Last month, I blogged about the recent prominence of SPAC IPOs. While many traditional IPO candidates have put their deals on hold during the COVID-19 crisis, SPACs have prospered, but a recent Woodruff Sawyer blog cautions that the rise in SPAC IPOs may be followed by a rise in post-deal litigation. The blog says that it isn’t the IPO that SPACs have to worry about; it’s the M&A deals that come next that often trigger litigation. Here’s an excerpt addressing a recent SPAC-related M&A lawsuit:
Consider the 2019 case of Welch v. Meaux. The plaintiffs in this case brought both Section 11 and Section 10(b) claims against officers and directors of the publicly traded company in connection with a de-SPAC transaction. The case also included a claim concerning the subsequent follow-on offering. The SPAC in question, Landcadia, had raised $250 million in its 2016 IPO. Landcadia had 24 months to complete its business combination before being forced to return the proceeds to its investors. With two weeks to go before the deadline, Landcadia agreed to buy a mobile food ordering and delivery company.
Things did not go well with the target company after it became publicly traded. Plaintiffs ultimately brought suit, alleging material deficiencies in the proxy statement and subsequent registration statement. Their allegations included the charge that when the target company began publicly trading, investors were not told of all the risks being foisted onto them. Moreover, the plaintiffs alleged that they were deceived as to the company’s prospects for profitability. This case is still pending.
The blog also addresses securities class actions targeting SPAC-funded operating companies, and reviews some of the difficult issues that D&Os may face in bankruptcy proceedings due to the structure of SPAC transactions.
-John Jenkins, TheCorporateCounsel.net June 1, 2020
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