Directors and officers of SPACs are exposed to unique risks during the formation of a SPAC, as well as the acquisition of the private target company and the process of taking it public, otherwise known as de-SPAC. D&O insurance thereby becomes essential, as illustrated by increasing demand and cost for this coverage as markets tighten.
Many SPAC-related liability risks present themselves:
- Inadequate disclosure in original SPAC offering
- Negotiation breakdown between SPAC and target company
- Shareholder-led transaction undermining
- SEC approval de-SPAC disclosure requirement failure
The SEC requires that all conflicts of interest be adequately disclosed to current shareholders and potential investors, but this proves difficult for SPACs oftentimes because there are so many. Add to this potential breach of fiduciary duty claims results from conflicts of interest and judgements during the translation process, and it’s easy to understand why SPACs need to protect themselves with adequate D&O insurance coverage.
In fact, the SEC recently backed up its requirements with enforcement actions that drove home the reality of risk of unwanted litigation and potential liability for SPACs, their target companies, sponsors, officers and directors, throughout the SPAC formation and de-SPAC transaction process. Said unwanted litigation is also wide-ranging, including breach of fiduciary duty, private securities antifraud, and aiding and abetting.