SPAC Bankruptcies

Editor’s Note: This article was originally published in Turnarounds & Workouts, Vol. 37, No. 6., pp 1-5 (subscription required). T&W, now in its 37th year of publication, is produced by Beard Group, Inc.

By Adam Brenneman, Thomas S. Kessler, Jack Massey, and Katharine Ross (Cleary Gottlieb Steen & Hamilton LLP)

The past several years have seen a significant rise in de-SPAC transactions, through which a company goes public through a merger with a special purpose acquisition company (“SPAC”) rather than through the traditional IPO process. Recent years have also seen, however, a growing number of companies that went public through de-SPAC transactions seeking chapter 11 relief in the face of economic distress and liquidity crises related to, among other things, decreasing interest in SPAC IPOs, rising redemption rates, increasing regulatory scrutiny, high-profile failures of de-SPAC companies, and high interest rates. As SPAC bankruptcies are relatively new phenomena, they present several potentially interesting and novel issues in the bankruptcy context.

This article discusses this rising trend in SPAC bankruptcies and three potentially interesting issues that may arise and are worth watching for in these cases: (1) the ways in which allegations of securities fraud intersect with and play out in SPAC bankruptcies; (2) the way that convertible debt—often used by SPACs to raise cash, particularly near the end of a de-SPAC transaction where proceeds are intended to replace IPO proceeds that are redeemed by investors—and the claims of convertible noteholders are treated in SPAC bankruptcies; and (3) the treatment of forward share purchase agreements—often used by SPACs to maintain a minimum level of capital at the closing of a de-SPAC transaction—in SPAC bankruptcies.

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