While special purpose acquisition companies and more traditional IPOs may share some similarities, they are considerably different, both in their approach, statements and disclosures, and when it comes to structuring D&O coverage. While a newly public company often only has to worry about a single entity/transaction, SPACs are a series of transactions each requiring careful coverage coordination among 3 separate entities for all intents and purposes. When structuring a D&O insurance program, there are 3 distinct stages:

STAGE 1: FORMATION OF THE SPAC: A lot of risks at this stage revolve around claims involving allegations of fraud, securities liability related to the SPAC's registration statements, alleged conflicts of interest, and potential regulatory actions. While historically SPAC entities have been deemed as lower risk, recent litigation is changing that perception. Securities claims and cases involving breaches of fiduciary duties have already been filed against SPAC entities themselves, and in one recent case, a SPAC encountered 10b-5 litigation prior to any merger, and before a target was ever announced. In order to secure coverage for such claims that may arise during the acquisition window, the SPAC will need to secure a public company D&O policy. Directors and officers should ideally begin the placement process at least 6-8 weeks prior to the public offering and can expect premiums to begin at roughly 100k per Mill with retentions beginning at 1-2 million. These policies can be written on 1-2 year policy periods in order to coincide with the acquisition window.

STAGE 2: De-SPAC PROCESS: The DeSpac process begins once a SPAC has located a target company and is ready to go public. This process poses its own unique risks, many of which revolve around transaction specific litigation and merger objection claims. Among other alleged wrongdoings, these claims may allege conflicts of interest, inadequate disclosures, inadequate consideration and/or due diligence failures. In order to secure “going forward” coverage for any alleged prior wrongful acts, the SPAC will need to coordinate run off coverage for both the SPAC and the target (private) company. This is a particularly turbulent stage riddled with challenges and different solutions. Among the considerations when structuring coverage, the SPAC and its directors must decide on:

• Length Of Policy Tails: Since policy tails provide coverage for future litigation, (alleging prior wrongful acts) they should cover the statute of limitations for any potential claims. The most common approach is purchase of a 6 year tail on both the SPAC and private company’s D&O policy. A 6 year tail generally averages around 300% of the annual policy premium – so for a 2 Mill policy hypothetically costing 250k, a 6 year tail at this stage would price around 750k+. While not advised, companies can of course opt for a shorter “tail” which would decrease that premium at the cost of leaving some potential future litigation uncovered. It should also be noted, these premiums are due in full and will need to be negotiated prior to the initial placement of coverage.
   
• Scope Of Coverage Being Extended: When purchasing run off coverage, SPACs can opt for different structures. For example, in cases where the underlying policies provide full D&O coverage (including entity and securities coverage), SPACs can opt to cover only the directors/officers going forward (for non- indemnifiable claims), effectively leaving the entity and its balance sheet exposed. Conversely where a SPAC only purchased A-Side coverage from the onset, the entity may decide to upgrade to full D&O coverage during run off. Historically stepping down from full D&O coverage to Side A only would carry a savings of roughly 20-30%, however that savings appears to be even a bit smaller when structuring coverage for SPACs. Given their emerging nature and the considerable uncertainties surrounding SPAC related litigation, we wouldn’t advise on opting for any Side A only structures unless full structures cannot be obtained or in cases where excessive retentions are prohibitive.
   
• Coordination Of Securities Coverage and Prior Acts Exclusions: With rare exceptions, most target companies will be written on private D&O policy forms. While private D&O policies extend extremely broad entity coverage, nearly all such policies also contain broad exclusions for securities claims. In order to; maintain the broad entity coverage going forward, and address the securities exclusion (for any potential claims related to the merger), the private company will need to ensure its entity coverage is appropriately tailed, whether that means purchasing a run off for the entire policy, or solely tailing the entity coverage. Additionally, the new public company entity will need to ensure the private company is endorsed as an additional insured on its own D&O policy, while addressing any prior acts exclusion in the process. To complicate matters, there are numerous ways insurers can structure this coverage.
   

STAGE 3: IPO / NEW PUBLIC COMPANY: In addition to the potential for merger objection claims, the risks associated with this stage mirror that of any other IPO or public company, including securities litigation, risk of insolvency, derivative actions, and regulatory actions. In the event that the new public company underperforms, the pool of potential claimants can be wide, ranging from PIPE investors, to shareholders of the SPAC, to shareholders of the newly public company. Given the complexity of these transactions, these claims may be brought against a myriad of parties ranging from the new public company, target company, SPAC entity and its sponsors, all the way down to the accounting firms and financial advisors involved. At this stage, the new public company will need to place a final public company D&O policy for the new entity. When providing policy terms, insurers may agree to provide full prior acts coverage or apply a strict prior acts exclusion, which will in part dictate the options when structuring the run off coverage as mentioned above. From a market and pricing standpoint, this D&O policy placement is very similar to any other IPO. Directors and officers should ideally begin this placement process well in advance and anticipate premiums beginning in excess of 150k-200k per Mill, with large retentions, beginning at (but often in excess of) 5 Mill. Lastly, many primary carriers will likely have limited capacity, only interested in limits under 5 Mill resulting in a towered approach when larger limits are of interest.

ADDITIONAL COVERGE CONSIDERATIONS

• Adequacy Of Policy Limits: Insuring a SPAC is an expensive endeavor. In many cases, the excessive premiums are often a limiting factor when setting limits, with most smaller SPACs settling on limits of 5 Mill and under, with slightly larger SPACs purchasing up to 10 Mill in coverage. In the post Cyan era however, it’s important to be cognizant of the fact that any section 11 claims (under the ’33 Act) can now be brought jointly in both state and federal courts which can quickly compound any defense costs incurred, quickly eroding available policy limits.
   
• Implementation Of Side A DIC: The majority of public company D&O programs include a layer of Side A DIC insurance. Given the complicated structures (and insurance programs) for these transactions, and questions surrounding the potential litigation against them, SPACs should strongly consider incorporating a layer of Side A DIC in order to maximize the protection for their directors/officers’ personal assets.
   
• Scope Of Regulatory Coverage: As discussed in our recent whitepaper, the scope of regulatory coverage can differ greatly between D&O policy forms. Given the intense regulatory scrutiny and increased exposure to regulatory investigations and proceedings, SPACs should carefully assess the degree to which the policy is extending such coverage, attempt to negotiate broader coverage when able, and favor policy forms that extend a greater degree of coverage.
   
• Target Company’s D&O Terms: When implementing run off coverage for the target company, the directors/officers of the SPAC should perform a careful review of the company’s D&O program, assessing the policy’s terms and conditions. In addition to carefully reviewing the securities exclusion, special attention should be given to any potentially problematic exclusions such as: professional services exclusions, contractual exclusions, product performance exclusions and/or any bodily injury/property damage exclusions, among others. Where exclusions are overly broad, SPACs should attempt to soften them as much as possible, whether that be: narrowing the lead-in/preamble language, carving back defense costs, and/or carving back Side A coverage or claims brought by securityholders. Should the private D&O insurer be unwilling to provide favorable terms or extend an appropriate policy “tail”, SPAC directors can attempt to shop run off coverage with a separate carrier. Lastly, it’s important to note that nearly all D&O policies will contain an “inadequate pricing exclusion” which can preclude coverage for any bump-up claims that may arise from the transaction. While these should also be carefully reviewed, SPACs will likely find it near impossible to have such exclusions softened or removed.  
   
• Allocation Clauses: The transactional nature of SPACs can give rise to claims that may allege wrongful acts that were committed both pre and post-transaction. In order to ensure these clams are covered under the appropriate policies, SPACs may need to address the policies’ allocation provisions and seek clarifying language within their policy structures when coordinating run off coverage during the de-SPAC. Such language would specify that any pre-transaction wrongful acts are covered under the appropriate run off policy, with post-transaction claims allocated to the new public company policy.