March 2023 in Brief: Mergers & Acquisitions

SPAC Termination Suits Keep Coming

By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance, Woodruff Sawyer

Another SPAC-related termination fee lawsuit was filed in the Southern District of New York on March 8, 2023. By our count that makes four. The other three were:

1. FAST Acquisition Corp., filed in August 2022, which involved a $26 million termination fee.
2. Pioneer Merger Corp., filed in December 2022, which involved a $32.5 million termination fee.
3. Concord Acquisition Corp., filed in December 2022, which involved a $20 million termination fee.

This case was filed against VPC Impact Acquisition Holdings II, the SPAC; its sponsor; and the SPAC’s directors and officers. Some of those directors and officers served in dual capacities at the SPAC and at the sponsor level, and so the sponsor was also pulled into the lawsuit. The allegations revolved around the SPAC’s intent to keep a $50 million breakup or termination fee resulting from a terminated business combination and the SPAC’s failure to close an alternative business combination.

The plaintiffs in the complaint argue that the defendants, having negotiated the hefty breakup fee in their original deal, did not diligently pursue another business combination even though they had a year to do so after the original deal fell through. The plaintiffs further argue that the defendants have no right to keep the breakup fee—that the breakup fee “is a corporate asset of the SPAC and rightfully belongs to and should be fairly distributed “to all owners in a dissolution.” Finally, the plaintiffs argue that “defendants owe fiduciary duties to SPAC stockholders by virtue of their control of the SPAC and their positions as officers and/or directors which require them to act in good faith and preclude them from advancing their own financial interest at the expense of public stockholders.” These allegations are similar to the ones in the other termination fee cases mentioned above.

To put things in perspective, according to SPAC Research, about 140 SPACs had liquidated in 2022, mostly towards the end of the year due to the 1% Excise Tax going into effect on January 1, 2023. As of this writing, about forty-four more SPACs have liquidated so far this year. Considering these high levels of liquidations, having four of these types of post-liquidation lawsuits is not alarming. However, it does serve as a reminder that in situations where SPAC liquidation activities run into disputes about distributions of assets left in a SPAC, shareholders are likely to bring action and not stop at the directors and officers of the SPAC. It remains to be seen whether shareholders of other liquidated SPACs will find fault with any of those 180+ liquidations, but SPAC teams should step carefully as they are liquidating and ensure that the liquidation procedures are carried out diligently and all financial elements are well documented.

Goodbye M&A Brokers No Action Letter, Hello Federal Exemption

By Eden L. Rohrer and Jessica D. Cohn

On March 29, 2023, the federal exemption from securities broker registration for qualifying mergers and acquisitions brokers (M&A brokers) became effective. That exemption was signed into law on December 29, 2022, as a policy rider to the Consolidated Appropriations Act of 2023 (H.R. 2617) (the M&A Brokers Exemption) and was described in our previous blog post and client alert.

The M&A Brokers Exemption can now be found in subsection (13) “Registration Exemption for Merger and Acquisition Brokers” of Section 15(b) of the Securities Exchange Act of 1934.

Since the adoption of the M&A Brokers Exemption, there has been much speculation about whether the Securities and Exchange Commission (SEC) would withdraw the SEC M&A Brokers No-Action Letter (January 31, 2014, amended February 4, 2014) (the M&A Brokers NAL). The M&A Brokers Exemption is essentially the codification of the M&A Brokers NAL with certain inconsistencies, most notably the size of eligible privately held companies. That speculation has been put to rest as on March 29, 2023, the SEC formally withdrew the M&A Brokers NAL. Accordingly, M&A brokers may only qualify for exemption from securities broker registration by satisfaction of the terms of the M&A Brokers Exemption, including that they are engaged in effecting securities transactions for privately held companies that have EBITDA less than $25 million and/or gross revenues less than $250 million.

It is still unclear whether the North American Securities Administrators Association will also amend its model rule, or whether state securities regulators will amend existing rules or adopt new rules consistent with the M&A Brokers Exemption.