2021 Year-End-SPAC and De-SPAC Litigation Update
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2021 Year-End-SPAC and De-SPAC Litigation Update
Introduction
While many refer to 2020 as the year of the SPAC (special purpose acquisition company), it seems lesser known that 2021 has been the year of SPAC litigation. In 2021, the number of SPACs continued to grow to over 500 SPAC IPOs. With $182 billion in “dry powder” waiting to be deployed by SPACs looking for a target company, it is likely we will continue to see a high volume of SPAC activity. At the same time, the amount of SPAC & de-SPAC-related litigation in 2021 nearly quadrupled in number from 2020.
We saw 42 total lawsuits, including security class actions and derivative suits, filed against SPACs and de-SPACs through the end of 2021. This is a dramatic rise from 10 lawsuits in 2020 and 6 in 2019. Some trends have emerged as we continue to track this litigation. It is most common that these suits occur within the first six months after the de-SPAC or merger date. We have also seen many cases filed even before a de-SPAC merger is announced and others filed two years into the future and beyond.
Why the Increase in Litigation?
Most recently, SPACs are routinely facing claims related to Section 14(a) and Section 10(b) of the Securities Exchange Act of 1934. Section 14(a) prohibits material misrepresentations and omissions, while Section 10(b) of the act prohibits manipulative or deceptive device or contrivance in contravention of rules and regulations prescribed by the Securities Exchange Commission (SEC). Other claims that frequently appear include a breach of fiduciary duty and, more recently, claims relating to the Fraud-on-the-market Doctrine. Both claims center on the idea that stock prices are a function of all material information about a company, that information has been made available to investors and it has been presented in a legal/ethical manner to the investors.
In April of 2021, the SEC released guidance on accounting regulations for SPACs. The SEC said that “the warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, OCA staff concluded that, in this fact pattern, such a provision would preclude the warrants from being indexed to the entity’s stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.” This accounting change forced many SPACs to issue restatements regarding a company’s financials.
