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Alleging a breach of fiduciary duty in a merger procedure

On Behalf of | Sep 10, 2021 | Business Litigation |

Purchasing shares in special purpose acquisition companies may reflect investor confidence in their managers’ experience with profitable mergers. The SPAC structure enables managers to offer stocks quickly by forgoing some of the traditional initial public offering disclosures.

After raising funds, SPACs use investors’ money to merge with private companies, thereby making them public. As noted by Inc. Magazine, the period within which SPAC managers must complete a merger before incurring penalties is between 18 and 24 months.

Rushing through a merger may result in a stock’s price drop

In some cases, the merger prospectus for a target company may contain faulty valuations or inaccurate financial projections. Because of the legal obligation to execute a merger within a given time frame, SPAC managers may rush through the deal-making process.

In some cases, SPAC investors may have cast their votes to approve a merger based on erroneous information. The post-merger company’s intrinsic value may reveal itself by a sudden drop in the stock’s market price.

Filing a legal action for breach of duty and damages

When stock prices drop significantly, shareholders may suspect that managers misled them about the target company. SPAC managers owe a fiduciary duty of care to shareholders to act in their best interests but may not have exercised adequate due diligence. They may, for example, have overlooked the possibility of the target company’s officers and directors having a potential conflict of interest.

Failure to conduct thorough due diligence concerning a target company’s finances, business operations or directors may result in legal action for a breach of duty. The lawsuit may include shareholder damages from lost profits. The Securities Exchange Commission may also begin an investigation based on the outcome of an investors’ lawsuit.

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