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ANALYSIS: SPAC IPOs Boom; Litigation Follows

Feb. 4, 2021, 9:07 AM

Special Purpose Acquisition Company litigation activity has risen fast on the heels of record SPAC initial public offerings in 2020. This upward trend likely will continue well into 2021 for two reasons: SPACs are the current preferred means by which companies go public; and the SPAC process itself may be creating fertile ground for initiating litigation.

After increasing throughout 2020, SPAC IPOs outnumbered traditional IPOs 129 to 86 in the fourth quarter. That trend accelerated in January, with SPAC IPOs dominating traditional IPOs 3 to 1.

Like the deals themselves, both pre- and post-merger SPAC litigation rose in 2020 and into 2021.

Filed either before or after the de-SPACing process (that is, a reverse merger with the SPAC), these suits usually target the sufficiency of proxy statement disclosures, the quality of the selected target, and/or allegations that the post-merger operating company misled investors. For example, plaintiff stockholders suing zero-emissions truck maker Nikola Corp. alleged that they relied on company statements, purchased Nikola shares at inflated stock prices, and then were harmed when prices better reflected the hidden reality about the company’s production and operations capabilities that came to light shortly after the merger.

The SPAC offering process also may be creating litigation opportunities beyond their sheer numbers. Before the buying frenzy, shares typically traded near the SPAC offer price ($10) ahead of the merger announcement. Now, shares often trade much higher than their redemption value, such as shares of Star Peak Energy trading as high as $38.20 on Jan. 13. If shareholders later wish to opt out of the merger and redeem their shares—as they have the right to do—they will receive only the $10 offering price as value for each of their shares plus interest, not what they actually paid. This shortfall, along with the uptick in SPAC volume, will likely create shareholder discontent—and increased litigation—in the coming year.

Bloomberg Law subscribers can find related content on our In Focus: Special Purpose Acquisition Companies resource.

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