Blog: Are PSPCs Really “Investment Firms”? | Cooley LLP


Not according to 49 large law firms! Earlier this month, a shareholder of Pershing Square Tontine Holdings, Ltd., filed a derivatives lawsuit against the board of directors of the company, its sponsor and other related companies, claiming that the company, a SPAC organized by a billionaire hedge fund investor, is actually an investment company which should be registered under the Investment Company Act of 1940 and its sponsor is actually an investment advisor who should be registered under the Investment Advisers Act 1940. If they had been registered, it is argued, they would have been subject to substantial regulation regarding the rights of the shareholders of the SAVS and the form and amount of the remuneration of the officers of the SAVS. According to the complaint, under the LIC, “an investment company is an entity whose principal activity is to invest in securities. And investing in securities is basically the only thing PSTH has ever done. The complaint sought “a declaratory judgment, damages and annulment of contracts the formation and execution of which violate” the ICA and the IAA. What’s particularly noteworthy about the litigation, aside from its new premise, is that the plaintiff’s attorneys include Yale law professor John Morley and Robert Jackson, NYU law professor and former SEC commissioner. . Today, a group of 49 major law firms, including Cooley, released a joint statement rejecting the complainant’s claims, saying there is no legal or factual basis for the allegation that PSPCs are investment companies.

Specifically, the complaint accused that “PSTH is an investment company under the ICA because its main activity is to invest in securities. Since the Company’s initial public offering over a year ago, investing in securities is all the Company has ever done. Since going public, PSTH has invested all of its assets in US government securities and money market mutual fund stocks. The PSTH and its advisers spent most of their time working for the PSTH negotiating the purchase of even more securities under a recently abandoned deal. Because the company and its sponsor did not register, argues the plaintiff, the defendants were able to “use their controlling positions to extract compensation from PSTH in forms and amounts that violate federal law.” Rather than paying reasonable fees and structuring them in the standardized and transparent manner required by the ICA and IAA, the Company has paid its investment advisers indirectly, in the form of complex Company securities which have never been offered for purchase by the Company’s public investors. . The actions of the defendants represent the specific danger that the ICA and the IAA have sought to address. Further, the complaint alleged that “less than twelve months after the Company authorized the Promoter and the Guiding Defendants to purchase identical warrants on the PSTH shares, the Company agreed to repurchase some of these warrants at a valuation which implied that the warrants were worth, in total, over $ 880 million, or thirteen times what the Sponsor and Director Defendants originally paid for them. This staggering compensation was promised at a time when the returns for the Company’s public investors have significantly underperformed the rest of the stock market. This is hardly the arm’s length market that the CIA and the IAA are asking for.

Although the hedge fund investor objected that the claims in the lawsuit were unfounded, it was reported that he still chose to make significant changes to the PSPC to avoid the lapse of time a litigation could entail, not to mention the adjustable wrench that litigation could throw at the search for a de-PSPC merger partner. In the meantime, it has also been reported that the Applicant has filed similar complaints against three other SPACs. Citing two anonymous sources, CNBC reports that the plaintiff’s attorneys “could initiate up to 50 PSPC lawsuits in the coming months,” raising the specter of a series of PSPC challenges that could derail the PSPC trend.

To counter this legal challenge, 49 law firms have signed a declaration affirming that classic SPACs are not investment companies within the meaning of the LIC. According to the statement, the investment by the PSPCs of the proceeds of their IPO in short-term treasuries and qualifying money market funds does not make them investment firms under the ICA, as claimed. the litigation. On the contrary, the statement observes: “[u]Under the provision of the 1940 Act invoked in the lawsuits, an investment company is a company which is or purports to be engaged primarily, or intends to engage primarily, in investment activities, of reinvestment or trading of securities. SPACs, however, are primarily engaged in identifying and completing a business combination with one or more operating companies within a specified time frame. Pending a merger of-PSPC or failure to complete a merger of-PSPC within a specified timeframe, “substantially all of the assets of a PSPC are held in a trust account and limited to short-term cash and qualifying money market funds ”.

The statement continues: “In accordance with long-held interpretations of the 1940 Act and its clear statutory text, any company which temporarily holds short-term treasury bills and qualifying money market funds while engaging in its business principle consisting in seeking a business combination with one or more is not an investment company within the meaning of the 1940 law. As a result, more than 1,000 IPOs of SPAC have been examined by the staff of the SEC over two decades and were not considered subject to the 1940 law. “

In conclusion, the signatories of the declaration “consider the assertion that SAVS are investment companies as without any factual or legal basis and consider that a SAVS is not an investment company within the meaning of the law of 1940 if it (i) follows its plan to identify and engage in a business combination with one or more operating companies within a specified time frame and (ii) holds short-term cash and qualifying money market funds in its trust account pending the completion of its initial business combination. “

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