Increased litigation over the growing wave of transactions involving special-purpose acquisition companies will likely lead to heated fights over the potential application of the so-called bump-up exclusion found in directors and officers insurance policies, policyholder attorneys say.
Also known as blank-check companies, SPACs have exploded in popularity in the past couple of years, and that surge has been accompanied by an increase in litigation against directors and officers of companies involved in SPAC transactions. Experts note the number of SPAC-related suits rose at a higher rate than the number of other securities suits, though these actions remain in the early stages of litigation.
A SPAC is a shell entity intended to raise capital through an initial public offering before buying a private company to take it public. SPAC transactions have grown exponentially as companies see value in an acquiring company setting one up and going out to find an operating company. As of Nov. 15, a total of 541 SPACs have priced an IPO this year, according to data-tracking site Spacinsider.com.
Insurance coverage issues tend to trail trends, and policyholder attorneys believe D&O policies' bump-up exclusion will play into the SPAC-related suits. These suits typically allege misrepresentations in post-merger press releases and public filings about a targeted company or the merged companies' business and performance, though some allege SPACs should be registered as investment companies.
The bump-up exclusion — or carveout provision, in the insurance industry's preferred nomenclature — addresses shareholder allegations that the price paid for the acquisition of a company wasn't adequate and precludes coverage for a settlement that increases that price.
For potential suits from insureds' perspective, Raymond Mascia Jr. of Anderson Kill PC said the traditional bump-up exclusion may be inapplicable to SPAC transactions.
"SPAC transactions are usually structured as reverse mergers," said Mascia, who represents policyholders. "As recent court decisions have recognized, mergers don't unambiguously fall within the scope of the traditional bump-up exclusion, which typically applies only to an acquisition."
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