Risk Specialists for the Entire SPAC Lifecycle From IPO to De-SPAC and Beyond

• D&O insurance policy terms that line up with a SPAC’s due diligence period.
  
• Proprietary SPAC peer benchmarking inclusive of pricing.
• Pre-negotiated tail coverage to cover claims against the SPAC brought after completion of a business combination.
• Claims advocacy in the event of a loss.
• Broad policy conditions including coverage for:
  • Claims brought by prospective targets and PIPE investors.
  • Alleged violations of the Securities Exchange Acts of 1933 and 1934, Dodd-Frank, and Sarbanes-Oxley.
  • Investigations by regulators.

There were 326 federal securities class action lawsuits filed in 2020 – a drop from the record 428 in 2019 -- but the average settlement value in 2020 was $44 million, more than a 50% increase over the 2019 average. These lawsuits highlight the liabilities that SPACs and their directors and officers could face arising from: 

• Representations made within IPO road shows, S-1s, and quarterly and annual filings.
• Due diligence and business combination proxy filings.
• Ongoing operations of post-combination entities.

The reverse merger that allows a private company to become a listed entity through a SPAC is typically a simpler, shorter, less expensive, and less market-condition-dependent process than a traditional IPO. But there can be unintended consequences and sources of liability for both the SPAC and its target, including, but not limited to:

• Breakdown of negotiations with a target company.
• Objections by the target company’s shareholders.
• Masquerading public shell companies.
• Private investment in public entity (PIPE) funding.
• Post-merger stock selloff.
• Lack of demand for post-merger shares.
• Limited public company preparedness and experience.
• Secondary public offerings.
• De-SPAC performance and financial issues. 

Regardless of a SPAC’s pre-IPO insurance relationships, Marsh’s SPAC specialists can help you manage your risk during the de-SPAC process, which typically commences between two and four months prior to the transaction close, depending on the history and shareholder base of the target and deal structure. Our specialists can assist with:

• Target Due Diligence
  • Review target company’s insurance.
  • Discuss how best to handle pre-transaction exposure.
  • Develop a plan for all lines of insurance.
• Strategy Meeting
  • Discuss post-close public company exposures.
  • Review program structure options and alternative approaches as possible levers to optimize risk transfer spend.
• Negotiating public company D&O program and other corporate insurance
  • Review limits.
  • Forecast retentions and premiums.
  • Evaluate whether and how to cover prior acts under the new public company program.
• Underwriting Meetings.
  • Coordinate underwriting meetings with all potential carrier partners.
• Program Negotiation.
  • Negotiate program structure options with the insurance markets.
• Proposal and Board Presentation.
  • Tailor the proposal and board presentation to capture the placement process and other key areas of focus.

Insurance Considerations in a Reverse Merger (De-SPAC)

A SPAC must conduct appropriate diligence regarding its target to ensure it is free from pending liabilities and not shopping for a new owner to take possession of deal warts. 

Although the number of SPAC-related securities class action claim settlements reached in the last 10 years has been limited, this is partially due to only a small percentage of SPACs completing the de-SPAC process. Litigation, however, has occurred after the business combination, and typically alleges poor due diligence. Litigation after combination typically alleges poor due diligence (for example, discovering that the target company’s financials were not accurate or their business prospects were misleading after the business combination).

Marsh is uniquely positioned to be a SPAC’s risk advisor through the de-SPAC process and for the post-close new company:

• Pre-acquisition insurance and risk management due diligence.
• Insurance capital solutions to address deal risks including representations and warranties, environmental, and tax.
• Deep industry knowledge from more than 20 global groups providing industry-specific experience and insights.
• Customized insurance and risk solutions for the post-close entity, ensuring a smooth transition from SPAC to an operating company.
• Cost-savings and liquidity strategies.
• Claims advocacy.
• Global insurance market access and an understanding of local insurance requirements for global operating companies.
• Enterprise and operational risk optimization.
• Digital capabilities. 

Sponsors that remain engaged following business combination can provide the public company with experienced officers and directors. This can be particularly beneficial when a target may have limited experience with the regulatory and compliance requirements of being a public company, and may ensure that appropriate and cost effective insurance is an essential risk management tool.