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SPACs present significant challenges for the insurance industry

The impact of Special Purpose Acquisition Companies (SPACs) on the London market is set to be a major factor in 2022 and the coverage issues they present will be a significant challenge for the insurance industry.

In November last year Hambro Perks Acquisition Company (HPAC), a special purpose acquisition vehicle sponsored by Hambro Perks Limited, announced its intention to float on the London Stock Exchange. HPAC intends to raise up to £150 million through the listing with London chosen because it is seen as the technology capital of Europe. 

This move is being seen as the precursor to an increase in SPACs activity in London following the FCA’s decision to bring in changes to the listing rules with the aim of increasing investor protection post-Brexit.

The FCA’s new SPAC rules, which came into force on 10 August 2021, were based on the recommendations from Lord Hill’s UK Listings Review which focused on providing additional protections for shareholders and came in against a back drop of clear evidence of the growth of SPACs around the world.

In 2020, SPAC IPOs raised almost twice as much as they raised in the previous 10 years combined and had already surpassed 2019 levels by March 2021. As of October 2021, SPACs had raised 138 billion U.S. dollars in IPOs in the United States since the start of the year. That meant SPACs had raised capital in 498 IPOs in 2021 alone.

A special purpose acquisition company (SPAC) is a company with no business operations which is set up for the sole purpose of raising capital through an initial public offering with the goal of buying an existing company.

The potential implications for the insurance industry of this increased activity needs to be recognised as litigation is a key factor in any merger and acquisition. Without a substantial operational history, finding the right cover in the current hard market for the SPAC could be demanding.

With a SPAC, Directors and Officers (D&O) must ensure they have the correct protection in place as three different sets of insurance for the target and the combined company, and their respective D&Os could be involved.

W Denis can arrange specialist insurance via 'Public Offering of Securities Insurance' as a non-cancellable multi year policy, with its own dedicated limit of indemnity.

Whilst similar cover can be added by creating a 'Side C' extension to an annually renewable D&O policy, it is prudent to separately insure the Prospectus and other Liability arising from the SPAC IPO, to avoid claims eroding an annually renewably shared D&O Side A,B,C limit, in order to isolate and protect the availability of important Side A cover (non-indemnifiable loss cover to protect Directors and Officers for other wrongful act claims).

If you would like to discuss this insurance, or obtain a competitive quotation, please contact Daniel Moss at daniel.moss@wdenis.co.uk  or on 0044 (0)113 2439812

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