SPACs continue to be the hot topic of the day. Over a course of what seems like a few months they have catapulted from being a questionable fringe financial vehicle to the most talked-about, fashionable fundraising and investment alternative to IPOs. Much has been written about their structure, their positives and their negatives, and, of course, the celebrities and billionaires that have embraced them. Very little attention, however, has been paid to whether, should anything go wrong, a SPAC can be protected by insurance. Indeed, there continues to be a significant amount of confusion as to the types of insurance a SPAC needs or can obtain during its lifespan.
The insurance needs of the SPAC are different at each phase of its existence. At the IPO, the SPAC sponsor team needs to obtain directors and officers (D&O) insurance to protect itself from potential claims and to attract knowledgeable, well-recognized directors (all of whom typically demand substantial D&O coverage). A typical, mid-size SPAC will need to consider somewhere between $20 million and $30 million of D&O coverage to be placed at the time of its IPO. A knowledgeable insurance broker will be essential to guide the SPAC through this process and to negotiate not only the IPO D&O coverage, but also the subsequent post-merger coverage for the target and the combined entity.
At the merger or the de-SPACing stage, the SPAC will be well advised to also consider a representation and warranties policy to protect against the seller's breaches of representations in the merger agreement. These policies offer a lot of benefits to both the buyer and the seller and are negotiated based on the specific facts of each deal. Their limits depend on the size of the transaction and the premium is calculated based on the size of the limit, currently running between 2.5% and 3.5% of the limit bought. Additional information on timing, pricing and other nuances of both the D&O the M&A representations and warranties insurance products is available in the Woodruff Sawyer Guide to Insurance for SPACs.
Originally published by Mayer Brown, October 2020
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