The recent explosive growth in special purpose acquisition companies, or “SPACs,” has resulted in a surge of SPAC-related litigation and investigations. Because the insurance market for SPAC directors & officers (D&O) liability insurance coverage is narrower than the traditional D&O liability insurance market, it may be challenging for SPAC executives to find sufficient coverage to mitigate the financial risks they face at each stage of a SPAC’s life span. This article explores the unique challenges facing SPACs and their sponsors when structuring a D&O liability insurance program.
Hot, Hot, Hot—Understanding the Drivers of SPAC-Related Activity
First, some background on SPACs. SPACs are publicly listed shell companies that raise investor capital to acquire or merge with a privately-held company within two years, and take that business public. A SPAC that does not acquire a target within that time period must liquidate and return the shareholders’ investment. Additional investment may flow into the company at the time of the merger. The corporate transaction allows the target company to quickly gain access to the public shell company’s cash and stock-market listing, and may be a more attractive option than a traditional initial public offering. SPAC growth has been phenomenal— 59 SPAC IPOs raised $13.9 billion in 2019, and the value of SPAC investments rose to $83.3 billion in 2020. While data for 2021 is still being collected, SPAC IPOs are estimated to have raised $100 billion by the end of May.