Last week, when a group of plaintiffs’ attorneys filed a shareholder’s derivative suit against Bill Ackman’s SPAC seeking damages and alleging the company was really an Investment Company that should be registered under the Investment Company Act, I assumed the attorneys filed the suit because it was Ackman’s firm; because of the size and prominence of the SPAC; and because of Ackman’s unusual plan to invest the SPAC’s IPO proceeds in a minority interest. Well, it turns out, the plaintiffs’ lawyers involved were just getting started. They have now filed two more shareholders derivative suits against two other SPACs’ boards and sponsors, based on the same theory as in the Ackman SPAC suit that the SPACs involved are really Investment Companies that should be registered under the Investment Company Act. Looks like these SPACs-are-Investment-Companies suits are a thing now, and this could all get very interesting.


The two SPACs involved in the new derivative suits are E.Merge Technology Acquisition Corp. and GO Acquisition Corp. E.Merge completed its IPO on July 30, 2020 and GO Acquisition completed its IPO on August 1, 2020. Derivative lawsuits filed on beheld of these two firms and against the companies’ boards and SPAC sponsor were filed in the Southern District of New York on August 20, 2021. A copy of the E.Merge complaint can be found here. A copy of the GO Acquisition complaint can be found here.  The two complaints were both filed by the same lineup of plaintiffs’ lawyers as filed the Ackman lawsuit. The lineup includes former SEC commissioner Robert Jackson and Yale law professor John Morley, who are also involved in the Ackman suit.


The two new complaints are substantially similar to each other and in many key respects largely mirror the allegations raised in the Ackman complaint. The complaints allege that though the companies have presented themselves as SPACs, they are in truth Investment companies that should be registered under the Investment Company Act of 1940, because their primary business is to invest in securities. The complaints allege that by calling themselves SPACs rather than investment companies, they purported to be able to compensate the directors with a massive block of the companies’ securities that will allow the directors to realize huge returns. The complaints seek the court enter a judgment declaring the companies to be an investment company; enter a judgment rescinding the directors’ share compensation; and to aware damages “reflecting the Defendants’ breach of their fiduciary obligations.”


Whatever the merits may be of the plaintiffs’ lawyers’ novel theory in these cases, it does appear that the lawyers are going all in. They have now filed three of these kinds of lawsuits, one can only assume that they will file more. Interestingly, in all three of these suits, the defendants named include the SPAC sponsor as well as the SPACs’ boards of directors. The possibility of these kinds of lawsuits is clearly a risk that will need to be taken into account in the way SPACs structure their D&O insurance, for example by including co-defendant coverage for the SPAC sponsor.


I had thought that the plaintiffs’ lawyers had filed the lawsuit against Ackman’s SPAC because they had some kind of public policy objective in mind. However, it now appears that the plaintiffs’ lawyers think they are on to something. If they succeed in establishing that SPACs are really investment companies, that is going to cause a whole lot of trouble, as obviously none of the hundreds of SPACs that have completed IPOs in the last 18 months have registered as investment companies.


Whether any given SPAC should actually be classified as an Investment Company is way beyond my expertise, but I do note that, as discussed in a recent memo from the Mayer Brown law firm , that SPACs typically are structured to take advantage of an exemption from Investment Company registration requirements under Rule 3a-1 under the Investment Company Act. The defendants in these cases are likely to rely on this exemption, a fact that undoubtedly is well known to the plaintiffs’ lawyers involved, so it will all be very interesting to see how it plays out.


The plaintiffs’ lawyers fundamental argument that these SPACs are really investment companies depends on what the SPACs did with their IPO proceeds. The E.merge complaint, for example, alleges that “E.merge is an investment company under the ICA because its primary business is to invest in securities. Indeed, investing in securities is all the Company has ever done. From the moment of its IPO, the Company has invested effectively all of its assets in securities of the United States government and shares of money market funds.” (The other complaints contain the identical allegation). In other words, the plaintiffs’ theory here depends on the fact that these SPACs — like every other SPAC — put its IPO proceeds in T-bills and money market funds. As John Jenkins points out on the blog (here), SPACs limit themselves to these investments in order to bring themselves within Rule 3a-1. If these SPACs are really investment companies because of this, well, then every SPAC is an investment company. As Jenkins points out, however, there has to be more to it than this. Right?


In fact, this is all about to get very interesting. It is entirely possible that we could see a whole flotilla of these SPACs-are-Investment-Companies lawsuit coming in. If the plaintiffs’ lawyers really believe these lawsuits can succeed, they have an awful lot of potential target to choose from.