Lawsuit against Bill Ackman's SPAC questions its legality

Pershing Square Tontine Holdings Ltd, the largest blank check company ever hit the market managed by the billionaire hedge-fund investor Bill Ackman, got sued for operating illegally as an investment company.

The suit was filed by Robert Jackson, a former SEC commissioner, and John Morley, a law professor at Yale, argued that the special purpose acquisition company (SPAC) should be regulated by the Investment Company Act of 1940 as it is an investment company like Ackman’s funds.

If the court determines that SPACs should be regarded as investment firms, it will require registration with the SEC and will have to place restrictions on fees charged for investment advice, which could have far-reaching implications for the SPAC industry.

By law, an investment firm’s primary operation is investing in securities, and the suit said that’s “basically the only thing that PSTH has ever done.”

If certain blank check companies were regulated as investment firms, the whole industry could be affected as it would be difficult for anyone in the investment business to participate in a SPAC.

Ackman denied the suit’s claims in an emailed statement to Bloomberg and said that the litigation is without merit, mentioning, “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.” 

Pershing Square Tontine “owns or has owned” U.S. Treasuries and money market funds that hold them, Ackman told Bloomberg, “as do all other SPACs while they are in the process of seeking an initial business combination.”

SPACs, are publicly listed empty corporate shell companies that raise money from investors to merge with a private business to take that company public through the back door.

The lawsuit comes less than a month after Pershing Square Tontine abandoned a deal with Universal Music Group (UMG), where Ackman agreed to buy a 10% stake in the largest music label for $4 billion from Vivendi SA.

The deal was canceled after SEC voiced concerns about the complicated and multi-faceted deal to which Ackman said he would instead purchase the UMG stake with his hedge fund rather than his blank-check company.

Last week, the French media conglomerate Vivendi sold a 7.1% stake of UMG to Pershing Square Capital Management, the hedge fund, for $2.8 billion, possibly selling another 2.9% by September 9 of this year, following the cancelation of the deal.

The new lawsuit asked the court to declare Pershing Square Tontine as an investment company as “from the time of its formation, PSTH has invested all of its assets in securities.”

“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 also sought to rescind contracts worth millions of dollars to members of the company’s board.

Blank check companies are already under fire from SEC, who have promised to tighten protections for investors, and are facing a rising number of class-action lawsuits by shareholders.

SPACs offer private companies a faster route to the stock market but have also had less oversight as in a SPAC merger, it can pitch investors based on forward-looking financials, which isn’t allowed in a traditional IPO.

Picture Credit: CNBC