Key Points

• SPAC IPOs have boomed since 2020, accounting for over half of all IPOs in the US in 2020 and 2021 while often circumventing rigorous due diligence required for traditional IPOs.
• 59 US SPAC securities cases have been filed in 2021 and 2022, compared to a total of 12 cases in 2019 and 2020. Many of these securities cases have now reached class certification stage where expert opinions on market efficiency and damages become necessary.
• Fideres was retained by class counsel in the recently certified class action against Clover Health¹ which shed light on some key considerations in SPAC litigation.

The SPAC Craze

Boom in SPAC Issuances

Once associated with lack of regulatory oversight in the 80s and 90s, SPAC IPOs proliferated in recent years with more than $150 billion capital raised in 2021 solely in the US. The majority of companies listed via a SPAC merger are now trading below their issuance price.

SPAC Securities Fraud

Trends in SPAC Securities Fraud

SPAC securities litigations have seen a sharp increase in the last two years. Typically, the plaintiffs of these securities class actions are SPAC IPO investors, suing either the SPAC sponsors, the target private company, or both. The allegations in the majority of these class actions relate to omissions or misrepresentations regarding the product of the target company, its operations, its capabilities or its client relations.

Source: Stanford Securities Class Actions Database

Drivers of Litigation

SPACs appear to be particularly prone to featuring in securities class actions which may be due to lower disclosure requirements, a buoyant stock market, and a focus on industries characterized by investors’ exuberance.

In addition, the prospect of having to return the raised capital to investors may have also pressured SPAC sponsors to settle for a less-than-ideal target company, and to misrepresent its true state of affairs in order to make it palatable to investors. It is important to note, however, that the time-incentive alone is unlikely to be sufficient to create an inference of intent in a 10b-5 case (as seen in re Stillwater Capital Partners Inc.²), although it may successfully be used in conjunction with other evidence.

Special Considerations in SPAC Securities Litigations

Securities litigation on SPACs bring a unique set of challenges, as it presents characteristics of IPO fraud, merger frauds, as well as the challenges presented by the “non-operating” nature of the SPAC itself.

Class Period

Unlike conventional IPOs, the de-SPAC process involves multiple entities, in particular the private target of a SPAC is a different entity than the SPAC itself. Using Clover as an example, the chart below shows a typical timeline for a de-SPAC.

From the merger announcement to the actual business combination, the defendant company in question is technically a “blank check” SPAC. However, like in Clover, the market commonly starts trading the SPAC shares in expectation of the business combination right after the merger announcement, making the price of the SPAC entity deviate significantly from its issue price. Therefore, it is often reasonable for the class period to start from the merger announcement rather than the actual business combination.

Event Study Challenges

Short Class Period

The class periods in SPAC securities litigations are usually short, and the event study regression window used in the analysis must be adjusted accordingly. In Clover and other recent SPAC securities litigations, experts have applied a shorter rolling regression window such as 60- or 90-days as opposed to a more common 120-days.

In addition, it is also common to apply an in-sample regression³ for the first rolling regression window, if the class period starts from the merger announcement. This is because SPACs are usually traded at or around their issue price before the merger announcement, which therefore is not representative of the stock price behavior after the announcement.

Small Sample of News Days

The Cammer court held that “[…] one of the most convincing ways to demonstrate [market] efficiency would be to illustrate, over time, a cause-and-effect relationship between company disclosures and resulting movements in stock price.”⁴

To evaluate this cause-and-effect relationship, financial experts analyze key days on which new value-relevant company information becomes public. A common choice for such news days are earnings release days. In the case of SPACs, these days may be scarce or even absent. Therefore, depending on the circumstances, the analysis may look at business combination related news days (e.g. shareholder voting days) or extend beyond the end of the class period.

Despite all these adjustments, this approach may still result in a relatively small number of objective news days. It is worth noting that courts have dispensed with the cause-and-effect factor, when other Cammer and Krogman factors support a finding of market efficiency.⁵ When certifying the Clover class, Judge Trauger stated “[Plaintiff’s expert’s] analysis is sufficient in light of the abundance of other reasons to conclude that the market for Clover securities was, in fact, efficient.”

Price Impact Direction

In Clover, the Defendants claimed that the misstatements lacked price impact because Clover’s stock price dropped on the merger announcement date, when the allegedly false and misleading positive statements occurred which on the face of it should have increased the stock price.

This line of defense has been raised in various SPAC securities litigations, as it has often been observed that the share price declined on the day of the merger announcements.

In Clover, Judge Trauger ruled in favor of the plaintiffs, noting that courts recognize the so-called “price maintenance” theory that “a misrepresentation can have a price impact not only by raising a stock’s price but also by maintaining a stock’s already […] inflated price […].”⁶

Warrants and Options

SPAC IPOs are often structured to offer investors a unit of securities consisting of common stocks and warrants. Some time after the IPO but before the business combination, the SPAC’s common stocks and warrants may be traded separately on the exchange under separate symbols. It is also common for exchanges like the CBOE to create and list options on the common stock after the business combination.

Experts in securities litigations commonly apply the principles of Cammer and Krogman factors in evaluating the market efficiency of warrants and options, although many courts have taken the view that market efficiency for the common stock is sufficient to demonstrate that options and warrants also trade in an efficient market.⁷