A Special Purpose Acquisition Company sells shares to investors through a public stock offering. As explained by the U.S. Securities and Exchange Commission, investment managers form SPACs by creating a shell company without business operations and listing it on an exchange.
SPAC managers may use investors’ money to acquire or merge with private entities that then become part of the publicly-traded company. Investors often refer to SPACs as “blank check” companies because they can move to acquire other businesses without revealing it until the deal is ready for a shareholders’ approval vote.
Declining stock value may lead to an investors’ lawsuit
When SPACs acquire or merge with private enterprises, the companies combine. The SPAC’s value can, however, decline based on a variety of factors. The post-merger company may, for example, fail or perform poorly. Shareholders may then find that their stock value fell when they decide to sell their shares.
If stock values fall, aggrieved investors may file a legal action alleging a breach of fiduciary duty. As noted by the Harvard Law School Forum on Corporate Governance, investors may also include an acquired company and its board of directors as defendants in their complaint.
Proof of a breach of duty and other outcomes
Managers and directors owe investors a fiduciary duty of care to make decisions in good faith and with loyalty to shareholders’ best interests. Investors may, however, provide evidence that managers failed to uphold their duty, such as by not disclosing accurate information about an acquired company.
An investors’ lawsuit may cause federal officials to launch an investigation into the SPAC or its managers. If evidence appears to show that managers or directors omitted information or published false material statements, they may face a separate action for an alleged violation of SEC rules.