William Ackman, CEO of PSTH as well as Pershing Square Capital Management.
Pershing Square Tontine Holdings, the SPAC that abruptly canceled a Universal Music acquisition deal last month, is facing a lawsuit over its legal classification, which allegedly enables higher-ups associated both with Pershing Square Capital Management and the SPAC to use “their positions of control to extract compensation from PSTH in forms and amounts that violate federal law.”
One George Assad, who purchased Pershing Square Tontine Holdings stock in May of this year, just recently submitted the complaint to a New York federal court. The 49-page-long action names the SPAC as a nominal defendant, with defendants including London-headquartered Pershing Square Holdings (which, along with other defendant entities, is “advised by Pershing Square Capital Management”) and PSTH’s four board members (aside from Ackman).
As initially mentioned, the multifaceted suit centers on PSTH’s legal classification, specifically under the Investment Company Act of 1940 and the Investment Advisers Act of 1940. The SPAC, the plaintiff maintains, “qualifies as an ‘Investment Company’ as that term is defined in the ICA,” with Pershing Square Capital Management (which is behind the fund) allegedly qualifying as PSTH’s investment adviser “as that term is defined in the ICA and IAA.”
“The ICA and IAA have been held by courts to apply to a wide range of entities, including so-called ‘acquisition companies’ that sell off their former operating assets and primarily hold securities while searching for new operating businesses to acquire,” the legal text proceeds.
To be sure, while Pershing higher-ups have stated that the SPAC’s “primary purpose is not to invest in securities but instead to acquire an operating business,” according to the plaintiff, securities investments represent “all” that the company “has ever done since its IPO,” to the tune of over $4 billion currently placed “in securities of the U.S. government and securities of money market mutual funds.” The lion’s share of the sum is tied up in the former, the plaintiff states.
Regarding Pershing Square Capital Management’s alleged status as an investment adviser, the plaintiff relays that “PSTH has no full-time employees of its own and is therefore completely dependent upon PSCM for investment expertise and administrative resources… the relationship between PSTH and PSCM is virtually identical to the pattern that characterizes relations between investment advisers and other types of investment companies, such as mutual funds and hedge funds.”
These points bear emphasizing because the lack of investment-company classification allegedly enabled PSTH to pay “its investment advisers indirectly, in the form of complex securities” that weren’t made available to public investors and that are allegedly worth “astronomical” sums.
Even considering claims that the defendants haven’t been paid for their PSTH work, the lawsuit continues, PSTH has issued these individuals two types of securities (“either for free or for prices far below the securities’ actual value”), thereby compensating them “at an unreasonable level in violation of the ICA and IAA.”
“Forward purchase units,” the first type of security, cost $20 apiece and offer one share in PSTH as well as one-third of a warrant to purchase another share for $23. Because the $2 billion in total forward purchase units “may be purchased on a delayed basis and do not have to be purchased at all,” notwithstanding the fact that they cost the same as PSTH’s units at the time of its IPO, the SPAC has acknowledged that the option “is worth hundreds of millions of dollars,” per the lawsuit.
Regarding sponsor and director warrants, the second type of security mentioned by the plaintiff, the Pershing Square TH Sponsor agreed to pay $65 million for the former, permitting it, “at an exercise price of $24 per share, to purchase whatever number of shares will equal 5.95% of the common stock of the fully diluted post-business-combination entity.”
The director defendants then bought warrants “on identical terms” – albeit for a comparatively small “0.2597% of the fully diluted stock” and at a cost of $2,837,500, or $812,500 from three defendants and $400,000 from a fourth person.
“These prices did not reflect fair market value,” the lawsuit states, and ahead of the planned UMG investment, PSTH agreed to buy back (based upon a value set by a third-party firm) 72 percent of the director warrants for $26.5 million in stock.
“Applying this same valuation to all 100% of the Director Warrants implies a total worth for the Director Warrants of an astonishing $36,807,104. This is no less than thirteen times the $2,837,500 the Defendant Directors paid for their Warrants just eleven months earlier,” the filing proceeds, with an estimated value of over $840 million for the sponsor warrants.
“Despite Ackman’s assertions that none of the Defendants have been compensated for their work, in fact the Defendants have received securities that under any plausible estimate are worth hundreds of millions of dollars—an unreasonable payment for the work performed,” the suit indicates towards its end.
Ackman, for his part, fired back against the complaint in a widely circulated statement: “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.”
The plaintiff is seeking, among other things, a declaration that PSTH “is an investment company within the meaning of the ICA,” the cancellation of the director-warrant purchase agreement, and damages “for all compensation paid or payments of a material nature made” to the defendants.