This year has seen continued enthusiasm for the use of SPACs when taking companies public. While this boom has been particularly pronounced in the US, there are increasing signs that a similar trend may be about to emerge in the UK. In our latest "5 things you need to know about…" series, we consider some of the litigation risks that can arise through the use of SPACs and highlight some key issues to be aware of.
1. The UK Looks to Join the SPACs-Mania
This year has seen continued enthusiasm for the use of special purpose acquisition companies ("SPACs") to take companies public. While this boom has been particularly pronounced in the US (see here), there are increasing signs that a similar trend may be about to emerge in the UK. In particular, the FCA's recently published updated listing rules and guidance is designed to make the UK more SPACs-friendly (see here), possibly leading to a growth in the SPACs market. For SPACs that meet the requisite criteria, key changes include a lowered size threshold of £100 million for an initial listing, as well as the removal if certain criteria are satisfied of the general presumption of suspension for SPACs who announce acquisition targets.
While generally seen as being quicker and less expensive than a traditional IPO, SPACs are nevertheless a complex investment that potentially raise a number of unique litigation risks throughout the transaction's lifecycle.
2. SPACs Lifecycle Risks
There are a number of distinctive stages of a typical SPACs transaction, each of which can give rise to different specific litigation risks. At the initial prospectus stage, first directors and promoters should consider the extent to which they will be required to disclose information about potential targets, particularly if such intentions are only vague or preliminary in nature. Risks may also arise at the de-SPACing stage, particularly where there has been a high profile merger with a private company with a lot of "buzz", yet with little in the way of financial reports or a proven track record. In both instances, SPACs directors and promoters should think carefully about the specific disclosure obligations (and accompanying litigation risks) that might arise as a result of providing too little or incomplete information to the public.
Such risks could culminate in shareholders bringing claims for loss suffered as a result of untrue or misleading statements (whether under FSMA or common law), or taking action against SPACs directors for breach of fiduciary duty. Further, claims may be brought by third party consultants for unpaid fees or in relation to the level of compensation provided (e.g. investment bank fees for identifying target SPACs or vice versa). Should SPACs fail, there is also the general risk of contractual and/or common law claims being brought as between SPACs and a prospective target following the breakdown of negotiations, as well as possible challenges to any management fees being deducted before investors are repaid.
3. Timing Issues
Under the FCA's updated listing rules, the time limit for SPACs to find and acquire a target company is two years, with the possibility of extending the period for up to an additional 18 months if certain conditions are met (e.g. shareholder approval). While the possibility of an extension could help to alleviate some of the time pressure on sponsors, the requirement for shareholder approval, combined with the opportunity for shareholder redemptions, can potentially create pressure on SPACs to find a suitable acquisition target. Such pressure to find a target in time can lead to poor investment decisions being made as well as financial projections possibly being overstated in order to attract investment. This may lead to the risk of claims being brought for failures by the directors adequately to promote the success of the company, and/or to exercise reasonable care, skill and diligence in carrying out their duties, and/or for failing to avoid conflicts of interest (e.g. in the context of non-arm's length transactions).
4. UK-Specific Disclosure Concerns
Unlike in the US, UK-based SPACs are not required to make certain mandatory or prescribed "filings", but are instead required to make ongoing disclosures consistent with the obligations of any listed company. As a result, careful consideration needs to be given by UK-based SPACs and their directors and officers as to the specific events that might give rise to a disclosure obligation (e.g. when to announce the identification of a potential target), as well as to how certain types of information (e.g. how a potential target has been assessed and valued) can be presented fairly to the public.
Litigation risks can include those arising from a leak of information (e.g. where the identity of the potential target becomes known prior to the formal announcement), or where the FCA's listing rules require that SPACs contact the FCA to request a suspension. There are also risks relating to insider dealing, unlawful disclosure of inside information, and market manipulation under the UK MAR.
5. Founder Risk
A number of high-profile civil and criminal cases in the US have highlighted the risks that can arise in the context of SPACs transactions with founder-led, often tech (e.g. "unicorn") start-ups with large ambitions, but potentially without a proven business model or product. Prominent examples include the DOJ and SEC's recent fraud charges against the electronic truck start-up Nikola Corp.'s founder Trevor Milton (see SEC's press release here), as well as the SEC's enforcement action against space engineering start-up Momentus Inc. and its founder, Mikhail Kokorich (see SEC's press release here) for, amongst other things, misrepresenting the state of the company's technology. Both cases illustrate the risks that can be associated with founder-led start-ups, as well as the difficulty in assessing fact from fiction in the context of privately held companies that revolve around one or two key personalities.
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