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Financial R&R: How Recent Court Decisions are Impacting M&A Litigation

By Alliant Specialty

Securities class action lawsuits may have declined in 2021 compared to the number filed in 2020, but a growing trend of M&A-related lawsuits involving special purpose acquisition companies (SPACs) is on the rise. Ron Borys and Ryan Farnsworth sit down with Matia Marks and Abbe Darr, Alliant Claims and Legal, to discuss the recent and upcoming court decisions impacting M&A litigation as well as the implications of D&O insurance policy language.

Intro (00:01):
Welcome to Financial R&R a show dedicated to financial insurance and risk management solutions and trends shaping the market. Today. Here are your host, Ron Borys, and Ryan Farnsworth.

Ron Borys (00:13):
Well, welcome everyone, and happy new year. This is our first Financial R&R podcast of 2022. My name is Ron Borys and I lead the financial institution's business at Alliant. I'm here with my partner, Ryan Farnsworth, and with our two special guests today, two attorneys in our legal and claims group Matia Marks and Abbe Darr. Matia joined us in 2021 and brought with her, a skillset, where she specializes in policy wording and a number of other legal and claims-related things that she helps our brokers with every day. And Abbe and I have been fortunate to work together now for at least five years. Abbe is a senior attorney in our group who focuses on working with clients on complex claims resolution. And we wanted to spend some time today talking about M&A claims, certainly saw a ton of M&A activity in 2020.

Ron Borys (01:01):
And, unfortunately, in some situations as a result of mergers and acquisitions, there are claims there are definitely some nuances that go along with claims from a D&O perspective when it comes to insurance. So, Ryan, I'm going to hand it over to you.

Ryan Farnsworth (1:19):
Yeah, look, I mean, we're going into 2022 full steam ahead. And I think anytime we're talking about M&A claims and the management liability professional liability sector, it always starts with security class action trends and how that's impacting the D&O market. And the rest of the claims kind of tend to follow from there. Matia we'd love to get a snapshot, of your perspective from 2021 and what the security class action trends look like. I think it caught us a little all by surprise in terms of how it turned out but love to hear your thoughts on that.

Matia Marks (01:48):
Thanks, Ryan. Yeah, it's definitely been an interesting year in the security class action litigation space. We're still waiting for the final numbers to come out, but as of the middle of 2021, we were at the lowest level we'd seen in years at 112, and we are definitely expecting to see a similar amount for the second half of the year on the SPAC front. There had been 600 SPAC IPOs as of December 15th, which had raised a total of $160 billion compared to 250 SPAC IPOs, which raised $80 billion last year. So, we're definitely seeing a large increase in that space. According to Back Insider, there are currently 507 back seeking to identify merger targets and there have been 48 business combinations so far in 2021. And there's also been 29 SPAC-related class action lawsuits filed in 2021. Those suits are mostly related to business combinations that took place in 2020 or prior. So, we've seen that there has been a lag between the business combination and when the litigation hits. And these claims have mostly been based on the poor performance of the new public companies, as well as negative disclosures, which affected the stock price of these SPAC companies. And finally, alleged misinformation that was distributed to shareholders prior to the de-SPAC transaction. So more to come on that later in the podcast.

Ryan Farnsworth (03:18):
That is definitely a lot going on. And it seems as if every time the SPAC has become a four-letter word for D&O insurance underwriters, you hear the folks, the talking heads on CNBC and refer to SPAC-A-Palooza, and they seem to have soured on, recommending those types of companies in terms of buying big, given their performance. So given the questions around it from a regulatory perspective, it's going to be very interesting to monitor those trends going into 2022. And one thing that we've been seeing over the last 18 to 24 months is the activity in private equity and the claims that are rising from M&A and other corporate transactions. I know you spend so much of your time in that world. What are some trends that you're seeing with respect to M&A claims, and even with insurance coverage relative to those, to those matters?

Abbe Darr (04:10):
Well, thank you so much for asking. I'm a sucker for talking about claims. So yeah, 2021 was a banner year, even though the claims volume and securities class actions were down. The trends that we've really been noticing is sort of the granularity with which the courts are looking at the details of the underlying transaction as it applies to coverage. So, I'll give you some examples of what we're seeing out there. Ryan, it's kind of nuts because in the traditional world of your bump-up claim, based on 75, where people were talking about not getting adequate share price considerations, I don’t believe that no one was going to get a dime of courage for settlement, but the core are looking at it more deeply, which is great, including in the Willis versus AIG and Northrop Grumman matters. They both involved bump-up claims and they both involved bump-up exclusions.

That specifically excluded loss that was related to allegations of unfair share price consideration. So, let's go back to Willis versus AIG. And there were two underlying actions there. One was based on allegations of misrepresentations in the proxy statement, and one was a derivative claim. So, the court took a look at it and Willis came and they said, we want our, our money, thanks for defending us, folks, but we want our money for the settlement here. And obviously, the insurers said, no, we have a specific exclusion here for bump-up claims. So, the court said, no, that exclusion doesn't apply because we've got to look at the details of the underlying transactions. And they found that there was a distinction in their minds between an acquisition or a takeover versus a merger situation. And they found that because it was a merger situation that the bump-up exclusion did not apply.

So similarly, the Delaware Chancery court took a similar look at a bump-up exclusion situation in Northman, which was kind of like the Mac daddy of all bump-up exclusion coverage, litigations. I think it had bought eight coverage litigations and similarly found that the transaction had to be looked at in order for the court to determine whether or not the exclusion applied. And they said that because the underlying transaction did not involve the acquisition of all or substantially all of the assets of the company at issue. Then the bump-up exclusion didn't apply. Now I happened to know a little birdie told me, Ryan, that you're very interested in straddle claims. So, I just wanted to point out to you that Northrop Grumman involved, both pre-merger and post-merger allegations of wrongdoing and which could implicate separate towers of insurance. And we need to pay really strict attention to situations there cause particularly in the SPAC universe. And that's what the straddle claims pertain to. So I, know Mati is going to talk more about it on the front of the SEC litigation and certain settlements, but I just wanted to foreshadow that because the court was not convinced in Northrop Roman, that either argument trying to preclude or push coverage into a prior tower of insurance would work, but there's much more than meets the eye and a lot of discussion to be had.

Matia Marks (07:55):
Thanks, Abbe. And in addition to the traditional M&A, as I mentioned earlier, we've seen 29 securities class action cases involving facts. And there have been a few notable ones that recently have settled that I wanted to mention here. The first one involves an electric vehicle company. And in that case, the SEC accused the electric vehicle manufacturer of violating the securities laws with numerous misleading statements that it had made for a significant period about its production capabilities, as well as the company's financial outlook. And the settlement actually followed civil and criminal charges that were filed against the company's founder for using social media to repeatedly mislead investors about the company's technology and capabilities. And the case actually settled for 125 million payments to the SEC. So, a pretty significant payment there. And another notable case involves a music streaming company that misrepresented that it had earned millions in revenue and had many subscribers when it had in fact, none.

And the SEC filed an emergency action in order to preserve the company's cash in order to get some of that money back to investors. And the company actually ended up paying a pretty large disgorgement of $38.8 million back to its investors and in the last week or so, we've also seen several new cases filed against SPACs. The first one was a securities class action lawsuit against SPAC merger FinTech company, where individuals were named in the lawsuit that included two former officers of the SPAC where the IPO had been completed in August 2020. The business combination had been announced in December 2020, and then the merger was completed in March 2021. And the company actually had revised their earnings guidance, which resulted in a pretty significant declaration to their share price. The complaint actually named four individual defendants, including the former CEO and CFO of the SPAC, as well as the CEO and CFO of the new company after the business combination and the complaint alleged that the defendant failed to disclose information about regulations and key markets that would've affected the company's performance.

So, there were definitely, allegations in the company complain about false or misleading information. And then most recently there was a securities class action filing against the company that completed its SPAC IPO in November 2020 and then announced plans to merge with the company that provided based infrastructure to the national security, civil and commercial markets. And that company completed their business combination in September of 2021. And the problem that we experienced here was that the company had announced plans to postpone the release of its third-quarter earnings, due to some accounting issues that they became aware of. And that also caused a significant decline of its share price. And then subsequently the company filed a notice with the SEC saying that they couldn't finalize their financial statement as a result, which further, reduced the price of their stock. And then the securities class action claim was filed against the D&Os of the private company, as well as the SPAC company with that alleged weaknesses in the company's internal control with regard to their financial reporting. So, we're definitely going to be keeping our eye on these two cases to see how they play out in the future.

Ryan Farnsworth (11:22):
Well, Mattia and Abbe, you've sufficiently scared everyone in the industry about dealing with claims and you probably could be writers on the next season of succession based on all these corporate issues that you're identifying and working through. I mean, as you know, on this podcast, we do everything we can to help our clients find a more rewarding way to manage risk. I mean, with all of these claims and potential policy issues that are dealing with exclusions and bad actors, and what is it that we are doing now? You talked about it, Abbe, I love straddle claims. I'm a sucker for straddle claims. One of the first things I did in this industry close to 20 years ago, was help a client through a straddle claim. So, it's not a new problem that we've been posed with, but finding the solution tends to be a problem for a lot of clients. And especially when you're dealing with acts that span a transaction. I mean, maybe Mattia I'll turn it over to you first and talk through some of the strategies that we have and that we need to implement to help clients work through M&A and SPAC-related litigation when it comes to policy wording.

Matia Marks (12:31):
In traditional M&A transactions, it's important to review any bump-up exclusion that's contained in the D&O contract as Abbe was alluding to before, and to make sure that any of those exclusions are as narrow as possible. It's also important to review other policy terms like the definition of securities claim to make sure it's as broad as possible, as well as define the definition of transaction. I mean, that was the situation in one of the cases that Abbe was just speaking about. So, that way we know what type of deal could potentially be subject to a bump-up exclusion. And we don't run into that situation where we're trying to figure out whether the applicability of that exclusion would apply to the transaction. As far as facts are concerned, it's important to make sure that the prior acts exclusion on the go-forward policy doesn't include that broad catch-all language, that could potentially kick out coverage for something that you don't want to.

So I like to normally try and amend the wording of the prior acts exclusion on the go-forward policy, instead of based upon rising out of attributable to type learning to precluded only for that part of loss that is attributable to wrong acts that occurred prior to the transaction date, that way get rid of that over overly broadly in language. And then it's also important to on the runoff policy to make sure that a straddle claim is specifically going to be picked up by the runoff policy. And so, it's important to be intentional about that wording and make sure that any wrongful acts, even if they happen over time will be deemed and have been committed on the earliest date and covered under the runoff policy.

Ryan Farnsworth (14:12):
It's such a key protection that the underwriters have when that language gets in the policy it's game over. And we've fought for our clients multiple times when we haven't been the broker for the go-forward policy, but we've had insureds that are sitting on a go-forward board to fight and get the best wording possible. At that point it's not about who's the broker, it's about how we can best manage the risk. And as we try to foresee those types of issues and other things that are going on into 2022, I want to put your crystal ball in front of you, Abbe and Mattia, and maybe Abbe, first talk about some predictions that you see for 2022, what are some things that we should be anticipating in the coming year?

Abbe Darr (14:53):
Absolutely. Ryan. And just to address something you said earlier, we certainly do not want to scare any listener or any of our clients. We are here, and we are aware of the issues. So, we are armed with the ability to work with our clients, approach the insurance companies and make sure that they get the Folsom coverage that they deserve. So, I know you guys on the broker side are doing that and the folks on the claim side are here as your teammates doing that as well. So, putting my little crystal ball in front of me, what do I see in 2022? Because there is a delay in the IPO and ultimate business combination and the fact sphere. I don't see that we won't see additional securities class actions that evolve around the ultimate business combination, but I am hopeful that based on what we all know now and our involvement that we're going to see policies that specifically address this back world and that at the end of the de-SPAC. So, we will see things about involving directors and officers, because we're going to see the result of the backlog of the IPO ultimately going into business combinations. And so, as I had previously said, so, I mean, while we don't see that we're not going to be busy doing this, we're better prepared to deal with this clean sphere. And we've certainly seen the arguments and we're ready to make them.

Matia Marks (16:27):
Yeah. And I'd like to add to what Abbe said, we've seen significant guidance from the SEC outlining the importance of the disclosure obligation under the federal securities laws, as they relate to conflicts of interest. And in fact, the chair of the SEC said in a speech in December of 2021, that he continues to be concerned about investors and the SPACs booth at the time of the initial SPAC IPO. Well, as at the business combination stage. So, his concern is, are investors benefiting from the protections that they would get under a traditional IPO with respect to disclosure? So there, continue to be inherent conflicts between the types of investors who stay through the end of the deal versus those who cash out. And the SEC has concerns about the discrepancy and information that's available to shareholders about the business combination. Certainly, the economic terms of the investments made by the SPAC sponsors, the directors and officers, and their financial incentives are often different from that of public shareholders. So, I think that given that the SEC staff has been invited to provide proposals, to consider how to better align the treatment of facts and their participants with investor protections, we're going to continue to see some activity here from the SEC, as well as more SPAC related regulations in the future.

Ron Borys (17:52):
Well, listen, I'm thrilled to have been able to disprove all those people who say I can't sit through a podcast and not steal the show. I mean, listen, at the end of the day, when you're fortunate to have two really talented attorneys, like the two of you, and a great moderator in Ryan, I mean this was definitely one of my favorite podcasts recorded to date and certainly a great way to start the new year. So, thank you both for taking the time and all this does is continue to remind me how really lucky we are as brokers to have such great partners. I continue to be impressed day in and day out with our legal and claims group. And oftentimes people think that that group is just for recovering claims. And you guys certainly do a great job at that, but there's so much more to what we can offer in the area of advice and expertise and help.

Ron Borys (18:37):
And I think you two are, are great examples of that. So, with that, we'll wrap up this, this episode of the Financial R&R. Thanks Ryan, for being such a great moderator today. And for those of you, who've heard some things today that you'd love to learn more about out, whether it's speaking with, with members of our team or, or learning more about Alliant, you can visit our website But with that, we'll wrap things up for now and look forward to tuning in again, soon with the next latest and greatest topic coming out of our financial institution team. Thanks so much.


Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.