Key Considerations for Side A, B, and C Coverage in SPAC D&O Insurance

Special purpose acquisition companies (SPACs) face unique risks that require carefully structured directors and officers (D&O) insurance. Understanding how Side A, B, and C coverages apply in the SPAC context is crucial for comprehensive protection.

I'll take a look at each of these "sides" and get into their specific implications for SPACs.

Side A Coverage: Protecting SPAC Leadership

Side A coverage protects individual directors and officers when the SPAC cannot indemnify them. For SPACs, this coverage is particularly critical due to the heightened personal liability risks.

Blank Check Company Risks

SPAC directors and officers face unique exposures due to the "blank check" nature of the company. Side A coverage should explicitly address claims related to:

• The target search process
• Due diligence efforts
• Disclosures about potential acquisition targets

Regulatory Investigation Protection

With increased SEC scrutiny on SPACs, Side A coverage should include robust protection for costs associated with regulatory investigations — even at the informal stage.

Post-Merger Considerations

After the de-SPAC transaction, consider securing extended reporting periods or "tail" coverage. This ensures ongoing protection for SPAC leadership for pre-merger activities.

Side B Coverage: Safeguarding SPAC Assets

Side B coverage reimburses the SPAC when it indemnifies its directors and officers. For SPACs, this coverage plays a crucial role in preserving the trust's assets.

IPO-Related Claims

SPACs should ensure Side B coverage adequately addresses claims arising from the IPO process, including allegations of:

• Misleading prospectus information
• Inadequate disclosures about sponsor compensation
• Conflicts of interest in the SPAC structure

De-SPAC Transaction Risks

During the merger process, Side B coverage becomes particularly important. It should address claims related to:

• Merger negotiations
• Valuation of the target company
• Disclosures in proxy statements

PIPE Investment Considerations

As Private Investment in Public Equity (PIPE) deals are common in SPAC transactions, Side B coverage should extend to claims arising from these arrangements.

Side C Coverage: Entity Protection for SPACs

Side C coverage protects the SPAC entity itself against securities claims. This coverage is especially important given the public nature of SPACs from inception.

IPO and Secondary Offering Protection

Side C coverage should robustly protect against securities claims related to:

• The SPAC's initial public offering
• Any subsequent offerings, including those associated with the de-SPAC transaction

Merger Objection Claims

SPACs face a high risk of shareholder lawsuits objecting to a proposed merger. So, make sure your Side C coverage explicitly addresses these types of claims.

Financial Projection Disputes

Given the SEC's focus on SPAC projections, Side C coverage should protect against claims alleging misleading financial forecasts, particularly those presented in merger documents.

Balancing Coverage in the SPAC Context

While all three coverage types are important, SPACs may need to consider unique approaches to balancing this coverage.

Prioritizing Side A

Many SPACs opt for policies with higher limits for Side A coverage or even completely separate Side A policies. This ensures protection for individuals even if entity coverage limits are exhausted.

Sublimits for Critical Phases

Consider policies that offer increased sublimits for high-risk periods, such as the de-SPAC transaction phase.

Coordination with Target Company Coverage

As the de-SPAC transaction approaches, it's crucial to consider how the SPAC's D&O coverage will integrate with the target company's existing policies.

SPAC-Specific Policy Features

Regardless of the coverage side, certain policy features are particularly important for SPACs:

Broad Definition of "Claim"

Ensure the policy's definition of "claim" encompasses SPAC-specific scenarios, such as challenges to the de-SPAC transaction or allegations of inadequate target search efforts.

Strong Severability Provisions

Given the various parties involved in a SPAC (sponsors, directors, officers), robust severability provisions are really important across all coverage sides.

Continuity of Coverage

Pay attention to how coverage will transition following the de-SPAC transaction, ensuring no gaps in protection during this critical phase.

Conclusion

For SPACs, understanding and properly structuring Side A, B, and C coverage is essential for comprehensive risk management. Each coverage type plays a distinct and crucial role in protecting the SPAC, its leadership, and its assets throughout the unique SPAC lifecycle.

Given the complex and volatile nature of SPAC risks, it's really important to work with a deeply experienced and knowledgeable broker. You will need help in getting each aspect of your coverage tailored to address all the risks faced specifically by your SPAC — noting that no two SPACs are alike (and may have vastly different risks from each other).

For my part, I'd recommend our team at Janover Insurance to get you connected with the best, most suitable D&O coverage for your SPAC. You can easily get a free quote from us to see what's available for you.