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MONTH-IN-BRIEF (Aug 2021)

Domestic M&A

Abandoned SPAC Merger Leads to Claims of Investment Company Act Violations

By Yelena Dunaevsky

On August 17, 2021, former SEC commissioner and now NYU law professor Robert Jackson and Yale law professor John Morley, representing a shareholder of Bill Ackman’s SPAC, Pershing Square Tontine Holdings Ltd., filed a derivative suit in the Southern District of New York on behalf of the SPAC and against the SPAC’s directors, its sponsor and others. Although SPACs have faced multiple lawsuits, including 20 securities class actions, so far this year—a considerable increase from previous years—the allegations in this complaint are novel. The complaint essentially alleges that the SPAC is, and should have registered as, an investment company under the Investment Company Act of 1940 (ICA) and that its directors received compensation that was illegal under the ICA and the Investment Advisers Act.

Bill Ackman’s name, coupled with the fact that his SPAC raised the most funds in SPAC history (close to $4 billion when it went public in July of 2020), coupled with the fact that the plaintiff is represented by a former SEC commissioner, coupled with the fact that this SPAC tried to complete a merger last month but called it off, and coupled with the fact that the allegations in the complaint seemed to suggest serious violations of yet another major set of laws, immediately catapulted this case onto the front pages of all major business news sections. The question floating around SPACland was shocking in its enormity: does the current SPAC structure, which has been used by hundreds of SPACs that have gone public and dozens more that have completed their business combinations and are now operating as public companies, violate Investment Company Act rules?

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