It’s a story of big names, big money, and big disappointment. Pegasus Europe, the largest Special Purpose Acquisition Company in Europe, is set to be wound up after failing to meet its financial targets.
Having launched in 2021, raising a record €484mn, with backing from Bernard Arnault, the founder of LVMH, and Jean Pierre Mustier, the former UniCredit chief, Pegasus Europe was poised to make a big splash in the world of finance. But as the winds of change continue to sweep through the SPAC sector, even the most prominent players are not immune to the risks and uncertainties of this emerging investment vehicle.
Let’s take a step back. What is a SPAC?
SPACs, or Special Purpose Acquisition Companies, are a type of investment vehicle that has gained much attention in recent years. Essentially, a SPAC is a shell company that is created for the sole purpose of raising funds through an initial public offering (IPO).
Once the SPAC has raised capital from public investors, it then hunts for a private company to merge with or acquire. This allows the private company to go public through the SPAC’s existing stock market listing without going through the traditional IPO process themselves. SPACs provide investors with a unique opportunity to invest in a company that has yet to be identified but holds potential for future success. Should the SPAC successfully merge with a private company, investors’ shares in the SPAC will automatically convert into shares of the new, publicly traded company.
However, investing in SPACs comes with risks. Researching the management team and potential acquisition targets is crucial, and investors should be prepared for volatility in SPAC share prices leading up to an acquisition announcement.
To understand what went wrong for Pegasus Europe, we need to look at the bigger picture.
Between 2020 and 2021, there was a surge of SPAC launches in Europe as the M&A market was booming and lawyers were working around the clock during the pandemic. However, due to the increase in shell companies, many struggled to find suitable businesses to merge with or acquire, resulting in a trend of returning funds to investors.
Unfortunately, Pegasus Europe was not immune to this trend. The SPAC had set its sights on the European financial services sector, with a particular focus on tech-savvy FinTech startups. Despite identifying between five and ten suitable target companies, the backers of the SPAC had difficulty agreeing on a price and could not close deals with any of them. As a result, Pegasus Europe could not find a suitable acquisition target and was forced to return funds to investors.
As Pegasus Europe’s collapse continues to send shockwaves through the finance world, it remains to be seen how the legal sector will be affected. However, it’s worth considering the potential practice areas that may be involved in advising Pegasus and its stakeholders during the winding-down process.
Restructuring and insolvency: This process of liquation and fund redemption can be complex and may require the involvement of restructuring and insolvency lawyers to manage the distribution of assets to shareholders and the resolution of any outstanding legal or financial issues related to the SPAC’s activities.
Litigation: Additionally, the legal industry may see increased litigation related to SPACs. With the rise in popularity of SPACs, there has been increased scrutiny and criticism of the structure and regulation of these investment vehicles. As a result, there may be an increase in lawsuits related to allegations of mismanagement, fraud, or other misconduct by SPACs or their management teams.
Regulatory: As SPACs continue to evolve, the regulation must keep up. Regulatory lawyers may be called upon to provide guidance and advice on regulatory compliance, corporate governance, and other legal issues related to these investment vehicles.
In the case of Pegasus Europe, the winding down process has already begun. The SPAC has estimated that ordinary shareholders can expect to receive around 10 euros per share, which was the listing price in Amsterdam. The final payments are expected to be made in July, according to the statement released by the company.
It remains to be seen what the future holds for SPACs in Europe and beyond, but it’s clear that the industry is facing some challenges as it continues to evolve. As always, it will be necessary for investors, legal professionals, and other stakeholders to stay informed and adapt to these changes as they occur.
Silicon Valley Bank UK (SVB UK), a major financing player for startups and tech companies, failed on March 10th, 2023, due to a bank run. Initially, the Bank of England (BoE) intended to place SVB UK into a bank insolvency procedure, but a cross-sector effort succeeded in convincing the government of the significant impact SVB UK’s failure would have on the UK’s innovation economy.
This led to a decision to find a buyer in the public interest. HSBC UK Bank Plc (HSBC) acquired SVB UK for £1 on March 13th in a favourable outcome that did not require government funds for a bailout. This is particularly noteworthy as bailouts have been subject to severe criticism.
SVB UK’s acquisition was crucial in preventing risks to corporate clients and the broader financial system. Without the acquisition, SVB UK could have faced insolvency, thereby jeopardising uninsured deposits, which, in the event of a bank failure, are not guaranteed protection and may not be fully reimbursed. It is worth noting that almost 90% of SVB UK’s deposits were uninsured.
SVB UK’s depositors would have fallen under the scope of UK’s Bank Recovery and Resolution Directive (BRRD), Article 108 of which provides that retail and SME depositors remain secondary preferential creditors, ranked behind fixed charge realisations, insolvency practitioners’ remuneration and expenses, and ordinary preferential creditors, including the Financial Services Compensation Scheme (FSCS) for compensation payments.
Large companies employing over 250 persons and with an annual turnover of €50 million or an annual balance sheet total of more than €43 million are not entitled to depositor preference in the UK. As such, they would be treated like unsecured creditors. Additionally, preferential creditor distribution may take several months, leaving those who require immediate liquidity assistance with a challenge.
SVB UK’s stabilisation through its acquisition by HSBC averted the risk of depositor shortfall. Deposits held with SVB UK remain protected, and businesses continue to bank as usual, accessing funds and making interest payments.
Firstly, it should be noted that the limited deposit protection afforded to depositors does not necessarily preclude the occurrence of a bank run. This is due to the restricted scope of the protection, which applies solely to deposits up to a certain threshold.
While such protection may mitigate bank runs involving retail depositors, its efficacy in the case of corporate and institutional depositors with substantial deposits is limited. For instance, companies holding tens of millions of pounds in deposits with a bank exposed to insolvency are unlikely to be incentivised to withdraw their funds due to the £85,000 deposit protection limit per depositor and banking institution. Moreover, regulated entities are excluded from deposit protection under the FSCS.
Additionally, depositors are responsible for prudently selecting the banks where they place their funds. The capping of deposit protection is motivated primarily by the need to deter moral hazard. If the protection were to cover all deposits, depositors would be disincentivised from conducting appropriate due diligence or diversifying their deposits among different institutions.
Consequently, corporate clients who previously concentrated their deposits with a sole bank may contemplate the advantages of spreading their deposits across multiple banks. In short, large companies should undertake proper due diligence and distribute their funds among various banks to ensure complete reimbursement in the event of a bank’s failure.
SVB’s downfall can be attributed to a disastrous risk management strategy. The bank’s top executives made a baffling decision to invest over £66 billion in deposits from startup companies into low-yielding mortgage-backed securities, earning a meagre 1-1.5% return. However, when the US Central Bank raised interest rates, alternative investment opportunities with higher returns emerged, rendering SVB’s investment unattractive.
This misstep led to a steep decline in the value of SVB’s investment, which was publicly disclosed in a securities regulatory filing. Both venture capitalists and startup founders swiftly felt the repercussions of the situation’s gravity, ultimately leading to the collapse of SVB.
SVB’s downfall highlights several significant legal, regulatory, and risk-related concerns regarding the bank’s governance.
First, the decision to invest such a massive amount of funds into low-yield mortgage-backed securities did not align with its core business model, exposing it to significant credit and liquidity risks, and, as such, warrants questioning. How and why did the board allow this investment? What checks and balances were in place to prevent such a misstep?
Of additional concern is the timing of the CEO’s decision to sell shares. The CEO’s sale of shares one week before the bank’s collapse was approved after the securities disclosure but occurred prior to the actual event – this warrants scrutiny and gives rise to potential concerns regarding insider trading, which, if substantiated, may lead to significant legal ramifications.
Finally, the lack of proper risk management practices is also a significant concern. SVB should have conducted regular stress tests to assess the impact of various economic scenarios on its portfolio as well as diversify its investments to mitigate risks.
Overall, these issues underscore the importance of proper risk management practices, governance, and transparency in the financial sector. Law firms play a crucial role in advising their clients to prevent such mishaps from occurring in the future.
Whilst the insurance industry is its sector, multiple legal practice areas cross into the industry, including commercial and private law. For example, in personal injury cases, there is a heavy reliance on insurance policies which lawyers should thoroughly understand to ensure fair compensation for their clients.
The fundamentals of contract law are still of key concern when dealing with insurance complexities and policy wordings. The conflict in Ukraine is an example of a current affair that has impacted the insurance industry. Contract purposes and circumstances shifted when the war broke out; however, many contracts included a ‘war exclusion’ clause. This style of clause became more prevalent following the 9/11 attacks and is still significant as these ‘war exclusion’ clauses limited the ability to rely on insurance as they were legally excluded.
Accordingly, insurance is a complex sector giving rise to disputes and requires careful consideration of contract laws.
A recent identification has been made that civil unrest has caused billions of reinsurance losses globally due to war and terrorist attacks. As a result of Russia’s invasion, pay-outs for destroyed buildings have significantly impacted political violence insurers. This illustrates that the current key implication in the sector is that an unstable economic environment has created exposure to a vast expanse of risks meaning global insurance spending is warned to double in the next decade.
An example of how the Russian conflict has created complexities for the insurance world is the current issue where insurers AIG are facing a legal dispute against Aer Cap. Aer Cap is an aircraft leasing company, and following the UK and EU’s direction to impose sanctions on Moscow, Russian airlines were notified by Aer Cap to return loaned aircraft. However, these instructions were not followed. Therefore, planes were stranded whilst the insurers refused to pay out because they believed the seizure of aircraft was not classified as a loss in insurance terms.
As a result, Aer Cap is seeking up to $3.5 billion because they argue that the insurance policy covered the situation broadly. Thus, the aviation sector is an example of how the insurance sector’s vulnerability to commercial and geopolitical changes can trigger serious legal consequences.
System threats are beyond the current war and climate change implications because the industry is still recovering from factors like the pandemic. Consequently, Lloyds of London chief John Neal announced last month that there is a prediction of increased financial risk and figures illustrating that premiums written this year could increase by £8bn from 2022.
Geopolitical volatility in the commercial climate not only triggers large corporations but also impacts individuals’ insurance policies. For example, the cost-of-living crisis has meant that it is expected that several customers may choose to cut back on their current insurance policies. When individuals cannot afford policies, they become more exposed to legal risks.
Another effect of this is that there will be increased work for lawyers if disputes arise, resulting in increased business for lawyers specialising in the insurance sector. For example, lawyers may advise individual customers on making claims, but also, they may advise insurance firms who are disputing or seeking to reject customer claims.
Alternatively, there may be an increased number of disputes arising as when the policyholders pay a higher price, they are likely to scrutinise their insurers more and seek more scope from their policies. However, if simultaneously prices were kept low, there is a chance that affordable coverage cannot be taken, and there will be an increase in insurance costs.