Ackman SPAC Hit With Investor Suit Questioning Its Legality
(Bloomberg) -- The largest SPAC to ever hit the market is operating illegally as an investment company, a new lawsuit against billionaire Bill Ackman’s Pershing Square Tontine Holdings Ltd. claims.
Less than a month after the blank-check company abandoned plans for a deal with Universal Music Group, it’s facing a civil suit from a shareholder claiming that it fits the description of an investment company and should be regulated as one, starting with the “staggering” compensation paid to Pershing Square Capital Management as investment adviser.
The suit by shareholder George Assad could have wide-ranging implications for the financial industry if a court determines that SPACs more generally should be regarded as investment companies subject to the 1940 Investment Company Act, which requires registration with the Securities Exchange Commission and places restrictions on fees charged for investment advice.
Under the law, an investment company’s main business is securities investing, the suit says, and that’s “basically the only thing that PSTH has ever done.”
Ackman denied the suit’s claims in an emailed statement on Tuesday.
“PSTH has never held investment securities that would require it to be registered under the Act, and does not intend to do so in the future,” Ackman said. “We believe this litigation is totally without merit.”
Pershing Square Tontine “owns or has owned” U.S. Treasuries and money market funds that hold them, Ackman said, “as do all other SPACs while they are in the process of seeking an initial business combination.”
The suit was reported earlier by the New York Times, which noted the lawyers behind it include former SEC Commissioner Robert Jackson and Yale Law School Professor John Morley. Securities class-action firm Bernstein Litowitz Berger & Grossmann is listed as lead counsel on the suit.
Usha Rodrigues, a professor of securities law at the University of Georgia, called the lawsuit’s argument “bold” and said it challenged the very model on which SPACs are premised.
“It could be a very big deal, if the court accepts the arguments,” she said.
But Rodrigues also said she was skeptical the case would succeed, as the SEC has allowed SPACs to operate for decades now without registering as investment companies. “The plaintiffs are really asking the courts to reject the SEC’s rules and regulations that have been evolving since 2003 if not earlier,” she said.
SEC scrutiny of SPACs has been ratcheting up significantly this year, with agency officials warning for months that risks aren’t fully understood by individual investors. The vehicles offer companies a faster route to the stock market than a traditional initial public offering but have also had less oversight.
SPACs, also known as blank check companies, are empty corporate shells that raise money from investors and then aim to merge with a private business, essentially taking that company public through the back door. In a blank-check merger, companies can pitch investors based on their forward-looking financials, which isn’t allowed in a standard IPO.
Ackman agreed to buy a 10% stake in Universal Music from Vivendi SA in June prior to its planned listing in Amsterdam. The unusual structure of the deal would have seen Pershing Square Tontine acquire the stake in UMG as a stock purchase rather than a typical SPAC merger.
Regulators shot down the structure last month, and Ackman said he would instead purchase the UMG stake with his hedge fund rather than his blank-check company. Pershing Square Tontine continues to look for a deal.
The suit took aim at the proposed deal as a securities investment.
“From the time of its formation, PSTH has invested all of its assets in securities,” the lawsuit states. “And it has spent nearly all of its time negotiating a transaction that would have invested those assets in still more securities.”
Pershing Square Tontine’s “abstract intention” to find a business and acquire it in the future is “insufficient to allow an entity that otherwise qualifies as an investment company to avoid regulation.”
The suit says Pershing Square Capital should be regarded as an investment adviser with restrictions on its fees. The proposed compensation to the fund in the form of warrants allowing it to buy shares under highly favorable terms far outstrip that which would be considered reasonable under federal law.
According to the the suit, the SPAC’s sponsor holds the right to buy 5.95% of any acquired company on a fully diluted basis.
“The Defendants have received securities that under any plausible estimate are worth hundreds of millions of dollars -- an unreasonable payment for the work performed,” the suit claims.
Jackson, now a law professor at New York University, and Morley said in an interview on Tuesday that the suit targeted Pershing Square Tontine because of what they called its uniquely byzantine compensation structure as well as the striking commonality between the SPAC and Ackman’s hedge fund business, which is regulated as an investment company. Both have the same investment staff and access to the same corporate resources, the lawyers said, and both mainly buy securities.
‘You just can’t make SPACS into something other than investment companies just by changing the name,” Morley said.
He and Jackson said they believed many other SPACs have similar issues and could be impacted by the case.
“We think this is a space where everybody sees the need for reform,” said Jackson.
The case is Assad v. Pershing Square Tontine Holdings, Ltd. et al, 21-cv-06907, U.S. District Court, Southern District of New York (Manhattan).
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