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(Reuters) – When a half-dozen or so lawyers started talking last Tuesday about issuing a joint statement rebutting three ballyhooed lawsuits against blank check acquisition companies, they figured they’d be lucky to get 20 firms to sign on.
The statement’s organizers – including Kirkland & Ellis; Skadden, Arps, Slate, Meagher & Flom; White & Case; and Greenberg Traurig – wanted to get the statement out quickly to reassure both SPAC sponsors and potential acquisition targets, but they worried that the tight deadline didn’t provide much time for firms to go through internal approval processes to allow their names to appear.
When the statement was released on Friday morning, only three days after it began to take shape, 49 firms had signed it. Nine additional firms subsequently asked to join the group, bringing the final tally in a statement re-released on Monday morning to 58.
There’s one overriding reason for firms’ shockingly fast SPAC defense rally, according to five lawyers involved in the effort: The legal theory underlying the anti-SPAC suits is just plain wrong.
“If this were even gray, you wouldn’t have law firms mobilize this quickly,” said Jocelyn Arel at Goodwin Procter.
The two law professors spearheading the anti-SPAC suits, former U.S. Securities and Exchange Commissioner Robert Jackson of New York University and John Morley of Yale University, declined to provide a statement responding to the 58-firm statement. But I would be remiss not to note that many of those firms earn fees from SPAC sponsors or SPAC targets, so keep that caveat in mind.
The big question prompted by the three lawsuits Jackson and Morley filed earlier this month in federal court in Manhattan – the first against billionaire Bill Ackman’s SPAC, Pershing Square Tontine Holdings Ltd, on Aug. 17, and follow-up suits against E.Merge Technology Acquisition Corp and GO Acquisition Corp on Aug. 20 – is whether SPACs are subject to the Investment Company Act of 1940. The professors contend that the so-called ’40 Act covers some SPACs because their primary purpose is to invest in securities.
That is not, of course, what SPACs tell the SEC when they seek regulatory approval to raise money from investors. SPACs typically say their goal is to acquire a private company within two years. While they search for a target, SPAC sponsors usually put investors’ money into trust accounts that hold short-term Treasury and money-market securities.
SPAC proponents say those trusts are designed to protect investors from losses if the SPAC is unable to find an acquisition or if investors decide to redeem their capital when sponsors announce a target. But under the Jackson and Morley theory, when SPACs fail to find an investment target and hold investors’ money in Treasury and money-market securities for a year or more, SPAC sponsors become investment companies.
“Under the ICA, an investment company is an entity whose primary business is investing in securities,” the professors argued in their complaint against E.Merge Technology. “From the time of its formation, this is all E.Merge has ever done with its assets.”
SPAC lawyers told me that it was the E.Merge and GO lawsuits that galvanized firms to challenge the law professors’ theory. The SPAC bar was already talking about the Pershing suit when Jackson and Morley filed the follow-on complaints, but the Pershing SPAC was a bit unusual, not least because Ackman sought a deal for the SPAC to buy shares in the Universal Music Group. (After the Jackson and Morley suit, Ackman said he would relaunch the $4 billion fund with a different structure.) By contrast, the E.merge and GO complaints, SPAC lawyers said, seemed to strike at conventional SPACs engaged in the entirely conventional practice of holding investors’ money in Treasury and money-market securities.
“When those two (suits) hit, everyone said, ‘That’s no different from 400 other SPACs,’” said Alan Annex of Greenberg Traurig.
If courts were to agree with the law professors’ theory, SPAC lawyers told me, it would wreak havoc in the industry, forcing sponsors to restructure their compensation and find new ways to safeguard investors’ capital.
But ’40 Act specialist Arel at Goodwin Procter said the theory is misguided. “No one is doing a SPAC to invest in Treasuries or money-market securities,” she said. “The whole premise is just not accurate.”
Fundamentally, the law firms’ statement said, SPACs are in the acquisition business, not the investment business. That’s what they tell investors in their IPO filings – and it’s why the SEC, which has approved more than 1,000 SPAC IPOs over the last 20 years, has never said SPACs are subject to the ’40 Act.
Kirkland’s first draft of the firms’ rebuttal statement was lawyerly, citing specific subsections of the statute, but organizers quickly decided to pare the document to a single page that non-lawyers could easily understand. The goal, after all, was to convince the market, not a judge, that the ’40 Act does not apply to SPACs. Lawyers who were involved in early drafts – including Investment Company Act specialists whose firms don’t represent SPAC sponsors – circulated the statement to friends at other firms. The process was informal, lawyers said, but things snowballed on Thursday. By Friday, some firms that hadn’t initially signed on were clamoring to join.
As you know, the statement will carry no formal weight in the law professors’ shareholder suits. But it’s a good bet that many of the same firms would sign an amicus brief arguing the same position.
It’s hardly a secret that the SEC has policy concerns about SPACs. Obviously, Jackson and Morley do too. But Kirkland’s Christian Nagler, who, according to other lawyers, quarterbacked the joint statement, said in an email statement that litigation isn’t the way to reform the industry.
“If those behind the lawsuits want regulatory reform I would be happy to engage in a dialogue with them and the SEC on any such proposed changes,” Nagler said. “Trying to severely hamper the SPAC market should not be achieved by way of lawsuits.”
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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin. Reach her at firstname.lastname@example.org