Pub. 1 2021 Issue 2

April 2021 | 25 Allison McFarland is an Associate at Armstrong Teasdale, focusing on general commercial matters. She has varied experience working across industries and practice areas, including insurance, sports and entertainment, commercial agreements and employment law. She can be reached at amcfarland@atllp.com. John Sten is Partner and Co-Leader of Armstrong Teasdale’s Securities Regulation and Litigation practice. He has over 25 years of corporate, securities and white-collar criminal defense experience, and began his distinguished career as a member of the U.S. Securities and Exchange Commission’s Division of Enforcement in Washington, D.C. He can be reached at jsten@atllp.com . Brittney Herron is an Associate at Armstrong Teasdale, representing businesses of all sizes in a variety of employ - ment-related matters before state and federal courts, as well as administrative agencies. She helps clients avoid claims, mitigate risk and ensure that their policies and prac- tices are in compliance with federal and state laws. She can be reached at bherron@atllp.com. Steven Foristal is a Partner in Armstrong Teasdale’s Corporate Services practice group, primarily focusing on mergers and acquisitions and commercial transactions. He also counsels clients on antitrust and distribution business services, private capital and emerging companies, technol- ogy and licensing agreements, and corporate governance. He can be reached at sforistal@atllp.com. concern that without external due diligence review, fraud in the merger will become more common. For example, target compa- nies may provide misleading or insufficient materials to the SPAC. Also, sponsors may move forward to consummate an acquisition with a target company for the limited purpose of the direct finan- cial gain to them, and without concern for investors’ interests — potentially overlooking financial reporting or internal control issues in the process. This has already started to happen. Following a Hindenburg Research report, several shareholders filed a securities fraud class actions against a zero-emissions vehicle company that merged with a SPAC in June 2020. The allegations include fraud and false statements under Section 10(b) and Rule 10b-5 of the Exchange Act, as well as claims against individual officers and directors. The buyer has also been accused of failing to conduct adequate due diligence of the target. The SEC and the Department of Justice are looking into the matter as well. We also anticipate an uptick in private shareholder litigation stemming from these transactions, including: (1) securities class actions against the new public entity (which is subject to the same scrutiny as any public company); (2) misleading or fraudulent misrepresentations or omissions in proxy statements (or other statements) concerning the target company; and (3) claims that SPAC directors breached their fiduciary duties of care and loyalty to the shareholders by failing to conduct adequate due diligence of the potential target. For instance, an investigation into potential claims against the board of directors of a holding company for possible breach of fiduciary duty and other violations of federal and state law in connection with a business combination was announced in February 2021. The investigation concerns whether the board breached its fiduciary duties to shareholders by failing to con- duct a fair process, including the dilution of ownership interest in the combined company. Another area that portends an increase in litigation and regulatory scrutiny is the increasing cost and difficulties in getting director and officer (D&O) insurance coverage for SPAC sponsor teams. Typically, SPAC sponsors obtain D&O coverage to protect them- selves from potential claims and as a means of attracting estab- lished directors to the SPAC management team prior to the IPO. Obtaining D&O coverage has become increasingly difficult; howev- er, fewer insurers write these policies, and the price for them is sky- rocketing. For example, from August to October 2020, a $20 million D&O policy cost more than tripled from approximately $400,000 to roughly $1.5 million. While there are other factors, the perceived risk of SPACs certainly plays a part in that increase. Many insurers are now enhancing their own due diligence processes, such as considering the management team’s track record, the due diligence process of the SPAC and the industry that the SPAC is targeting, among other factors. The SEC Will Look Closely at SPACs in 2021 With the explosion of SPAC activity, it is not surprising that reg- ulatory authorities, especially the U.S. Securities and Exchange Commission (SEC), have taken notice and have become more in- volved in regulating and overseeing these investment vehicles. For example, on Dec. 22, 2020, the SEC Division of Corporate Finance issued CF Disclosure Guidance: Topic No. 11, which outlines disclosure considerations for SPAC IPOs and business combina- tion transactions. This guidance is intended to bring about clear disclosure by SPAC sponsors, management and other affiliates so that public investors understand their financial incentives and potential conflicts, both at the time of the SPAC IPO and during the business combination transaction. Incoming SEC Chairman Gary Gensler has also indicated that heightened scrutiny and increased regulation of SPACs are forthcoming in 2021. In particular, Gensler could increase oversight on projections and insider trading and build on the recently issued disclosure requirements, especially concerning disclosure of conf licts of interest. With increased scrutiny and disclosure requirements, we can expect to see an increase in investigations and litigation arising out of SPAC transactions or potential SPAC transactions. SPAC IPOs Will Face Competition in 2021 On Dec. 22, 2020, the SEC approved the NYSE-proposed plan to allow companies to raise capital through direct listing IPOs instead of solely selling existing shares of the company. This means that a company can now sell, on its own behalf, newly issued shares directly to investors to raise new capital without a traditional un- derwritten offering. Under the new rule, the NYSE recognizes two types of direct listings: (1) “Selling Shareholder Direct Floor List- ings,” which are consistent with the prior rules where a company lists shares on the NYSE in connection with the direct sale of shares by existing shareholders; and (2) “Primary Direct Floor Listings,” where a company lists shares on the NYSE and sells shares itself in the opening auction on the first day of trading, either in addition to or instead of, facilitating shares by selling shareholders. This is yet another method for companies to go public without engaging in the traditional IPO process and could reduce companies’ popularity choosing to go public via SPACs. ■