Blank Check Boom: D&O Insurance Strategies for PSPC Management

October 21, 2021 – The decline is 20/20, and directors and officers of publicly traded companies are starting to reflect on the approach of year-end reports. The craze around Special Purpose Acquisition Companies, or SPACs, has peaked over the past year or so, but with such popularity there has been increased regulatory attention and greater consideration for the coverage of ‘directors and officers insurance (D&O).

The only operational objective of these “blank” fictitious companies is to acquire a private company with the money raised by the sponsors via an IPO, thus allowing the latter to go public quickly. According to the organizational documents of a PSPC, if PSPC is unable to complete a merger with a target company through the De-SPAC process, usually within 24 months of the closing of the IPO , it must return all the money from the trust account to the public shareholders PSPC. While many agreed-upon mergers are still in the works, around 445 SPACs are due to find merger partners soon or may be liquidated.

There are three separate D&O insurance programs involved in these PSPC and De-PSPC transactions. First, once formed, PSPC should obtain a two-year D&O policy, typically with a six-year run-off, or “tail,” policy after the De-SPAC transaction closes. Second, the private target company will likely already have its own D&O insurance, which should cover the private company and its directors and officers as part of the merger negotiations and the transaction. Finally, the future company will need a D&O insurance program put in place at the close of the De-SPAC transaction to mitigate the exposures of the newly formed public company.

Amid the volatility of global stock markets, PSPC’s 248 IPO prices raised $ 83.3 billion in 2020 and were quickly overtaken by PSPC’s 434 IPO prices which raised 235. $ 6 billion in 2021. While these numbers once reflected increases in stock prices and new entrants, increased regulatory and shareholder attention has diminished enthusiasm and increased the risk of litigation and litigation. investigation facing liability insurance. Shareholder advocates and legal and banking practitioners are calling the end of 2021 an inevitable return to earth for PSPCs.

However, given where PSPC stocks are currently trading, buying them in the current market might be considered a more prudent investment than in the past. Now more than ever, it’s critical for PSPC management to fully understand the nuances of D&O coverage, as it’s an almost risk-free bet that PSPC’s fervor will return.

The PSPC management team, or sponsors, typically own 20 percent of the outstanding common shares of PSPC at the end of the IPO, consisting of the founder’s shares they acquired for nominal consideration. when they formed PSPC. Despite these generous returns, SPAC promoters should be aware of the liability risk associated with their role so that they can assess whether their insurance adequately meets their needs.

Once a sponsor finds a target, PSPC typically prepares and distributes a proxy to its shareholders containing information regarding the transaction and the target company, including historical audited financial statements and pro forma financial information. This document is also filed with the United States Securities and Exchange Commission (SEC) and is subject to review by the SEC.

There is an increasing number of securities litigation between shareholders and SPAC sponsors for alleged material inaccuracies or omissions in De-SPAC documents regarding the level of diligence undertaken. Once the De-SPAC process is complete, directors and officers may be faced with allegations involving breaches of fiduciary duties and securities claims. While these types of claims are familiar to SOEs, for SPACs, complainants focus on a company going public through a privately negotiated SPAC to substantiate alleged conflict of interest claims. , misaligned incentives or ineffective due diligence.

The directors and officers of the SAVS must carefully examine the general conditions of the D&O policy of the target company. Careful consideration should be given to exclusions, including professional service exclusions, contractual exclusions, and bodily injury / property damage exclusions. When the exclusions are too broad, SPACs should try to limit them as much as possible, by reducing the wording of the preamble, the exclusions to save coverage of defense costs, unpaid claims (“side A”) or claims presented. by security holders.

When setting the terms of the policy for the future business, insurers may agree to provide full coverage of prior acts or to apply a strict exclusion of prior acts, which will in part dictate the options when structuring the policy. liquidation cover mentioned above. From a market and price point of view, this D&O policy placement is very similar to any other IPO. Best practices require that directors and officers begin this investment process well in advance.

SPACs can expect increased attention from regulatory and private advocates on the incentives and motives for managing SPAC. Since many of these litigation risks may not become evident until after the De-SPAC process, PSPC will need to coordinate liquidation coverage from both PSPC and the target company in order to provide coverage “at the future ”for any previous prejudice presumed act.

The unprecedented increase in the number of SPACs has been accompanied by unprecedented scrutiny. SEC staff and members of Congress carefully review filings and disclosures from SPACs and their private targets. An assessment of insurance coverage for potential regulatory risk is a growing consideration for investors.

The Investor Advisory Board seeks to address “[q]questions as to whether the targets are of sufficient size for the sponsor’s economy to be reasonable “and the”[p]Potential lack of sufficient PSPC targets, which may prompt sponsors to market substandard lenses that are generally unprepared to meet legal, regulatory and overall market expectations. “

With April 2022 as the target date for issuing a proposal, the SEC recommends stepping up its regulation of PSPCs through stricter enforcement of existing disclosure rules and the SEC’s stakeholder analysis of the various stages of PSPCs. The closer the SPAC bubble is to bursting, the closer SPACs can come to traditional IPO regulation.

Last month, several U.S. Democratic senators raised concerns about prompting PSPC sponsors to close merger deals quickly. In a letter sent to six serial creators of PSPC, senators requested information on the use of PSPC by October 8, 2021, “in order to understand what kind of congressional or regulatory action may be needed to better protect investors and market integrity “. Senators have not yet received a response.

The extent of regulatory coverage can vary considerably from one D&O policy form to another. Given the increased regulatory scrutiny and exposure to regulatory investigations and proceedings, SPACs should carefully assess the extent to which the A&D policy extends coverage, favor policy formulas that extend greater coverage, and attempt to negotiate wider coverage when warranted.

Potential policyholders need to understand how the D&O insurance market responds to PSPCs and fast SEC regulations every step of the way – during the initial formation, the De-PSPC process, and the post-PSPC period for the company. future.

Unique considerations for PSPC policyholders may include: determining whether claims against promoters are insured; when a runoff policy becomes involved; how to allocate between policies when D&O coverage is shared; whether an exclusion of prior acts applies to the misconduct of the directors and officers of the target company before the merger; and the interplay between private company tail policy and future public company coverage when a claim alleges acts before and after coverage.

SPAC D&O coverage is not universal. Hedging requires examining where liabilities flow, where indemnification is granted and the types of securities covered. PSPC management should work closely with insurance brokers and partners by reviewing bylaws and exculpatory clauses to ensure that terms and periods of coverage are coordinated to avoid gaps that may arise. threaten the stability of PSPC. As time-consuming as it may be, a case-by-case analysis of each PSPC is essential.

If trends in SAVS litigation persist, SAVS management should be prepared to invest in coverage. With a clearer perspective on the PSPC flood and the personal risks to sponsors and targets, PSPC management is better equipped to plan appropriate D&O insurance policies.