SPACs are created to raise capital from the public to purchase a target company. Essentially it’s a much faster way for a private company to go public without offering shares to individual buyers.
Once considered safer than the similar IPO process, risk is now increasing for special purpose acquisition companies, meaning insurance needs are increasing, even during the run-off period following a transaction.
While taking a company public provides a company many benefits, it also opens the company up to the legal right of shareholders to file a number of lawsuits against the company’s directors and officers for fraud, securities liability related to the SPAC's registration statements, alleged conflicts of interest, and potential actions taken by regulatory authorities.
These are just a small number of the potential basis for lawsuits for a SPAC, and risk is increasing with exposure extending to before the acquisition window. Legal precedent was recently established when a lawsuit was filed during the SPAC discovery period wherein it was still searching for a suitable target private company.
Once a target private company is identified and acquisition begins, a public company D&O policy can be written for a a term of one-to-two years to overlap with the acquisition window.
With proper run-off insurance coverage, if the underlying event took place before or after the acquisition, a claim against a former director or officer is covered if it is made during the (generally up to six year-long) run-off period.
Run-off insurance may be purchased as add-on to an existing policy, or as a stand-alone policy from a third-party insurance company. When it’s added to an M&A transaction the cost is included, but the directors, officers or target company itself may pay for the policy directly if the hostility of the transaction reaches a certain threshold.
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