On August 17, 2021 and August 20, 2021, a purported shareholder of certain special purpose acquisition companies ("SPACs") filed three derivative lawsuits in the United States District Court for the Southern District of New York asserting that the SPACs are investment companies under the Investment Company Act of 1940, because proceeds from their initial public offerings are invested in short-term treasuries and qualifying money market funds. Assad v. Pershing Square Tontine Holdings, Ltd., No. 21-cv-6907 (S.D.N.Y Aug. 17, 2021); Assad v. E.Merge Technology Acquisition Corp., No. 21-cv-7072 (S.D.N.Y Aug. 20, 2021); Assad v. GO Acquisition Corp., No. 21-cv-7076 (S.D.N.Y Aug. 20, 2021).
In each of the three lawsuits, Plaintiff alleges that the SPAC is an "Investment Company" under Section 3(a)(1) of the Investment Company Act of 1940 ("ICA"), and, in two of the three lawsuits, plaintiff alleges that the SPACs' management companies were "Investment Advisors" to the SPACs under the Investment Advisers Act of 1940 ("IAA"). Based on this premise, the complaints challenge various transactions between the SPACs and the SPAC sponsors and directors that the complaints allege were illegal under the various provisions of the two Acts for various alleged reasons such as (i) the SPAC was not registered as an Investment Company, (ii) the management company was not registered as an Investment Advisor to the SPAC, (iii) various transactions between the SPAC and SPAC sponsor were not made available to all investors and (iv) the SPAC directors were not elected by the shareholders.
Plaintiff's claims are all derivative of the fundamental claim that the SPAC is an Investment Company and, in the case of two of the lawsuits, that the management company is an Investment Advisor. Specifically, plaintiff alleges that, counter to each of the SPAC's representations that it was an entity formed for the purpose of acquiring a business, it in fact is a company formed for the purpose of investing in securities and thus an "Investment Company" under the ICA.
Other than the declaratory judgment claims, which plaintiff asserts in his own name, the complaints assert derivative claims and thus name the SPACs as nominal defendants. The complaints also name as defendants the SPAC sponsors, the SPAC directors, and various affiliated entities. Each complaint seeks a declaration that the SPAC is an Investment Company under the ICA and, in the case of two of the lawsuits, that the management company is an Investment Advisor under the IAA. The complaints also seek to unwind various arrangements between the SPACs and the other defendants and to enter a damages award for breaches of fiduciary obligations allegedly owed under the ICA.
On August 19, 2021, two days after the first lawsuit was filed, William Ackman—the CEO of the Pershing Square SPAC and the Pershing Square management company—indicated in a letter to investors that he plans to return the trust assets to investors and form a different type of entity he terms a "SPARC" in which investors will have the right to purchase into future acquisitions announced by the entity now operating as a SPAC. If that happens, the lawsuit against Pershing Square and the management company will become moot.
On August 27, 2021, Pershing Square notified the Court by letter of the two additional cases that plaintiff filed, which were assigned to different judges, and noted that "some degree of coordination or consolidation may be appropriate" in light of the similarities. Pershing Square also indicated that an expedited schedule may be appropriate because SPACs, by the terms of their incorporation, must effectuate an "initial business combination" within a set period of time, or else unwind. Plaintiff responded by letter later the same day, indicating that, while he did not oppose expedited treatment of the Pershing Square case, the three cases "have important differences that make them unique and independent." The parties are scheduled to meet and confer this week on a joint proposal to the Court.
On August 27, 2021, a group of 49 law firms issued a joint statement that they view the assertion that SPACs are Investment Companies as without factual or legal basis and believe that a SPAC is not an Investment Company under the 1940 Act if it (i) follows its stated business plan of seeking to identify and engage in a business combination with one or more operating companies within a specified period of time and (ii) holds short-term treasuries and qualifying money market funds in its trust account pending completion of its initial business combination.
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