Bill Ackman’s troubled SPAC was hit Tuesday by a lawsuit alleging the blank check company had promised directors “staggering compensation” and demanded that the company’s special status be revoked.
Plaintiffs – former Commissioner for the Securities and Exchange Commission, Robert Jackson and Yale law professor John Morley – claim that Pershing Square Tontine Holdings is not an operating company at all. Instead, they say, Ackmans SPAC is an investment firm, just like its hedge funds. They say the SPAC should obey the Investment Company Act of 1940.
“By telling the world that PSTH is not an ‘investment company’ within the meaning of the ICA, Defendants have structured PSTH to charge their public investors hundreds of millions of dollars in compensation,” said the Legal action.
“Under the ICA and [Investment Advisers Act of 1940], the form and amount of this compensation are illegal, “it said.
The Investment Company Act and the Investment Advisers Act are the principal pieces of legislation for investment companies and investment advisers, and give the Securities and Exchange Commission the power to regulate these entities.
SPACs (Special Purpose Acquisition Companies) are listed shell companies with the aim of acquiring a private company and going public.
The lawsuit, which was filed in the US District Court in Manhattan, concerned the compensation the directors of the SPAC would have received from the repurchase of warrants. Warrants are a sweetener that gives investors the right to buy a stock at a certain price before a certain point in time.
“The company agreed to buy back some of these warrants at a valuation that implied the warrants were worth more than $ 880 million in total – thirteen times what the sponsor and director defendants originally paid for them,” said it in the lawsuit.
“This staggering compensation was promised at a time when returns from the company’s public investors were well below the rest of the stock market.
Pershing said Ackman waived his right to compensation in the now-abandoned deal to purchase 10% of Vivendi’s flagship Universal Music Group, noting that the billionaire eventually withdrew the deal in July, citing SEC concerns.
The Universal Music deal would have left $ 1.5 billion in residual funds in Ackman’s SPAC, giving investors warrants for a new vehicle that would pursue another acquisition in the future.
Ackman previously told CNBC that regulators had raised concerns that the entity newly created as part of the deal would become an investment company.
A spokesman in Pershing Square said the complaint was based, among other things, on the fact that PSTH owns, or has owned, US Treasuries and money market funds that own Treasuries, as do all other SPACs, as they go in search of an initial Business combination.
“PSTH has never held any securities that would require registration under the law, nor does it intend to do so in the future. We believe this litigation is completely unfounded,” the spokesman said.
The New York Times first reported the lawsuit on Tuesday morning.
SPACs are hit by a wave of class action lawsuits as more hyped deals turn out to be flops and stocks fall.
After a record quarter in the first quarter, the SPAC market stalled and emissions fell nearly 90% in the second quarter due to mounting regulatory pressures.
Correction: This story has been revised to correct that the lawsuit alleged that the directors were promised the “staggering compensation.” In an earlier version, the allegation was misrepresented in the lawsuit.
– CNBC’s Dan Mangan contributed to this report.
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