Specialty Podcast: The Rise in SPAC Litigation for 2021

Intro (00:00):
Welcome to the Alliant Specialty Podcast, a show dedicated to risk management and professional solutions. Here is your host, Sandy Crystal.

Sandy Crystal (00:14):
Welcome, everyone, to our latest podcast. This is Sandy Crystal, Executive Vice President, Managing Director, at Alliant. I'm pleased to have with me today, Tim Crowley, our SPAC Practice Leader, Steve Shappell, Specialty Head of Legal and Claims, and Tom Shashaty, Vice President of our Financial Institutions Practice. We’re here today to talk again about SPACs. Today, Tim is going to go through an update on where the market for SPACs is, which has certainly changed over the last several months, and even the last several weeks. Steve is going to give us an update on the claims environment on SPACs with the volume of SPACs that we have seen that has led to more and more claims in these SPAC arenas, and then Tom's going to talk about what sponsors should be thinking about from their own exposure in their own coverage. So, with that, I'm going to hand it off to Tim, want to give us an update on where the SPAC market is today?

Tim Crowley (01:05):
Since our last podcast update, the environment for SPAC D&O insurance continues to evolve on a weekly, if not daily basis, specifically, almost all carriers are continuing to adjust their underwriting appetites for SPACs. On top of the significant increase in SPACs that we experienced in 2020, we've already experienced over 200 SPACs in the first two calendar months of 2021, and thereby each of these insurers has provided a significant amount of capital to the SPAC community and is analyzing the claim trends that Steve will talk about. But also, how they control their capital while remaining disciplined to underwriting and differentiating amongst the SPACs. So, some of the carriers that were frequently writing primary, excess, or side A, for SPACs at the time of the IPO have adjusted those appetites. There's still a strong appetite amongst the carriers to provide those solutions. However, some carriers that were previously providing primary solutions are now more focused on excess or higher excess or side A options. Some of the carriers are beginning to become a little bit more creative as they look to continue to provide solutions to the SPAC community, but maybe a little bit more on their own terms than what they were doing, you know, 6 months, 12 months, or etcetera, or longer ago. So, one concept that we're seeing insurers attached to their policies is in the form of what they're labeling as an affiliate exclusion, this type of exclusion continues to provide the coverage. However, it would determine that the insurance would not provide coverage for any type of transaction. If there is some kind of affiliate ownership represented from the SPAC to the ultimate target, whether that's ownership by the sponsor itself or by the Director or even an Officer of the SPAC, clearly that's not an ideal solution, but based on kind of the appetite of the targets, that may be something that could help lower a premium in some circumstances or allow a SPAC to obtain additional capacity.

If that is something that's being considered, there are common exceptions or grants of coverage within that exclusion that will allow granting the cover in the event, that there was some type of independent third-party fairness opinion from some type of M&A advisor or other in response to kind of the accelerating premium environment and a little bit of a supply and demand issue at the insurance carriers and increase the number of SPAC clients are looking at side only options. Side insurance affords protection to the individual Directors and Officers in circumstances where indemnification is unavailable from the SPAC and the SPAC context. That is a bit more likely due to the trust concerns than maybe a typical C-Corp or publicly traded company. And so that is a way that some ensure for SPACs are looking to provide protection to the Directors and Officers and shield those personal assets, but reduce cost a bit, most of our SPACs purchase the coverage on a 24-month period to align with the life of the SPAC.

But some SPACs are looking to evaluate options on either a 12 or an 18-month basis and depending upon the insurance carrier may or may not get a discount for that, but it's something that should be explored both on a primary and or excess basis from an underwriting perspective. We're continuing to see the carriers scrutinize the risk factors in the S one, whether it has to do with SEC guidance regarding potential conflicts of interest in the offering statements, or even certain S one risk factors, sometimes even relating to the state of the D&O insurance market and the level of those premiums. And, you know, the underwriters continue to focus on certain S one risk factors relating to the availability or lack thereof of indemnification to the SPAC during the hunting phase, in response to the proceeds of the IPO being within a trust.

And lastly, just from a timing perspective, it seems like, you know, a lot of SPACs are now getting to market sooner, both from, you know, the equity markets and the D&O insurance market. It seems like the timing between some of the confidential S one periods and up to the public filing and ultimately the IPO is in some cases shortening. And I think that just kind of highlights the need to work with a qualified insurance broker, such as Alliant, kind of early and often in the process to get the proper advice, to establish a strategy and timelines that generate the best results for the SPAC and its Directors and Officers underwriters are continuing to look at the number of SPACs out there, but also the number of SPACs that a sponsor may have in the marketplace hunting for targets at the same time. So, underwriters may be evaluating the time in between a SPAC going public and announcing its business combination, and then either a second, or even a third S one, or goes public with that second or third SPAC to look at the amount of capacity that's providing to an individual SPAC and to see how many SPACs are out there, hunting for targets at that one time in a given industry class.

Sandy Crystal (05:50):
Given what we're seeing and what Tim described in the marketplace, Steve, do you want to talk about what the claims environment is out there are the underwriters, you know, experiencing claims activity in the SPAC world it's driving this behavior?

Steve Shappell (06:01):
Yeah, so certainly there are SPAC claims and, you know, the good news is there have been, as Tim described, there have been hundreds and hundreds and hundreds of these SPACs and these SPACs are beginning to de-SPAC, and so we're getting a chance to observe where these claims are going to come from. You know, the good news is we've not seen any claims arising out of the pure IPO of the SPAC. And so that's the good news, and I think most people didn't anticipate them because literally, they're taking money, they're raising funds in an IPO and putting in under trust. So, there's not a whole lot that could go wrong there. The dieback is the process where we're seeing litigation and we're seeing a variety of litigation and I'll see the good news is we haven't seen a lot of litigation.

So, in the last 12 months, by my count, and I counted before I just got on here, I think there are 13, maybe 14 federal shareholder class action complaints involving SPACs, and when I say involving some of them are very remote, they started as a SPAC, they dieback, and more than a year later might, might have drawn a kind of classic 10B5 lawsuit. But the fact that their genesis was a SPAC puts them in this category and we are paying attention to this because it is something we are doing. We're really studying these because there's a lot of unknown. We know a lot about shareholder class action litigation, and we know about a lot about what gets people sued in a public setting, and that's what happens here. When they teach back, they become public companies. So, we have the 10B5 litigation. We have the merger objection litigation, and I would say in the current year, there have been, by my count, 6 of the 56 lawsuits filed so far, this year involving SPACs. And of those 6, two of them are merger objections. So, kind of the classic merger. Objection, we see the news is pretty good. So, of the annual rate right now, about 350 shareholder class acts actions per year, because it ticked down last year. There's only been 13 in the last year. So that's the good news. The bad news is, you know, we are seeing these and what we're seeing is kind of an increasing boldness in the pleadings. That's going to really involve a lot of intense motions, practice, and litigation.

We saw the SPAC board and CEO and CFO named along with the target companies, CEO and CFO. So, we're seeing some pretty bold pleadings, and based on my observation and the law, I mean I don't think a lot of these will stick, right? Because particularly these claims are sounding like fraud, like a 10B5 suit. And that's a very difficult claim to make against a sponsor because the sponsors, you know, making very limited representations, and the pleading requirement to plead the client to commit fraud is very high. So, we're going to see some pretty intense motions practice in the first half of this year on some of these 13 claims that have been filed in the previous year. So, fingers crossed, right? The one thing we don’t know of the 20 or so, de-SPAC suits filed because back and debacking is not new.

It's just, the frequency is just out of this world right now. But what we've seen is some of those suits, a number of them have been voluntarily dismissed and have gone really well. So, fingers crossed, right? We're going to keep our eye on this, but you know, the Lite is ramping up is the bad news. And the allegations of 10B5 fraud in section 14 of the 34 act allegations for misrepresentations and proxies they're being made in greater frequency. Luckily, it's not an alarming number right now, but we're watching it very carefully as we have a SPAC and de back a day occurring.

Sandy Crystal (09:57):
Tom, given all that background, why don't you talk a little bit about what sponsors should be thinking about from their own exposure when they're sponsoring SPACs?

Tom Shashaty (10:06):
Sure, during our last conversation, we touched on the point that some financial institutions should look into their own management professional liability insurance and how there could be some E&O, D&O coverage, potentially built into those programs that could extend to the back sponsors either as a subsidiary or an affiliate, or portfolio company of a fund. You know, we would certainly encourage folks to continue investigating this with their broker and prepare for underwriting questions. That'll certainly come up during the cycle. Carriers are looking into the sponsorship themselves from a structure standpoint, warrant offerings, private placements. They're also looking into where the liability sets among any funds, their managers and the sponsor and the SPACs, and then any available in indemnity from a fund that's a management company or these affiliates, and how that would all sort of shake out. Another item two that they're asking about is any potential conflicts of interest from a regulatory perspective. Just seeing again, the regulators are keeping in mind, the end investor and just making sure that disclosures are certainly, in tip-top shape. Depending on what they learn, any renewal terms that come in may include exclusions pertaining to SPA sponsorship. So, just something else to be mindful of. It's not a hard an exclusion in some we've been successful in negotiating these exclusions off, but I would just suggest giving your underwriters the opportunities to understand and underwrite the risk as Tim alluded to, you know, the market is shifting quickly, right? It's changing by the day, by the week. So, we're going to continue to monitor and provide more updates.

Sandy Crystal (11:35):
Thank you, here at Alliant we placed D&O insurance for 50 SPACs in the last 12 months, and this remains an area that changes very quickly and we remain committed to staying on top for our clients. I want to thank Tim, Steve, and Tom for their insights today. And I hope everyone took away something from our podcast. And I look forward to our next one.

Outro (11:54):
Thank you for listening to the Alliant Specialty Podcast. For more information, visit www.alliant.com.