SPAC disputes in the Cayman Islands
2023 has produced the first special purpose acquisition company (SPAC) related filings in the Grand Court of the Cayman Islands, and Campbells has recently advised on numerous SPAC related disputes.
The SPAC structure
A SPAC is a structure whereby a special purpose vehicle is listed on a public stock exchange to raise IPO proceeds, which are used to complete a merger with a privately held entity (often a promising start-up) within a certain period of time.
Class A Shares in a SPAC are issued to the public at a specified price, and those proceeds are held in trust. The SPAC then has a specified period of time within which to consummate a merger using those proceeds, failing which it must return them to the public investors (with interest), and then ordinarily dissolve.
In exchange for funding its set-up costs, acting as its directors and managers, and being responsible for identifying a target and negotiating a merger, the sponsors of a SPAC are issued Class B shares. These shares generally give the sponsors control of the SPAC and convert into Class A shares if a merger is consummated. Generally, these shares will convert into 20% of the value of the SPAC in the event of a merger, but will be worthless if no merger takes place.
The SPAC boom
While the SPAC concept was developed decades ago, the volatility surrounding the global COVID-19 pandemic saw a renewed enthusiasm for SPAC deals, with 247 SPACs incorporated in 2020, raising USD80 billion, and a further 295 SPACs incorporated, raising USD96 billion, in the first quarter of 2021 alone, before a sharp decline beginning in 2022. While the US was the epicentre of the SPAC boom, significant numbers of SPACs were also launched in other jurisdictions. It has been estimated that around one third of the SPACs launched globally during this boom were incorporated in the Cayman Islands.
SPAC maturities
While early SPAC launches and mergers were wildly successful, the majority of SPACs launched between 2020–2022 have ultimately failed to consummate a merger transaction within the required time period. Under the usual terms of Cayman Islands SPAC constitutional documents, those SPACs are now required to return the funds held on trust to investors (with interest), and then liquidate and dissolve.
SPAC disputes
The failure to consummate the intended business combination transactions has resulted in a number of disputes arising, which in some cases have led to the commencement of litigation in the Cayman Islands. The failure of a SPAC to complete a merger within the required timeframe may give rise to claims against:
- the SPAC itself;
- the directors of the SPAC; or
- the sponsor of a SPAC.
Claims against the SPAC
Potential claims against a SPAC itself include:
- creditor claims, where a SPAC has incurred costs (including to its service providers) which have not been paid, or cannot be paid, out of the working capital contributed by its sponsor(s);
- claims brought by investors in the SPAC, in particular if it has taken steps which are not in accordance with its articles, or which are inconsistent with public disclosures made at the time of its IPO; and
- claims brought by counterparties to any agreements the SPAC has entered, including any entity with which a SPAC has agreed to complete a business combination.
These types of claims may involve liquidation proceedings, seeking a winding up of the SPAC, either because it cannot pay debts to the investors, or on the just and equitable ground in other circumstances, or claims for breach of contract by the SPAC. Other types of claims are also possible, but are in general less likely.
Claims against directors
Claims against the directors of a SPAC might be distinct from, or in addition to, claims against a SPAC itself. Claims against directors of a SPAC might be brought by creditors of a SPAC, if the SPAC has incurred debts which it cannot repay, or on a derivative basis by investors in the SPAC for any breaches of their fiduciary duties. Breach of duty claims may also be brought against directors by the SPAC itself, including by any liquidator(s) of the SPAC.
Claims against directors of a SPAC may carry personal liability, either to compensate the claimant for any loss it has suffered, or to account for any profits which have been made as a result of a breach of duty. Such claims may also involve indemnity issues, relevant insurance coverage and other issues stemming from the ability of the company to meet claims.
Claims against a sponsor
Claims against a sponsor may arise from the conduct of the management or employees of the sponsor, who are generally also the management or directors of a SPAC. Such claims are most likely to be brought if those employees have taken actions which appear to prefer the interests of the sponsor to the interests of the SPAC, or its investors or creditors.
Where such claims are made, the knowledge of these employees of the sponsor may be attributed to the sponsor, such that the sponsor may be liable to compensate the claimant for loss they have suffered, or to account for any profits the sponsor has made.
Claims against other parties
It is possible that claims could also be brought against other parties involved in promoting, sponsoring or facilitating the SPAC, including underwriters and professional advisers. Generally, such claims would need to be parasitic on claims against another party (whether the SPAC, the directors, or the sponsor), and to involve allegations of conspiracy, knowing assistance of a breach of duty, or knowing receipt of property involving a breach of duty.
Such claims are more complicated than direct claims against the primary alleged wrongdoer, but can conceptually, in appropriate circumstances, be pursued in the Cayman Islands.
This article was first published on www.chambers.com.
