SPAC Merger Litigation: Mitigating Risk for SPAC Boards and Sponsors; Rep & Warranty, D&O Insurance, Recent Case Law

The rapid growth of the SPAC market has resulted in a wave of litigation against SPACs and their directors, officers, and sponsors. Allegations relating to inadequate due diligence and disclosures, sponsor conflicts of interest, and director independence and compensation have been raised in federal and state courts. Securities class actions and shareholder derivative lawsuits have become commonplace post-merger. Counsel should understand the potential theories of liability and how to mitigate against the risk of such claims.

Breach of fiduciary duty lawsuits typically allege that the SPAC structure creates an inherent conflict of interest between the SPAC's sponsor and its board and the SPAC's investors. In the Multiplan case decided Jan. 3, 2022, the Delaware Court of Chancery held that the stockholders stated a plausible claim for breach of fiduciary duty, which impaired their ability to decide whether to redeem their shares. The court also found that the entire fairness standard of review, not the more lenient business judgment rule, applied to the de-SPAC merger.

In addition to covering losses from a breach of representations in the merger agreement, representation and warranties insurance can be used to refute allegations of insufficient due diligence. A valuable side benefit of these policies is the insurer's close examination of the SPAC team's due diligence. A disinterested third party's second layer of diligence can either validate the SPAC team's diligence process or point out potential problems that could be corrected and adequately disclosed before closing the transaction.

Listen as our authoritative panel discusses the types and evolution of SPAC litigation filed in connection with SPAC mergers, what counsel can learn from these cases, and how best to minimize future risk.