Syed Rahman of financial crime specialists Rahman Ravelli explains the challenges facing directors of special purpose acquisition companies (SPACs).
The recent increase in the use of SPACs (special purpose acquisition companies) is due to them being seen as a quick, alternative way into capital markets. A SPAC's sponsors (those who create it) seek to raise capital through an initial public offering (IPO) - where a company lists its shares on a stock exchange - in order to acquire an existing business in a way that is quicker than the more traditional route.
But SPACs can pose risks for the directors that become involved in them. The risks may differ from SPAC to SPAC and can be dependent on the quality of a SPAC's sponsors, where it was formed and its ability to protect its directors against legal liability. Directors, therefore, have to exercise caution.
Many SPACs are created in places where corporate law differs from that in the UK. Directors must pay close attention to how the SPAC operates once it has been formed in order to reduce the potential for damaging legal action being brought by interested parties. They need to research the other directors on the board, examine the track record of the SPAC sponsor and carry out due diligence on both the management teams working for the SPAC sponsor and the target company itself. This is the only way to reduce the risk of money being lost and/or legal action being brought.
For directors, the issue of a SPAC's capital allocation - determining the most efficient investment strategy for the money it has available - is vitally important, as is the need to make sure all its activities are legally compliant.
Directors must disclose any potential conflict of interest that may affect the SPAC's functioning. They need to be able to show that they did everything possible to ensure that shareholders were able to make a fully informed decision about transactions recommended by the board of directors. Otherwise, the risk of litigation could become an unpleasant reality.
A SPAC's shareholders could sue its officers and directors for breach of fiduciary duty, as could shareholders in the company that is the acquisition target. Shareholders in the SPAC or its acquisition target could also bring legal action if there were omissions or material misstatements in company registration documents. Directors must, therefore, approach all of their duties with an awareness of all possible consequences.
A must-read, the full article and others relating to SPACs and the new FCA rules are available to read here: SPAC Directors, their duties and their Risks.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
