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SPAC Litigation: What Happens if the “Blank Check” Bounces?

The demand for Special Purpose Acquisition Company (SPAC) formations in the Cayman Islands increased through the first quarter of 2021 following robust performance in 2020. Whilst the second quarter of 2021 has seen a slowdown from this unprecedented frenetic pace, it is unlikely that the overall demand for this bespoke structure will subside in the near future.

As the number of speculative SPAC formations continues to grow and sponsors search for target companies in an effort to consummate transactions in a relatively short timeframe, it is inevitable that the risk of litigation will grow in parallel. In this briefing, we highlight the relevance of director’s duties in relation to SPAC transactions and some of the issues that may arise as a matter of Cayman Islands law.

What is a SPAC and Why Cayman?

A SPAC is a vehicle formed and listed on an exchange with no specific business purpose other than to raise funds for some future undefined object. In the United States, these types of vehicles are often referred to as “blank check” or “cash shell” companies. Unlike in a traditional initial public offering (IPO), the SPAC model is unique in that, at the time of the IPO, a SPAC vehicle will have no portfolio investments, substantive operations or any investments earmarked for acquisition. Upon listing, the net capital proceeds of the IPO are generally placed in a third party escrow / trust account, and a SPAC then has around 24 months in which to source and consummate a transaction, failing which the venture must normally be wound-up and the funds returned to investors. Once the SPAC has raised funds through its IPO and an appropriate target business has been identified, a business combination is effected that normally results in the target business being acquired by or merged into the SPAC. Following this “de-SPAC-ing” process, a more conventional operating business structure exists and the surviving entity continues to operate as a publicly listed company under the rules of the relevant stock exchange.

Although the majority of US-listed SPACs are incorporated using Delaware corporations, a SPAC incorporated in the Cayman Islands is often seen as a good alternative as it may offer a more efficient structure and remove any additional US tax, legal or regulatory implications that may arise as a consequence of using a US vehicle. The NYSE and Nasdaq allow listings by SPAC entities formed in most of the leading offshore jurisdictions, including the Cayman Islands.

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SPAC Litigation: What Happens if the “Blank Check” Bounces?

 


Jonathon Milne
Partner

Cayman Islands   +1 345 814 7797
Mobile  +1 345 925 2952


Erik Bodden
Partner

Cayman Islands   +1 345 814 7754


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