A SPAC (Special Purpose Acquisition Company) transaction is a type of corporate transaction in which a publicly traded “blank check” company raises money through an initial public offering (IPO) with the intent of using the proceeds to acquire an existing private company. The private company then becomes a publicly traded company as a result of the merger with the SPAC.
SPAC transactions have become increasingly popular in recent years. They are a means for private companies to go public without going through the traditional IPO process. This can be a faster and more efficient way for companies to raise capital and gain access to the public markets. However, it also comes with some risks; the private company being acquired may not have the same level of financial and operational transparency as a company that has gone through the traditional IPO process.
The recent 2023 lawsuit against a SPAC named GigCapital3 will be allowed to proceed, per a decision by the Delaware Chancery Court in January. Brought by plaintiff firm Grant & Eisenhofer, the lawsuit alleges that GigCapital3 denied essential information to public shareholders, hindering their ability to ascertain the real values of shares held and to make appropriate decisions regarding them.
The case represents a potential setback for SPACs, which are already declining in prominence due to increased scrutiny from the SEC. A recent research paper by Professor Michael Klausner of Stanford University created a stir in Congress and beyond, by calling common SPAC practices into question. As of September 2022, only 76 SPACs had made public offerings in 2022, down from 613 the previous year.
The new lawsuit against GigCapital3 could open the door to a flood of similar lawsuits against other SPAC companies. The chair of Baker McKenzie’s North America securities litigation practice commented, “This decision will be the full employment act for lawyers and judges in Delaware.”
We will keep you updated on the progress of the case, or any others that impact the business world. In the meantime, do call our office with any questions or concerns about your startup.