Pershing Square Tontine Holdings Facing Lawsuit from Former SEC Commissioner and Law School Professor

By now, everyone new to SPACLand has probably figured out that it’s a real roller coaster over here. For the veterans of the asset class, we’re a hardened bunch used to the steeplechase of obstacles that invariably appear one way or another. But for the newly initiated, this must seem nuts.

In the past year alone, SPACs saw an explosion in popularity, only to experience a short-lived downturn around last year’s election which was soon eclipsed by an even larger surge in popularity in the first quarter of 2021. And just as SPACs crested the apex of that ride, the SEC questioned the warrant accounting suggesting warrants should be marked as a liability, not an equity, forcing a mass restatement of financials and creating a pause in the market.  Only to find out investors didn’t care. And yet, SPACs still kept hanging in there. Mostly because many companies preferred them to traditional IPOs as a means of going public.

Subsequently, SPACs had slowly started to increase its deal count again when…*record scratch*… a former SEC commissioner and a law school professor decided to file suit against Bill Ackman’s Pershing Square Tontine.

To summarize what many of you have already read in the past two days, Bill Ackman’s SPAC, Pershing Square Tontine Holdings (NYSE: PSTH), was hit with a civil suit claiming the deal acted as an investment company, violating rules which require these deals to adhere to the Investment Company Act of 1940.  To call this odd would be an understatement, but first, let’s review the details.

The case is being brought by Robert Jackson, a former SEC commissioner, and John Morley, a law professor at Yale, which contends that PSTH is an investment company. To put a more specific point on it, the suit alleges that it violated Investment Act Company rules by taking a minority stake in Universal Music Group. And further to that, that the compensation for the transaction was egregious. However, the deal had already been cancelled and was cancelled more than a month ago. And yet…we have a lawsuit now for a deal that is not even happening.

Even more ironic is the fact that Pershing Square Tontine is the deal that initiated a more friendly sponsor structure as compared to the current market standard for sponsor compensation. If you recall, in PSTH’s structure the sponsor and directors did not receive any compensation unless the post de-SPAC company traded 20% above the SPAC IPO issuance price, which is why it’s so odd that compensation is an issue in PSTH’s suit.  Nonetheless, as you’re about to see, the real focus of the suit isn’t actually PSTH, but SPACs in general.

Disregarding PSTH for a moment, it’s very strange to have a former SEC commissioner contend that the SPAC structure is illegal. Particularly so since Mr. Jackson has never seemed to have had an issue with SPACs while he was working there. In fact, Robert Jackson was an SEC commissioner from January 11, 2018 through February 14, 2020 and in that time, 112 SPACs were declared “effective” and priced their IPOs. It doesn’t appear Mr. Jackson ever objected to those SPACs and their compliance with investment company act rules. Yet, now, while a law professor and no longer an SEC commissioner, and presumably not even an investor in PSTH, he felt compelled to bring suit against Pershing Square Tontine regarding a deal that is no longer even happening. Why? Does the suit even have a chance?

Usha Rodrigues, a professor of securities law at the University of Georgia, stated in a Bloomberg article that, “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”.

Furthermore, the lawsuit’s issue with compensation has been a SPAC sticking point in the media for months now, but both the media and the suit seems to glaze over deal specifics. For example, the suit alleges, “The Company agreed to repurchase some of those warrants at a valuation that implied the warrants were worth, in the aggregate, more than $880 million — thirteen times what the Sponsor and Director Defendants originally paid for them.”  However, what has largely been missed by the media is that this is a) not true – PSTH not only agreed to a third-party advisory firm to determine the value of the warrants in any forthcoming transaction, PSTH actually agreed to cancel any sponsor compensation at all in the UMG transaction and b) the UMG deal upon which this suit is predicated has been cancelled. Again, the UMG deal was cancelled exactly one month ago on July 19^th.

So, to summarize, PSTH agreed to zero sponsor compensation in a deal that ultimately was cancelled, but one month later they are being sued for “compensation”. On paper, there doesn’t seem to be much of an actual lawsuit there.  So why file an unwinnable suit in the first place?

Well, maybe the clue is in this statement also found in the same Bloomberg article, “He [Morley] 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.

And there it is…

For emphasis, Jackson is quoted as saying…”many other SPACs have similar issues and could be impacted by the case.”  Is his goal to kill the SPAC market completely??

Plus, the PSTH deal could be tied up in court for quite some time, running out PSTH’s clock and potentially forcing it to liquidate, not the least of which would result in retail, the very investors the SEC seeks to protect from SPACs, losing money if they bought above the $20.00 issue price. Do the litigants want to be responsible for investors losing money due to a lawsuit that challenges the SEC’s position on SPACs for the last two decades?

But…the ne plus ultra question is, what do a former SEC commissioner and a law professor have to gain from this suit and stopping SPACs? That’s the REAL question.