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Some issues involving SPAC start-ups, mergers and investments

On Behalf of | Sep 10, 2021 | Commercial Law

Investors or start-up groups considering a special purpose acquisition company may wish to take proactive approaches to protect their venture. Before launching a “blank check” SPAC company, for example, its start-up members may need to structure it correctly to help prevent disputes filed by aggrieved shareholders.

As noted by the U.S. Securities and Exchange Commission, investors should conduct due diligence on SPACs and their managers. Carefully reviewing the SPAC’s prospectus and its reports regarding a potential merger may avoid legal issues. If managers present false or misleading materials, shareholders may file a lawsuit against them and the SPAC for the resulting financial damages.

Protecting and applying investors’ funds appropriately

Individuals launching SPACs typically list it as a shell company on a public stock exchange. The SPAC begins without regular business operations. As noted by CNBC, once the SPAC begins trading, its managers place their investors’ proceeds into a low-risk trust fund offering interest.

A third party holds the investors’ funds much like an escrow account until the SPAC’s managers identify a private company for a merger or acquisition. Imprudent investing of shareholders’ funds, however, may result in a breach of fiduciary duty.

Completing mergers and acquisitions within allotted timeframes

Managers commit to acquiring or merging with a targeted private company within 18 to 24 months of the SPAC’s initial trading date. After negotiating a transaction with a suitable company, managers require a vote of approval from the SPAC’s shareholders. If the majority of investors approve, managers use the money held in trust for the intended merger or acquisition.

When managers cannot complete a transaction in time, they must return the funds held in the trust to investors plus their pro-rata share of earned interest. Failing to return investors’ funds may result in a shareholders’ suit for breach of duty and a possible civil action by the SEC.