Guide to D&O Insurance for SPAC IPOs, 2024 Edition

• The SPAC and its directors and officers 
• The private company the SPAC is acquiring and its directors and officers 
• SPAC sponsors  
• Other parties related to the deal

Most of these suits are filed post-merger, but there are also examples of class action filings before the M&A transaction.

Breach of Fiduciary Duty Suits

A series of breach of fiduciary duty lawsuits in Delaware over the past few years resulted in stringent standards being applied by the courts, making it a challenge for defendants to dismiss the suit. Indeed, many SPACs now prefer to avoid incorporating in Delaware.

Many breach of fiduciary duty suits are brought on behalf of a corporation by shareholders in the form of a derivative suit, and Delaware corporations cannot indemnify these settlements.

As a result, these suits can pose a severe personal financial risk to the individual directors and officers of the SPAC. Without D&O insurance, individual directors and officers may need to cover settlement costs out of pocket.

Merger Objection Lawsuits

Merger objection suits revolve around allegations of insufficient disclosure about an upcoming merger.

These kinds of lawsuits are typically dropped after additional disclosure is filed, and the plaintiffs and their attorneys walk away with a “mootness fee.” While the number of these suits should be waning given recent court rulings, they are still a threat for now.

Merger objection suits are so common that they are often referred to as the “M&A tax” of doing business in the United States.

Regulatory Enforcements

Aside from private litigation, the SEC, the DOJ, and the Financial Industry Regulatory Authority (FINRA) continue to focus on the SPAC market.

Since 2021, these agencies have brought several enforcement and investigative actions against SPACs, their directors and officers, their sponsors, the targets, the target’s directors and officers—and even against SPAC professional advisers.

Last year, the SEC settled another $1 million civil penalty enforcement action against an investment adviser—Corvex Management LP—for failing to disclose conflicts of interest.

Enforcement actions in this arena have resulted in over a hundred million dollars in fines. Consider, too, the enormous legal costs that would have been incurred while defending against the enforcement action.

Of course, D&O insurance for SPACs will not pay for governmental fines and penalties. Unfortunately, the costs of defending an investigation of the corporate entity are also typically not covered by D&O insurance.

However, D&O insurance will pay for the defense of individual SPAC directors and officers, costs that can otherwise be personally bankrupting.  

• Additional types of lawsuits SPACs face 
• The lifecycle of the SPAC and corresponding D&O insurance activities 
• Risk factors D&O insurance underwriters assess 
• What the process of securing D&O insurance looks like 
• Business combination and D&O insurance logistics 
• Questions to ask to secure the right D&O insurance broker