The Impact of SPACs on the D&O Insurance Market
Most of us remember the explosive growth of special purpose acquisition companies, more popularly known as SPACs or “blank check companies” in 2020 with continued growth so far in 2021. According to Business Insurance Magazine, SPACs are “publicly traded shell companies formed for the purpose of raising capital to acquire existing businesses and usually have two years to make an acquisition after their initial public offering.”
When a private company merges with a SPAC, it is known as a de-SPAC transaction, and the merged entity operates as a public company. This process is seen as less costly and involved than the traditional way of taking a company public. (It is an alternative to the private company having its own initial public offering (IPO) or combining with a traditional company.) But with the increase in the use of SPACs has come the increase in shareholder lawsuits and U.S. Securities and Exchange Commission (SEC) activity reports the National Law Review. The rise in litigation and regulatory interest is predicted to continue and affect directors and officers (D&O) insurance rates.
There are definitely risks at every stage of the SPAC’s lifecycle, and D&O rates could continue to rise for both SPACs and the D&O market overall. But there could be good news for supply and demand. Business Insurance Magazine reported that there have been new entrants into the management liability market in the U.S. which means that capacity for the D&O liability insurance market should increase. Additionally, reports show that mature companies are seeing more stability in the D&O market versus startups or companies that are now going public.
We’ll continue to keep an eye on what’s happening in the D&O market and what this means for our clients, particularly whether or not the SPAC market and future litigation causes disruption and turbulence in the D&O market. If you have any questions on this topic or if you’d like to know more, reach out to Rose & Kiernan, Inc. here or by calling (800) 242-4433.