By Scott Kapp, Partner at DLA Piper; and Bill Rudnick, Senior Partner and General Counsel for Cresset
You have deep subject matter expertise in your industry and years of executive leadership experience. Because of your reputation as a leader in your field, you receive an invitation to serve on the board of directors of a Special Purpose Acquisition Company (SPAC) that is looking to take a company in your industry public. The SPAC has dangled an attractive equity stake in front of you if you say yes.
Should you do it?
Before you answer that question, a refresher on what a SPAC is. A SPAC is a company set up by investors with the sole purpose of raising money through an IPO to acquire another company. An example is the 2019 acquisition of Virgin Galactic by SPAC Social Capital Hedosophia. There has been a boom in the creation of SPACs recently, with more than 300 SPACs now operating in the United States.
When a SPAC forms its board of directors, it recruits subject matter experts with business leadership experience that can help guide the acquisition. That’s where you come in. Because of your credibility and expertise, you are of significant value to a SPAC. However, it is important to understand that there are risks along with opportunity.
So, if you are approached by a SPAC, or if you are interested to join a SPAC board, the following are 5 questions to ask yourself before you say yes:
1. Have I done my due diligence?
First, learn as much as you can about the company you are about to join as a director. Read the public filings, which are available on the SEC website. Determine whether the shareholders, promoters, and other directors are the type and quality of people you want to be associated with.
2. What do I know about being a director of a public company?
There are specific roles and responsibilities for directors of public companies, including SPACs. Those include making sure that all decisions you make are in the best interest of all the shareholders, and that in making those decisions you exercise your best business judgement. That may involve engaging consultants, lawyers, accountants, and other advisors to guide you. Understand that you have fiduciary duties to all of the shareholders of the company. If you fail to adhere to this standard, there can be adverse consequences to the board, the company, and potentially you.
3. What indemnification protections are in place?
How exposed are you if there is future litigation? Are adequate funds available within the SPAC to cover potential indemnification? We are still in a SPAC bubble, and it is expected that many SPACs will fail (read about the potential risks and rewards of investing in SPACs here). It is also worth noting that the SEC has recently opened an inquiry with several Wall Street banks and is seeking information on risk management and compliance practices in relation to SPACs.
If you are on the board of a failed SPAC, what might that mean for you from a financial perspective? The company’s organizational documents and the agreement that you sign to become a director should contain indemnification provisions stating that the company will indemnify and defend you if there is future litigation arising out of the SPAC’s conduct. If the company does not have sufficient funds to indemnify you, there is a solution, and that is to have a strong directors and officers (D&O) insurance policy. We explore that more below.
4. Does the SPAC and / or the company it plans to acquire have D&O insurance?
As referenced above, D&O insurance can help protect you in your role as a director. There is no shortage of liability exposure for board members, including lawsuits brought by investors, employees, regulators, vendors, and others. Examples of allegations that can trigger a D&O policy include breaches of legal duties, anti-competitive behavior, and violations of state and federal securities laws. While a SPAC may be covered for its own liability, D&O insurance may also be needed to cover you personally in your role as a board member. To more fully explore D&O insurance, please review this article.
5. What is my reputational risk?
There are two levels of reputational risk for those serving on SPAC boards. First, there is the inherent risk of associating your name and credibility publicly with the SPAC sponsors and others on the board. Will that association reflect positively on you? As we noted above, do your due diligence on the other board members. Second, if the deal your SPAC is pursuing fails, how will that reflect on you? Are you comfortable being associated with that failure?
SPACs can present a rewarding opportunity for board members who help to facilitate their public offerings. However, it requires thoughtful planning and due diligence. The questions above can get you started in deciding whether a SPAC is right for you.