SPACs – Who is at Risk after Closing?
By Daniel Howard & Matthew Wiener
Special purpose acquisition companies (SPACs) have emerged as a preeminent transaction vehicle for global M&A over the last year and continue to transform the space—raising over $83 billion with 248 IPOs last year and setting a new record of nearly $88 billion with 298 SPAC IPOs in Q1 of 2021 alone.1
SPACs have allowed M&A investors to obtain meaningful ownership stakes in companies that may have previously pursued an initial public offering, changing the face of M&A with a new strategy for both buyers and sellers—but their soaring popularity doesn’t mean SPACs carry less risk than a traditional M&A transaction. In actuality, the targets being acquired in SPACs are generally private companies and investors (including SPAC sponsors and PIPE investors) are subject to the same post-closing liability concerns that would otherwise be present in a private transaction, despite the end result of a publicly listed entity.
In most de-SPAC transactions, where the publicly-listed SPAC moves to acquire a target company, the acquisition agreement will generally provide for a “public-style” construct where the representations and warranties (R&W) being made by the target company terminate at closing—as such, there is generally no recourse for the SPAC sponsors or PIPE investors when it comes to target company R&W breaches. As a result, there can be greater risk for these buyers and investors with respect to post-closing target liabilities than there otherwise would be in a traditional private M&A transaction.
Similar to private M&A, transaction-focused insurers have recognized a need to address this risk, and certain insurers are now underwriting R&W insurance (RWI) policies for de-SPAC transactions, providing downside protection to both sides of the transaction and helping align the interests of SPAC investors and rollover sellers.
In many de-SPAC transactions, the target company’s sellers end up owning a majority of the resulting public company. Due to the unique sponsor/investor minority-ownership position post-closing, RWI has not historically been available, as insurers have been unwilling to structure these policies to meet the specific needs of the parties to the transaction. Understanding the need to address these unique issues, Aon has worked alongside select RWI insurers to facilitate the development and availability of policies that address the unique risk transfer needs of parties to a de-SPAC transaction.
Specifically, we are now able to place a RWI policy at the de-SPAC entity level (effectively designating such entity as the Named Insured under such policy) so that the de-SPAC entity is entitled to receive all reimbursements under the policy directly. This helps avoid a potential structuring issue where sponsors and PIPE investors do not have a jointly owned vehicle where losses could be equitably and pro-ratably distributed. Equally as important, select RWI insurers are now willing to underwrite such policies with no pro-ration of loss, meaning that the RWI policy will reimburse the de-SPAC entity for 100% of any insured loss, effectively insuring all owners of the company, including sellers, sponsors and PIPE investors.
In addition to these new and unique loss reimbursement provisions, an RWI policy in a de-SPAC transaction may also feature:
- Generally competitive pricing in-line with many other RWI policies (i.e. no de-SPAC premium).
- Ability for de-SPAC companies to pay for the RWI policy as a transaction expense as part of closing, so all parties, not just sponsor, share in costs.
- No current de-SPAC-specific exclusions.
According to strategic communications & advisory firm ICR, there are currently over 430 SPACs with over $140 billion in cash seeking acquisitions, with an additional 252 SPACs on file trying to go public.
With an ever-increasing number of SPAC IPOs and associated de-SPAC transactions, we anticipate the need to transfer post-closing liabilities through the use of unique insurance products such as RWI to increase. Aon is uniquely positioned to work with SPAC clients on this solution to improve your transaction outcomes and enhance your value.
For additional information on de-SPAC representations & warranties insurance:
Contact Information
Matthew B. Wiener
Managing Director
[email protected]
(o) 713.470.9794
If you have questions about your coverage or you are interested in obtaining coverage, please contact your Aon broker.
All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.
