Pershing Square Tontine Holdings—the special purpose acquisition company set up last year by billionaire hedge fund manager William Ackman that recently dropped its plan to take a stake in Universal Music Group—has been sued by an investor in a case that could ripple throughout the world of blank-check companies for the years to come.
The lawyers whose action prompted Ackman to make changes to his special purpose acquisition company (SPAC) are preparing to target 50 or more similar investment vehicles.
The case, which is being argued by Robert Jackson, a former S.E.C. commissioner, and John Morley, a law professor at Yale, alleges that Ackman’s SPAC is actually an investment company, which should be regulated under the Investment Company Act of 1940.
If SPACs are regulated as investment companies, much of the industry could be impacted because it would be harder for anyone in the investment business to participate in a SPAC.
Because a SPAC is registered with the SEC and is a publicly-traded company, the general public can buy its shares before the merger or acquisition takes place.
For this reason they’ve been referred to as the ‘poor man’s private equity funds.’
SPACs are already under fire from regulators who have pledged to tighten protections for investors and they face a rising number of class-action lawsuits by aggrieved shareholders.
Ackman recently altered his plan to take a stake in Universal Music Group because he was being sued by an investor who asserted that the blank-check company had to comply with a law enacted after the Wall Street Crash of 1929 led to the Great Depression.
Along with Sony Music and Warner Music Group, Universal Music Group one of the “Big Three” record labels.
In June 2021, Pershing Square Tontine Holdings, a special-purpose acquisition company run by investor Bill Ackman, announced it would acquire 10 percent of UMG before it went public, in a $4 billion transaction.
The deal collapsed in July 2021 due to regulatory concerns, and it was announced that Ackman’s Pershing Square Holdings would complete the purchase instead.
SPAC IPOs have seen resurgent interest since 2014, with amounts of capital flowing to them increasing from $1.8 billion across 12 SPAC IPOs in 2014 to $83.3 billion across 248 of them in 2020.
The group, which includes former U.S. Securities and Exchange Commissioner Robert Jackson, filed lawsuits last month against three blank-check acquisition firms: GO Acquisition, E.Merge Technology Acquisition Corp and Ackman’s Pershing Square Tontine Holdings.
The lawsuits accuse the SPACs of operating illegally by not registering as investment companies. Ackman last week said the lawsuit against his SPAC was without merit, but acknowledged that the legal uncertainty hanging over it would make it tougher to find a merger partner.
The group of lawyers, which includes law firms Susman Godfrey and Bernstein Litowitz Berger & Grossmann, one of the most prolific U.S. shareholder class action firms, may file as many as 50 lawsuits against SPACs in the coming months, two of the sources said.
Jackson and representatives for the law firms either declined to comment or did not respond to questions for comment.
While none of the group’s lawsuits have had their day in court, they point to a rapidly escalating legal campaign against SPACs. These shell vehicles raise money in an initial public offering to pursue a merger with a private company. There are currently 438 SPACs, which, like those that were sued, have yet to clinch a merger, according to data from SPAC Research.
SPACs became one of Wall Street’s hottest investment trends last year as many retail investors stuck at home during the COVID-19 pandemic placed speculative bets on them.
They lost some of their appeal after many went on to report weak financial performance and a regulatory crackdown ensued over their disclosures.
The purpose of the Investment Company Act of 1940, as stated in the law, is “to mitigate and … eliminate the conditions … which adversely affect the national public interest and the interest of investors.”
Specifically, the law regulated conflicts of interest in investment companies and securities exchanges.
It seeks to protect the public primarily by legally requiring disclosure of material details about each investment company. The act also places some restrictions on certain mutual fund activities such as short selling shares.
A successful case could restore some much-needed regulation to Wall Street, where greed has run amok ever since the enactment of massive tax cuts for the rich in 1981, and it accelerated with the repeal of the Glass-Steagall Act in 1999.
After the financial crisis of 2007–2008, including the housing bubble and stock market crash, the weak Dodd-Frank Wall Street Reform and Consumer Protection Act has not curbed the recklessness that has accompanied the unbridled greed.
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