you rich”. Since NBC recently documented NFTsHere at the Juris Lab, it’s up to us to demystify SPACs for the world.
SPAC stands for Special Purpose Acquisition Company. It’s kind of a merger and takeover. A group of investors will assemble a team to operate a SPAC and then give the public the opportunity to invest in the SPAC. The money invested is then used by the SPAC team to search for privately held companies to buy and go public. Generally, when the SPAC team can’t find a good target that investors agree to, investors’ money is returned. The process can take a few months or a few years.
SPACs are not a new concept, but about that last year and a half Their popularity has exploded. Even if other M&A activity has remained stable or has decreased, SPACs have increased, suggesting that they are crowding out typical M&A activity.
Litigation will arise regardless of the form of the mergers and acquisitions. How well documentedThe vast majority of public M&A deals are challenged in court. M&A transactions aside, securities disputes pose a significant threat to any company due to the loose certification standards for classes that allow a plaintiff to represent millions of stocks. Any company that suffers a price decline can be in the nine- to ten-digit range Expect claims for damages. Given the market’s incentives and trend towards SPACs, the courts will inevitably see more litigation focusing on SPACs.
The first harvest of SPAC securities lawsuits has already arrived. Stanfords Securities Class Action Clearinghouse has identified 21 SPAC-related federal securities lawsuits filed since 2019. (This doesn’t account for state litigation, such as derivative action filed in the Delaware Court of Chancery.) I decided to take a closer look and see what these state securities lawsuits look like. In discussing this, I have divided them into current lawsuits (filed within the last six months) and older lawsuits (filed before October 2020).
The central theses
The rate of recent lawsuits (1.66 per month) is more than three times that of older lawsuits (0.5), suggesting that the increase in SPAC activity is being felt in court.
SPACs are an easy target for a strike action – a lawsuit that is filed weeks before shareholders vote on a merger and then quickly abandoned or dismissed, usually in exchange for a six-figure payout to the plaintiff’s attorney. Only 1/3 of the SPAC complaints (7) in the database fit the model of a strike action. (To determine if a lawsuit was a strike, I looked for two criteria: (1) the plaintiff filed the lawsuit before shareholders voted on a merger or acquisition, and (2) the lawsuit after We can expect more lawsuits over time, SPACs identify targets to be acquired, and these acquisitions will be subject to a shareholder vote.
Plaintiffs can often choose between several different grounds for action when they are suing for securities fraud. Of the 14 non-strike actions, only one action contained an action under Section 11 or 12; 5 of the actions contained a claim under Section 14 (a); and all 14 non-strike actions contained a claim under Section 10 (b).
The universal appeal to section 10 (b) is not surprising; Its elements generally have the lowest threshold to be crossed.
What is somewhat surprising is the rare reference to section 14 (a). Because SPACs generally require a shareholder vote to acquire a target, a power of attorney must be issued making them susceptible to claims under Section 14 (a). I’m guessing we’re just seeing a time lag in the data. Here’s why. The plaintiffs’ attorneys in securities fraud suits must go through a court-supervised appointment process before leading the litigation. When claimants initially file their complaints, they usually only state what is necessary to save time and resources. So why put in all the work if you don’t get appointed a lawyer? Once appointed, the chief attorney will aggravate the complaint, often with new grounds for complaint and hundreds more pages of allegations. The infrequent use of Section 14 (a) can therefore only reflect that in many of these cases there are still wildcard complaints. Indeed, of the 9 non-strike actions still pending in the original appeal, only 1 contains a claim under Section 14 (a). Of the 5 non-strike actions for which an amended complaint was filed by the chief attorney, 4 included a Section 14 (a) action. I would bet we will see a shift to more claims under Section 14 (a) as amended complaints are received in recent cases.
The biggest benefit is that while SPACs are booming, we are still very early in the lifespan of SPAC litigation. SPACs take time to decide on a destination. The plaintiffs’ attorneys take time to file a lawsuit. The courts take time to appoint a senior attorney. However, 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 businesses and the securities forces to watch.
Show data from the post Here.
Read more in the Juris Lab …
Bryan Gividen is a Senior Associate at Vinson & Elkins LLP in Dallas, where he focuses on litigation and appeals against shareholders and mergers. He studied economics at Brigham Young University before graduating summa cum laude from the William & Mary School of Law. The views expressed here are Bryan’s sole and do not reflect the views of any of his employers or clients, past or present. Follow Bryan on Twitter @BryanGividen.