Introduction
With rapid growth in the formation of special purpose acquisition companies (SPACs), unprecedented opportunities have emerged for D&O liability insurers and reinsurers. However, with the brisk growth, concerns have emerged about potential claims aggregation and the increased possibility of SPAC-related litigation, which have led others to take a more cautious approach. In mid-April, Robbins Geller announced the formation of a dedicated SPAC task force to “protect investors in blank check companies and seek redress for corporate malfeasance.” This should be viewed as a ‘”shot across the bow” for all SPACs and SPAC directors and officers, SPAC sponsors, post de-SPAC transaction companies and for D&O insurers. Underwriters considering entrance or expansion into the SPAC D&O market will benefit by having a robust picture of the underlying risk exposures and identifying market obstacles and opportunities for timely action. Guy Carpenter has conducted a detailed analysis of the evaluation criteria and associated risk factors with SPACs over the course of their life cycle, from their initial public offering (IPO), to commencing due diligence, negotiating a merger agreement, closing a reverse merger and operating as a new public company. As warrants are a key economic feature with SPACs, one area Guy Carpenter is exploring are variables that influence an option’s price. Implied volatility is an essential ingredient to the option-pricing equation, and the failure of an option trade can be significantly heightened by being on the wrong side of implied volatility changes. Consequently, we are evaluating companies to see if there is a correlation between elevated implied volatility percentages and securities litigation.
