The 3 Stages of SPAC D&O Insurance

Special purpose acquisition companies (or SPACs) have a unique lifecycle, and their directors and officers insurance needs evolve as they progress through different stages. Understanding these stages is crucial for ensuring appropriate coverage throughout the SPAC's journey. This article delves into the three primary stages of SPAC D&O insurance: the IPO stage, the search stage, and the de-SPAC transaction.

The IPO Stage: Laying the Foundation

The Initial Public Offering (IPO) stage marks the beginning of a SPAC's public life. During this phase, the SPAC raises capital from investors with the promise of identifying and merging with a suitable target company. The D&O insurance needs at this stage are focused on the risks associated with going public.

Key coverage considerations during the IPO stage include:

Prospectus Liability

The SPAC's IPO prospectus is scrutinized by regulators and investors. Any alleged misrepresentations or omissions in this document can lead to claims. D&O insurance should provide robust coverage for these potential liabilities.

Securities Claims

As a newly public entity, the SPAC is exposed to the risk of securities claims from shareholders. The D&O policy should offer protection against such claims, including those related to the IPO process and initial trading of the SPAC's securities.

Regulatory Investigations

The Securities and Exchange Commission (SEC) has shown increased interest in SPAC IPOs. Coverage for costs associated with responding to regulatory inquiries and investigations is crucial at this stage.

Breach of Fiduciary Duty

Directors and officers have a duty to act in the best interests of the SPAC and its shareholders. The policy should cover claims alleging breach of this duty in the context of the IPO process.

At this stage, it's also important to ensure that the policy's definition of "wrongful acts" is broad enough to encompass the unique activities of a SPAC during its formation and IPO.

The Search Stage: Nothing's Certain

Once the IPO is complete, the SPAC enters its search phase, looking for a suitable merger target. This stage can last up to two years and comes with its own set of risks that need to be addressed in the D&O policy.

Key coverage considerations during the search stage include:

Due Diligence Claims

Shareholders may allege that the SPAC's management team conducted inadequate or rushed due diligence on potential targets. The D&O policy should provide coverage for claims related to the target search and evaluation process.

Conflict of Interest

SPAC sponsors and management may have connections to potential targets, which can lead to allegations of conflicts of interest. The policy should offer protection against claims that these relationships improperly influenced the merger decision.

Negotiation-Related Claims

If merger talks break down with a potential target, shareholders might allege that the SPAC team mishandled negotiations or missed out on a favorable deal. Coverage for such claims is important during this stage.

Public Communications

During the search phase, any public statements about the SPAC's progress or potential targets can be scrutinized. The policy should cover claims arising from these communications.

Extended Reporting Period

Given the potentially long duration of the search phase, it's crucial to ensure that the policy can be extended if needed, or that it includes an automatic extension provision if a merger isn't completed within the initial policy period.

The De-SPAC Transaction: Insurance as You Cross the Finish Line

The de-SPAC transaction, or the merger with the target company, is a critical part of the SPAC life cycle that brings its own set of D&O insurance considerations. This stage involves complex negotiations, detailed disclosures, and significant changes to the company's structure and operations.

Key coverage considerations during the de-SPAC stage include:

Merger Proxy Statements

The proxy statement provided to shareholders about the proposed merger is a potential source of claims. The D&O policy should offer robust coverage for allegations of misstatements or omissions in this crucial document.

Valuation Disputes

If the stock price of the merged company drops post-transaction, shareholders might allege that the SPAC overpaid for the target. Coverage for claims related to the valuation of the target company is essential.

Multi-Party Claims

The de-SPAC transaction can lead to claims from shareholders of both the SPAC and the target company. The policy should be structured to handle this complex scenario.

Representation and Warranty Claims

While separate Representations and Warranties (R&W) insurance is often purchased for the transaction, the D&O policy should dovetail with this coverage to ensure no gaps.

Run-Off Coverage

After the merger, it's crucial to secure adequate run-off or "tail" coverage. This covers claims made after the transaction for actions that occurred prior to its completion, typically for a period of 3-6 years.

Continuity of Coverage

Ensure that the post-merger company will have appropriate D&O coverage in place immediately following the transaction.

Conclusion: The Importance of Adaptive Coverage

As a SPAC progresses through these three stages, its risk profile evolves significantly. It's crucial for SPAC directors and officers to work closely with experienced insurance brokers and legal counsel to ensure that their D&O coverage adapts to these changing needs.

Regular policy reviews and adjustments are necessary, particularly as the SPAC approaches key milestones like the announcement of a merger target or the de-SPAC transaction. This isn't exactly something you can just set an annual reminder for, in other words.

Remember: We're here to help with your SPAC D&O insurance needs. That's true if you need a policy or just have some questions about how to ensure your company is suitably protected.