Serial plaintiff George Assad, a 75-year-old Massachusetts stock broker, has been busy lately.
In addition to his eye-popping lawsuit against Bill Ackman’s troubled special purpose acquisition company, Pershing Square Tontine Holdings, Assad has just filed two similar lawsuits in federal court against SPACs GO Acquisition Corp. and E.Merge Technology.
Assad has filed 34 federal securities complaints against companies over the past decade, and many of them have been dismissed within months. Whether these three lawsuits follow that trajectory remains to be seen.
But he is not the only, or necessarily the most important, actor here.
Ackman asserted in a letter to Tontine shareholders last week that Assad is merely a “prop” for the law professors and other lawyers putting the complaint together. The same lawyers and firms are in all three lawsuits, and they include former Securities and Exchange Commissioner Robert Jackson, an NYU law professor who was one of former President Trump’s Democratic nominees, and Yale law professor John Morley. The two professors have reportedly said they are using the lawsuits to reform the SPAC market.
“The real desire is to go after all SPACs,” said Joel Rubinstein, partner at White & Case who advises SPACs.
All three cases accuse the SPACs and their sponsors and directors of breaching the Investment Company Act of 1940 because they hold securities. After going public, SPACs place the proceeds in trust, where they hold government securities and money market funds that invest in government securities until they use the money to help purchase a privately held company, thereby taking it public.
The main complaint of all three lawsuits, however, is the lofty compensation to sponsors and directors. Both of the new lawsuits allege that the lucrative sponsor shares are illegal under the terms of the Investment Company Act.
“Rather than pay reasonable fees and structure them in the standardized and transparent ways required by the law, the company has paid defendants in a special class of shares, unavailable to the general public, that gives defendants an economic interest equal to at least 20 percent of the company’s outstanding equity — and potentially much more,” according to each of the new complaints. In both cases, “defendants received all this for a purchase price of $25,000,” the complaints said.
“The potential value of this compensation could exceed $100 million,” they added. “This is hardly the arm’s length bargain between an investment company and an outside manager that the ICA demands,” the complaints said.
Ackman forswore sponsor shares when he launched his SPAC last summer, calling the compensation “egregious.” The complaint against Tontine focuses, instead, on warrants issued to directors of the company and Pershing Square.
Similar allegations could be made against all SPACs. In his letter to shareholders last week, Ackman added that if successful, the lawsuit would “imply that every SPAC may also be an illegal investment company” and would have a “chilling effect” on the entire SPAC market.
He called the lawsuit “without merit,” but said it could still “deter potential merger partners” until it is resolved.
Now that more suits have been filed, they could potentially affect the more than 400 SPACs that are currently seeking a merger partner.
Lawyers who work with SPACs tend to agree with Ackman’s assessment.
“I don’t think the lawsuit has merit either,” Rubinstein told Institutional Investor last week. “It comes down to what is the business purpose of the SPAC? The business purpose of the SPAC is not to invest in securities… and ultimately to make a minority investment… The purpose of a SPAC is to combine with an operating company.”
Added Rubinstein: “That’s where the whole thing falls apart.”
The new lawsuits target other heavy hitters in the financial and corporate world. GO Acquisition was founded by Noam Gottesman, who co-founded hedge fund GLG Partners, and Gregory O’Hara, the former chief investment officer of J.P. Morgan’s special investments group. O’Hara is now the president of Clementine Investments, a specialty travel and hospitality private investment firm.
Gottesman now runs a family office called TOMS Capital. He ran London-based GLG, which was bought by Man Group, until 2012. He earlier served as executive director of Goldman Sachs International.
Meanwhile, the co-CEOs of E.Merge Technology are Jeff Clarke, the former Kodak CEO, and Guy Gecht, the former long-standing chief executive of EFI.
E.Merge shares fell on Wednesday to $9.75, below their net-asset value of $10, while GO closed at $9.76.
GO declined to comment.
The plaintiff lawyers and E. Merge did not to respond to requests for comment.