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Universal Music investor hits back at lawsuit against his SPAC

By | Published on Monday 8 November 2021

Universal Music

The special purpose acquisition company that tried to buy 10% of the Universal Music Group has hit back at a lawsuit that claims the business is actually a more conventional investment firm and should be regulated as such. Pershing Square Tontine Holdings says that lawsuit is based on a “fundamentally mistaken” understanding of how special purpose acquisition companies – or SPACs – actually work.

PSTH, led by hedge fund manager Bill Ackman, announced in June that it would buy 10% of Universal Music from its then owner Vivendi. The transaction was meant to take place before Vivendi spun off its music division as a standalone business listed on the Dutch stock exchange.

However, that SPAC deal was somewhat unusual. SPACs – sometimes also known as blank cheque companies – are businesses with no active operations that raise money on the investment markets with the intent of using that cash to buy a privately-owned business outright. In doing so, the bought business basically gets a back-door stock market listing, without having to go through the tedious rigmarole of a full-on Initial Public Offering.

But Ackman’s SPAC plan saw PSTH simply buying 10% of a company that was already about to list on a different stock market. Concerns were raised about that arrangement by both the SPAC’s investors and the US regulator the Securities And Exchange Commission. So much so, Ackman ultimately abandoned the whole thing, and instead bought 10% of UMG via other investment funds he controls.

But that didn’t stop one investor in PSTH from going legal. In the wake of the proposed Universal Music deal, George Assad sued, arguing that PSTH was being run as a more conventional investment company – buying and selling investment securities like shares and bonds – rather than an entity that exists to acquire a privately owned business outright.

That’s important because, if it was an investment firm, PSTH would be subject to extra regulation under law, including over the fees it pays its advisors, which includes another Ackman-controlled business.

Assad’s lawsuit stated: “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”, by which it meant the abandoned UMG share purchase.

However, in a legal filing submitted last week, PSTH argues that Assad’s lawsuit is “fatally flawed from top to bottom”. The SPAC has fully complied with SEC rules, it says, and those rules are clear that SPACs are not investment companies governed by the US Investment Company Act.

The legal filing also basically argues that the lawyers leading on Assad’s litigation – who are both law professors – are actually pursuing the case not because PSTH broke the rules, but because said professors don’t like the rules and want to use this dispute to force a change to SEC regulations. Mainly because of the recent increase in the use of SPACs to take private business public.

The filing states: “Plaintiff’s counsel has admitted publicly that these are issues for the SEC to decide and that this case is just a tool to try to prod the SEC into upending the settled regulatory framework for SPACs, a framework with which [PSTH] has fully complied and upon which countless market participants and investors have relied for decades”.