SPAC

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.

Directors and Officers (D&O) Insurance

While SPACs are beneficial in many ways, they also expose directors and officers to unique risks not present in traditional companies because SPAC trusts can not be used to indemnify a SPAC leader from a personal lawsuit. These directors and officers must have pockets deep enough to cover settlement costs themselves.

Obviously these individuals would like to purchase a traditional D&O policy to indemnify themselves against these huge personal expenditures, but this is not possible. SPACs operate on an exclusive timetable not covered by the standard 12 month coverage of a typical D&O policy. As a result directors and officers must acquire a custom tailored D&O policy written to cover the projected length of the SPAC and de-SPAC process, including generally a six-year run-off period.

After de-SPACing occurs it’s difficult to get go-forward D&O coverage for SPACs, which usually covers the entire SPAC regardless of duration. That’s why a unique insurance company like First Cover is absolutely essential, one who understands how to think months or years into the future and incorporate all possible scenarios that may require SPAC D&O coverage.