How lack of insurance for SPAC directors threatens to derail M&A deals under Hong Kong’s new listing regime
- Directors of blank-cheque companies face legal liability risks from a lack of insurance options in Hong Kong, sponsors say
- Pricey premiums charged for covering SPAC directors’ legal risks could pose risks to M&As
The dearth of insurance that protects directors of special purpose acquisition companies (SPAC) from legal liability could hold back mergers and acquisitions and prove to be a setback for Hong Kong’s new listing regime, according to sponsors and insurance players.
“We may not be able to obtain D&O insurance on acceptable terms, or at all, in Hong Kong,” according to a filing by Trinity Acquisition Holdings, a SPAC whose backer includes former Chinese Olympic gymnast Li Ning. “[This] could make it difficult and expensive for us to … complete [an acquisition].”
“Uncertainties clouding the future performance of the private business the SPAC is seeking to acquire is front and centre of the unknown risks cited by many insurers,” Wood said.
For example, only professional investors are allowed to buy and deal in shares issued by a SPAC. Hong Kong also only allows large SPACs that raise at least HK$1 billion (US$128 million) to list on its main board, the highest requirement among all exchanges.
The risks from underwriting D&O liability insurance for SPACs is high because there is a limited source of data and information that an insurer can rely on to determine potential claims, said Eric Hui Kam-kwai, chief executive of Zurich Insurance (Hong Kong).
“Unlike the underwriting practice for other listed companies, insurers can only assess the quality and experience of the SPAC’s management team, and the potential risks involved in the broader industries that the blank-cheque company is targeting,” Hui said.
The actual start-up a SPAC plans to buy is not known until it makes a formal announcement, which in Hong Kong is within 24 months of the SPAC’s listing date. Failing this, the SPAC must liquidate and return the funds to investors.
Zurich Insurance, which currently offers D&O liability insurance to SPACs in the US, is considering expanding the service to Hong Kong, Hui said.
Expensive D&O insurance premiums for SPACs raises the cost of acquiring businesses, making the deal less palatable for the SPAC shareholders who have a vote on the deal, industry players said. The availability of more players stepping in to provide insurance will help develop the overall SPAC market.
In the US, shareholders have attempted to vote down deals, and have filed security class actions alleging inadequate disclosure by SPAC sponsors. As a result directors and officers involved have made claims to indemnify the legal costs.
Class actions related to SPACs in the US rose to 31 last year, from two in 2019, according to insurance broker Woodruff Sawyer.
The heightened concerns over lawsuits have significantly inflated the premium for D&O liability insurance last year, curbing insurers’ appetite to underwrite these policies, said Bernhard Kotanko, senior partner at McKinsey.
Aon’s Wood said that the absence of a class action regime in Hong Kong means that chances of litigation are lower compared with the US, and that bodes well for the future of D&O insurance for SPACs here.
“The market dynamics will not, however, change overnight,” said Wood. “But better times are definitely ahead.”