SPACs (special purpose acquisition companies) are thriving across the Atlantic with over $50bn raised by US SPACs this year alone1, however in the UK, SPAC activity has been relatively subdued.
A SPAC is a newly formed company, with no trading or operational history, that has been incorporated by a group of sponsors for the sole purpose of acquiring companies. It raises capital through an IPO (Initial Public Offering) and then has a period of time (normally 18-24 months) to acquire a target company.
In the US shareholders get to vote on whether to approve a SPAC’s acquisition target and can get their investment back if it isn’t approved. In the UK however shareholders typically do not vote nor have a redemption right if they don’t approve of the target.
Ordinarily investors wait for up to 24 months for a target to be acquired. If this period lapses and no target is acquired, the SPAC is dissolved and the money returned to shareholders. This dynamic has meant that demand for UK listed SPACs has been significantly lower when compared to the US.
Nevertheless recent commentary has suggested that the London Stock Exchange is looking at ways to lure SPACs to list in London and given this, bankers and lawyers familiar with these structures are bracing themselves for increased demand for SPAC structures here in the UK.
The insurance market is also preparing to service the requirements a SPAC structure has for insurance protection during a typical investment lifecycle. Such a lifecycle can be divided into three areas, the initial IPO, the acquisition of the target and its ongoing operations.
The board of directors constituting the SPAC is usually selected by the SPAC sponsor before the IPO event with additional directors appointed soon after.
An IPO can attract substantial personal risk for a company’s directors/officers, especially in relation to the liabilities that may arise out of the prospectus or admission document in particular as they may face civil and criminal liabilities if it is inaccurate, incomplete, or misleading.
For example, claims could arise from misrepresentation or overstatement of profit forecasts or a host of other risk factors.
Whilst some of these risks can be insured by taking out a Directors’ and Officers’ Liability (D&O) insurance policy, a specific Public Offering of Securities Insurance (POSI) or an IPO insurance policy should be taken out which ring-fences the IPO exposure away from the company’s conventional D&O programme.
D&O policies can be extended to cover the risks that might be warranted in a POSI policy or might already be covered.
However in most D&O policies, when there is an IPO, this can trigger a change in risk provision in a D&O policy and put it into run-off and so a separate POSI policy should then be taken out. This would leave the D&O programme to respond to “business as usual” risks faced by the directors/officers (which is renewed on an annual basis).
Once a SPAC has identified a target it will enter into a purchase agreement to acquire the shares in that target. At this point the SPAC may consider taking out Warranty & Indemnity (W&I) insurance. This provides cover for financial loss incurred pursuant to valid breaches of a warranty pursuant to the purchase agreement or a claim under a tax indemnity.
It has in recent years become a great deal facilitation tool providing a host of benefits to both acquirers and sellers. For sellers it removes the requirement to have an escrow and therefore are able to realise all deal proceeds at closing. For an acquirer it can be an important differentiator in an auction process gaining them a competitive advantage to secure an attractive target.
Such protection is even more valuable in relation to SPACs with investors able to take comfort in the knowledge they can seek protection from the insurance market, regardless of the sector the acquisition is made from.
Other M&A insurance solutions may also be taken out such as Tax Liability Insurance that can ring fence a potential tax exposure from a business or Contingent Risk Insurance which can potentially cover remote but significant identified contingent liabilities subject to analysis.
Furthermore and most importantly the M&A insurance market has proven itself able to execute deals within the time constraints of a competitive process, thereby providing an acquirer with certainty that they will have insurance protection when they sign a deal.
The completion of an acquisition of a target by a SPAC is known as a reverse takeover in the UK and at that point the SPAC listing is cancelled. The shares of the new enlarged group are re-admitted on the market upon publication of a prospectus or admission document for the enlarged group. At this point a POSI insurance policy will need to be taken out again and the existing D&O policy of the SPAC and the D&O policy for the former target company will require a D&O tail policy, known as run-off protection.
The newly enlarged group will need to comply with new reporting obligations, rules and regulations. At this juncture it will be important to update and ensure all the insurance policies are fit for purpose, however planning for this should be done in advance of the acquisition so that there are no gaps and that all “business as usual risks” are protected.
Setting up a SPAC therefore involves engagement with the insurance industry right at the outset.
This is particularly important in the current climate where capacity across all lines is hardening. Over the summer, three major insurers withdrew capacity from the M&A insurance market. With M&A claims increasing in frequency and severity plus the onset of the economic downturn, a correction in M&A insurance pricing is inevitable.
Furthermore, even prior to the current pandemic the D&O insurance market was already experiencing a hard market but with claims further spiralling and the fear of future litigation linked to Covid-19 and the impending recession, price rises of 200-300% will be seen for those fortunate enough to find themselves capacity for their D&O renewals with POSI reflecting a higher pricing still given the short supply of coverage.
As a result, finding capacity will be challenging and it is therefore vital that those contemplating SPAC structures together with the bankers and lawyers engage with insurance specialists early on in the process, to ensure they obtain the appropriate insurance protection they seek.
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