SPAC (special purpose acquisition company)

A SPAC, or Special Purpose Acquisition Company, is a shell company, that is, one with no operational assets or commercial activity of its own, that raises funds from the public through a stock market listing for the sole purpose of completing an acquisition or merger with a target company not yet identified at the time of the listing. The funds raised are held in escrow until a transaction is completed. If no target is identified within a period generally between eighteen and twenty-four months, the SPAC is liquidated and the funds returned to investors. The mechanism experienced explosive growth in 2020 and 2021, representing at its peak the majority of US stock market listings, before collapsing from 2022 under the combined effect of poor post-merger performance and increased regulatory attention from the SEC. For the financial lines market, the SPAC boom temporarily swelled demand for D&O cover, each listing creating a need for protection, before the reflux contributed to the contraction of premiums. SPACs also generated specific litigation, in the form of securities actions targeting SPAC sponsors and the executives of merged targets for misleading disclosure, litigation that progressively receded from 2023 but fed D&O loss experience over the period.

In the first quarter of 2021, an electric mobility group completes its US listing through a merger with a SPAC, raising 800 million dollars. Its D&O insurer underwrites a policy covering risks linked to the transition period. In 2023, shareholders file a class action accusing the executives of having provided unrealistic revenue projections in the merger prospectus. The D&O insurer must mobilize its reserves and revise its SPAC sub-limits for upcoming renewals, contributing to the decline in D&O rates specific to listings.

Special Purpose Acquisition Company, blank check company, société coquille côtée