The notion that a SPAC’s trust is impenetrable and impossible to access by any party other than public SPAC shareholders through redemption or a target company at close is one of the fundamental bedrocks of the SPAC product.

However, a number of peculiar legal situations have recently attempted to test that notion and one involving Financial Strategies Acquisition Corp. (OTC:FXCO) made it far enough that Continental Stock Transfer & Trust recently opted to step in to fight for the trust.

Financial Strategies had a strange end to 2023, as it faced its transaction deadline in December and filed for bankruptcy rather than attempt an extension or liquidate its trust. It also moved to do so without terminating its pending combination with Austin Biosciences.

This bankruptcy itself took a number of turns, with its first filing being thrown out only to be refiled in the Eastern District in Texas. In its second attempt, Financial Strategies attempted to have the remaining $6.7 million from its trust account placed in a debtor-in-possession account, which would have made it available to settlements with creditors.

Delaware corporate statutes govern a large portion of US corporate life and, under Delaware law, corporations typically cannot dissolve and pay out money to investors before making creditors whole.

SPACs are obviously different from most operating corporations. So, although some bankruptcy court judges unfamiliar with SPAC vehicles may initially look to those Delaware statutes, the fate of the trust is generally governed by New York law, pursuant to provisions in the trust agreements. This, in theory, should take precedence over all other principals, but not always without some wrangling.

In the Financial Strategies case, Continental was represented by CSG Law in fighting against the SPAC’s attempt to shift its Chapter 11 bankruptcy, which would have resulted in more of a reorganization, to a Chapter 7 liquidation to creditors.

Financial Strategies then moved on May 1 to pull back from the Chapter 7 shift, but Continental’s counsel pushed to have the motion adjudicated on the merits to get a judgement on the general principle as to whether the SPAC’s management or creditors had any claim on the trust in the first place.

The Texas judge sided with Continental, finding that the “bankruptcy estate has no interest in the principal amount of the Funds held in the Trust Account, and they are not property of the estate.” And further, Financial Strategies’ rights “to the Funds are limited to any interest income that may be available, subject to the limitations specified in the Trust Agreement.”

As such, the bedrock principles of SPAC trusts were upheld in the courts once again, but this case will not necessarily form an automatic precedent to ward off future bankruptcy attempts of this kind.

What is perhaps more noteworthy is that Continental opted to take this fight on itself.

Unlike other parties seeking to prevent Financial Strategies from breaking the trust who represented public investors, Continental didn’t stand to actually receive any of the funds in question. But, it certainly benefits from a stable environment where SPAC trusts are unbreakable as this undergirds its own business model of holding assets in trust for these transactions for virtually all SPACs.

Continental President and Chairman Steven Nelson told SPACInsider the firm has been trying to be proactive in cases around fundamental trust rules. It has also taken a role in litigation around 26 Capital‘s collapsed combination with the Okada Manila Casino and attempts in Florida courts to claw back redemptions from Industrial Human Capital shareholders amid its bankruptcy proceedings.

Nelson emphasized that, “Continental has acted to protect shareholder interests in SPAC trusts in a number of bankruptcy related situations, including Financial Strategies, 26 Capital and Industrial Human. In each case, creditors were seeking to attack trust assets thereby hoping to reduce shareholders’ proceeds.”

“The decision in Financial Strategies which we obtained, and the decision in 26 Capital from the Delaware Chancery Court, are together important in the ongoing battle to protect SPAC trust assets on behalf of shareholders,” he continued. “I am happy to say that those creditor attacks have thus far failed. All of the SPAC shareholders in those matters have received full trust value as has been the case for all other SPACs which Continental has handled since 2003 — well over 1,000 SPACs.”

To that same point, it remains unclear how many more such legal cases challenging this issue are due to come up. But, even among creditors and vendors in the SPAC market who could see their bills unpaid from SPACs gone bust, most would theoretically also be greater losers should the whole apple cart of SPAC trust fundamentals be upset by a case like this.

As such, only those with tenuous or one-off relationships with SPACs are likely to pursue them. This provides all the more reason for anyone in the SPAC game to seek to work with more partners who are similarly invested in the health of the product not just the single SPAC in question.