Suing SPACs

Abstract

In 2020, the financial world became transfixed by a massive increase in the number of firms that going public through special purpose acquisition company (“SPAC”) transactions. A SPAC is a publicly traded company formed solely for the purpose of raising money from investors and choosing a merger partner, thereby bringing the target company public. SPAC shareholders vote on the proposed transaction, but also have the option to redeem their shares for the price paid plus interest prior to the merger. SPACs have always been controversial; they make risky ventures available to unsophisticated investors, may involve acute conflicts of interest, and do not make the rigorous disclosures required in standard IPOs.

Is litigation a solution to these problems? The SPAC boom, as many commentators predicted, precipitated a “deluge” of lawsuits. Although several studies examine the SPAC transactions themselves, this project is the first comprehensive study of SPAC-related litigation. Using a dataset of all SPAC transactions completed since 2014 and all SPAC-related lawsuits filed since 2017, I assess the prevalence and characteristics of these lawsuits. I find that the probability that a deSPAC transaction will generate a lawsuit appears to be unrelated to the returns on the deal, the size of the merger, the industry of the target, and various proxies for SPAC quality. However, I find a negative association between the likelihood of litigation and redemption rate. This is surprising because it means that the SPAC transactions more likely to generate lawsuits are those where the SPAC shareholders choose to keep, rather than redeem, their shares, presumably signaling greater confidence in the quality of the deal. I argue that many of these lawsuits are opportunistic, and may be of questionable quality. I further argue that these lawsuits are an inadequate substitute for the liability that firms face in connection with standard IPOs. If the problems of SPAC structure need correction, private litigation may not be the optimal solution.

Keywords: securities, litigation, SPACs