Sales for LVMH amounted to 64.2 billion euros ($71.55 billion) for the 2021 fiscal year, an increase of 44 percent compared to the year before and 20 percent compared to pre-pandemic 2019, the French luxury goods group reported on Thursday. Organic revenue growth was up by 36 percent and 14 percent compared to 2020 and 2019, with the group saying that its performance for the year “confirms a return to strong growth momentum following the severe disruption to the first half of 2020 resulting from the global pandemic,” and noting that “within the context of a gradual recovery from the health crisis,” it is “confident in its ability to maintain its current growth momentum.”

Delving into the performance of Fashion & Leather Goods over the course of 2021, Bernard Arnault-led LVMH revealed that its largest division “reached record levels,” with revenues totaling 30.8 billion euros ($34.32 billion) for the year – up from 21.2 billion euros and 22.2 billion euros in 2020 and 2019, respectively. Operating margins were up for 2021, as well, totaling 41.6 percent (from 33.9 percent and 33 percent in 2020 and 2019). These results were helped along by a strong fourth quarter, according to the group.

Louis Vuitton, Christian Dior, Fendi, Celine, and Loewe achieved “record levels of revenue and profitability,” while Marc Jacobs “also performed particularly well.” (The big name missing here is, of course, Givenchy.) Louis Vuitton and Dior, in particular, turned “an exceptional performance,” complete with enduring rises in profitability, which LVMH confirmed was “already at an exceptional level.” Specifically, Dior – which saw the success of its new Caro bag and its caning pattern, as well as strong demand for micro bags, and the launch of seasonal capsule collections – boasted “exceptional growth in all its product categories among local customers” over the course of the year. Meanwhile, demand for Louis Vuitton was driven by its “reinvention of iconic models,” along with new artistic collaborations.

Speaking of local customers, LVMH management stated during a post-release call with analysts that local customers “are getting more selective in terms of brand choice,” with the group attracting new local customers in Europe to compensate for the lack of Asian tourists. Also worth noting: LVMH management stated that under the watch of creative director Hedi Slimane and CEO Séverine Merle, Celine has one of the fastest growth rates in the industry.

In terms of Fashion & Leather Goods sales by region, LVMH said that sales in the United States and Asia – which account for the majority of revenue – rose “sharply” in 2021, followed by Europe, finally returned to growth in Q4 compared to 2019, and Japan “with more limited growth.” 

Turning to the Watches & Jewelry division, LVMH saw “a strong rebound of activity in own stores and the successful integration of Tiffany & Co.,” which helped to send revenues up by 167 percent in 2021 compared to 2020, and boosted profits from recurring operations almost six times compared to 2020 and up 128 percent compared to 2019. The division generated the bulk of its sales in Asia (excluding Japan) and the U.S., which LVMH says are “the best performing regions.” Tiffany, alone, saw “record performance in terms of revenue, profits and cash flow, and increased its global attractivity as a result of its high impact innovations and collaborations” during its first year under the LVMH umbrella. The New York-headquartered brand – which benefitted from “strong interest” in its Knot collection, and the rapid development of iconic lines T and HardWear – was also responsible for “increased intangible assets” and “increased inventories” for the division.

Elsewhere in the group, the U.S. was responsible for the greatest increase in Perfumes & Cosmetics sales, which grew by 27 percent in 2021 compared to 2020. LVMH specifically highlighted the “enormous success” of Dior’s Miss Dior and Sauvage fragrancesnoting that in 2021, Sauvage became the highest selling fragrance in the world (women’s and men’s lines, included), which is “a worldwide first for a male fragrance.” 

Selective Retailing, the division that houses the likes of Sephora and duty-free venture DFS, saw organic revenue rise by 18 percent compared to 2020 but was nonetheless, down by 18 percent compared to 2019 due to the impact of travel retail. While DFS suffered from “the very limited recovery in international travel, travel restrictions in China, and quarantine measures in Hong Kong,” not all was lost, as growing demand from local customers helped to boost sales at the seven T Gallerias outposts in Macao. Still yet, Sephora helped buoy the Selective Retailing division by “surpassing its 2019 level of activity, benefiting from the strong rebound in its stores and the continued momentum of its online sales.” 

In addition to growing e-commerce sales for Sephora, LVMH also pointed to Loewe and Marc Jacobs, stating that Loewe’s “online sales grew significantly” and Loewe enjoyed “a highly impressive surge in online sales.” In what is likely a nod at least in part to the role of e-commerce, LVMH states that “investments in [Celine’s] omnichannel strategy played a key role in the Maison’s new gains.”

As a whole, the group reported “continued strong growth of online sales alongside the gradual return of customers in stores,” noting that in terms of efforts, including continued online endeavors, it “made the choice to keep the distribution [of its major Maisons] highly selective, limit promotional offers and develop online sales through their own websites” in order to “preserve their exceptional image – a key element of their lasting appeal.” Going forward, LVMH says it expects to double-down on “the digitization of its Maisons to enrich customers’ experiences online and in stores.”

In a post earnings call on Thursday, LVMH chairman and CEO Bernard Arnault stated that he believes that the group “has enough wiggle room to raise prices” – which has been a common move across the luxury landscape over the past couple of years, in particular – “and protect its margins in an inflationary environment,” per Reuters. He cautioned, however, that management has to “remain reasonable” when it comes to boosting prices of the group’s offerings in the year ahead.

On the topic of group’s ambitions on the metaverse, LVMH does not appear as gung-ho as some of its rivals, with Arnault saying that LVMH “is not interested in selling 10 EUR virtual shoes,” noting that “at this stage, we are very much in the real world, selling real products.” On this same note, he further asserted, “We have to be wary of bubbles,” he said. “At the beginning of the internet, there were all sorts of things popping up and then the bubble burst. There may be relevant applications, but we have to see what universes might actually be profitable.” In terms of NFTs, in particular, Arnault stated that “it will be interesting to see how it generates profit, [as] NFTs are generating profits, and I’m sure this will have a positive effect if things are done properly.”

As for what the group is interested in is what Arnault called “more useful features in the future to support real life activities,” as indicated by LVMH’s recent expansion of the Aura Blockchain Consortium, which now includes Aura SaaS, a blockchain-based platform that aims to “help brands to address authenticity, ownership, warranty, transparency and traceability … [with] lower license and onboarding fees.”

BlackRock CEO Larry Fink released his annual letter to CEOs this week, asking recipients to tailor their environmental, social and governance (“ESG”) reports to ensure that they are “consistent with the Task Force on Climate-related Financial Disclosures” (“TCFD”), a framework that aims to help public companies and other organizations disclose climate-related risks and opportunities. As part of the company’s focus on “sustainability,” Fink says that BlackRock is “asking companies to set short-, medium-, and long-term targets for GHG reductions,” and to ensure that corresponding reports are in line with the TCFD, as the firm “believes these are essential tools for understanding a company’s ability to adapt for the future.” 

Fink’s call on companies to utilize uniform ESG disclosures for the benefit of investors “reflects a growing consensus among both prominent businesses (e.g., State Street) and regulators (e.g., U.S. Securities and Exchange Commission Chairman Gensler) that the disclosure framework outlined by the Financial Stability Board-created TCFD is the appropriate model to adopt,” says Mintz attorney Jacob Hupart. Given his position at the top of the world’s largest asset management firm, Fink and other powerful investors’ pushes for uniform disclosures are expected to impact “the reasoning and eventual implementation decision by regulators,” such as the SEC, which has not yet issued its rules on climate-related disclosures.

Among those that have moved to mandate the TCFD framework, the UK’s Financial Conduct Authority published a Policy Statement – and final rules and guidance – on climate-related financial disclosures for publicly-listed companies, which mandate that standard listed companies are required to include a statement in their annual financial report that sets out whether their disclosures are consistent with the TCFD, and if not, to explain why, beginning on or after January 1, 2022. The aim, according to the UK government: to ensure that companies “consider the risks and opportunities they face as a result of climate change.” 

Enduring calls for uniform reporting and looming crackdowns by regulators come as the amount of ESG disclosures included in SEC filings, for instance, has significantly increased in recent years. “This trend will no doubt continue once the SEC introduces its climate change rules,” according to Bass, Berry & Sims attorney Kevin Douglas. Additionally, he notes that “there has been a significant expansion in the scope of ESG disclosures being provided by many public companies (particularly large-cap companies) outside of SEC filings, including via corporate social responsibility or similar reports, and company website disclosures” – with such efforts being seen in the fashion industry, as brands seek to cater to rising consumer and investor interests. 

In fact, a number of notable fashion brands and groups – including Burberry, Kering, LVMH, H&M, Uniqlo-owner Fast Retailing, Hermès, Zara-owner Inditex, Richemont, and Tapestry – have voluntarily adopted the TCFD reporting guidelines in recent years, presumably due, at least in part, to pushes from shareholders to where to an accepted framework as part of their duty to such parties. Within the fashion space, Gucci owner Kering was a first-mover, along with ASICS Corp., both of which adopted the TCFD in June 2017, closely followed by Burberry and Marks & Spencer that same year. Luxury powerhouses LVMH, Hermès, and Richemont joined in December 2020. And more recently, Coach’s parent Tapestry, Inc. adopted TCPD standards in July 2021.

While the lineup of fashion-focused supporters of the TCFD includes some of the biggest names in the industry, it is, nonetheless, a very short list – making up roughly 1 percent of the nearly 2,000 companies that use the TCFD framework. Missing from this list are, of course, some of the biggest names in sportswear/activewear, as well as nearly all of the big-name Western retailers, among others, raising questions about why more brands have not opted to adopt the voluntary framework, and whether more will follow suit going forward amid pushes from influential investors and ahead of further regulatory action on the ESG reporting front.

Ultimately, if companies “already feel compelled by investor demands to issue TCFD disclosures,” Hupart asserts that “the imposition of similar regulatory requirements may not inspire as much resistance as would be provoked by other types of climate disclosures.” 

Burberry provided insight on its enduring effort to move upmarket by doing away with markdowns in a Q3 conference call on Wednesday. The British brand – which reported a 5 percent increase in sales to 723 million pounds ($985 million) for the three-month period ending in December – revealed that while its sales have not not surpassed pre-pandemic levels, momentum is building. The group pointed to a 36 percent increase in full price sales compared to the same quarter last year and a 10 percent rise over the previous quarter, “with all product categories growing by double digits, helped by flagship stores that were attracting a new generation of Burberry customers.” 

In a statement on Wednesday, Burberry Chair Gerry Murphy stated that “full-price sales continued to grow at a double-digit percentage compared with two years ago, accelerating from the previous quarter and reflecting a higher quality business.” He noted that the company’s “focus categories outerwear and leather goods performed strongly as we continued to attract new, younger consumers to the brand.” Full price outerwear and leather goods sales grew by 38 percent and 29 percent, respectively, compared to the same quarter in 2020, with the brand benefiting from sales of its “new elevated check range in Birch Brown colorway,” for instance, as well as the introduction of its “crossbody, tote and SLG versions as part of [its] Winter collection.”

Beyond outerwear and leather goods, CFO Julie Brown highlighted sales of footwear, namely, men’s sneakers, particularly among younger consumers in the U.S., which proved to be a strong region in terms of full-price sales, along with Mainland China. (“Burberry does not see any slowdown of demand in China yet, with near-term headwinds caused by regional covid-19 lockdown,” per Bernstein.) Burberry reported that “full-price comparable store sales were driven by continued strong performance in the Americas, a material sequential improvement in Asia Pacific as COVID-19 restrictions eased and improving trends in EMEIA despite an ongoing lack of tourism.” 

On the digital front Burberry’s management noted that full price sales were up by “high double-digits” across its e-commerce channels during Q3, and the brand achieved its “highest level of earned reach to date on Instagram driven by brand activations including pop-up on Jeju Island coupled with strong momentum on TikTok.” In terms of the metaverse, Burberry said that its partnership with Mythical Games this summer to release a limited NFT collection within the Blankos Block Party game was a success, with the digital tokens selling out within 30 seconds. (The NFTs released in August consisted of 750 tokens representing Sharky B, which were sold for $300, 1,500 Jetpack NFTs that were priced at $100, and $50 Pool Shoes and $25 Arm Band NFTs, which were not limited in terms of supply and were offered up for a two-week period.)

Seemingly foreshadowing more efforts within this realm, Burberry said it views the metaverse as “a great opportunity to connect with the next generation of consumers.” 

As for management, Burberry is in between CEOs at the moment, with Marco Gobbetti, who joined in the brand in 2016 and spearheaded its move more upmarket, recently moved to the same role at Ferragamo, which is in need to a significant revamp from a marketing/positioning point of view. His successor Jonathan Akeroyd, who is moving on from the CEO job at Versace, is slated to begin his tenure in April. In a note in June, Bernstein analyst Luca Solca stated that while “Burberry is in a far better position than when Marco took responsibility for it,” the “jury is still out on Burberry’s continuing momentum.”

Last week, Stella McCartney, the Act on Fashion Coalition, New York State Senator Alessandra Biaggi and Assembly Member Dr. Anna Kelles publicly unveiled proposed new legislation that focuses on cleaning up the fashion industry. If signed into law, the Fashion Sustainability and Social Accountability Act will call on apparel and footwear retailers with global revenues of at least $100 million that sell products in New York State to publicly make environmental and social disclosures, and set forth plans to improve upon the workings of their supply chains – or risk noncompliance status and the potential for monetary penalties of up to two percent of their annual revenues. 

Specifically, the “Fashion Act” (S7428/A8352) would require companies to map out at least 50 percent of their supply chain, identify “significant real or potential adverse environmental and social impacts,” and then disclose targets for prevention and improvement of those impacts. Companies would also have to disclose their material use (by material type); a quantitative baseline and reduction targets on energy and GHG emissions, water, and chemical management; and the wages of workers.

First introduced to the New York State Senate in October, the bill has found three New York Senate co-sponsors, as well as proponents in the fashion industry, with famed fashion designer Stella McCartney, for instance, stating that the legislation is “an example of a step towards a better, more regulated future.” In a report last week, New York Times fashion critic Vanessa Friedman called the proposed legislation a chance to hold “pretty much every large multinational fashion name, ranging from the very highest end – LVMH, Prada, Armani – to such fast-fashion giants as Shein and Boohoo” accountable “for their role in climate change.”

The Fashion Act – which aims to get “fashion retail sellers and manufacturers  to  disclose  environmental  and   social  due diligence policies” – is worthy of the many glowing headlines it has garnered since its public unveiling, as the fashion industry is sorely lacking when it comes to transparency about its occupants’ environmental impact and labor policies (topics that typically fall under the umbrella of Environmental, Social and Governance (“ESG”) reporting), despite being a significant driver of global greenhouse gas emissions. 

“Unlike other heavy polluting industries, such as the auto sector, fashion retailers and manufacturers operate in a regulatory-free vacuum,” the New Standards Institute stated in a release on Friday. “This has led to a global race to the bottom, where the companies that have the least regard for the environment and for workers have the greatest competitive edge.” 

Against this background, the industry is desperately in need of change. A number of industry initiatives and voluntary collectives have formed with the goal of cleaning-house, but in many cases, they have petered out or missed the mark in terms of what is actually in need of fixing. Getting brands to map out at least 50 percent of their supply chains and set science-based targets to reduce their impacts is an important endeavor, and ideally, the Fashion Act will kickstart a larger overhaul of the fashion/retail system. 

However, in order for such an industry-wide ESG reckoning to come into fruition, a number of foundational elements must be put into place first. 

From Uniform Data Standards to Reliable Audits

One of the most pressing roadblocks to implementing regulation in the fashion and apparel space (and every other industry when it comes to monitoring environmental and social factors) is the current lack of uniform data standards. Unlike financial reporting, there is neither an internationally agreed-upon standard to measure or calculate environmental and social factors, nor a process for auditing to ensure compliance against such a common standard.

The problem of data standardization and transparency is, of course, not a new one. Back in August 2020, for instance, Commissioner Allison Herren Lee of the U.S. Securities and Exchange Commission noted, “We are long past the point at which it can be credibly asserted that climate risk is not material. We also know today that investors are not getting this material information. The world’s largest asset managers, the largest pension funds, the largest insurers, and every major systemic bank seek disclosure of climate related financial risk.” 

As it currently stands, there are hundreds of different ESG ratings systems, such as those from Sustainalytics (a subsidiary of Morningstar), Morgan Stanley Capital International (“MSCI”), Bloomberg, and Institutional Shareholder Services. These firms use unique proprietary models to measure climate risk, human rights and social policy, corporate governance, and supply chain policy, primarily based on voluntary-provided information. A uniform data standard for reporting social and environmental data – paired with suggestions on the relevant data, calculations, and disclosures – is currently lacking to ensure a consistent format in the data collection and reporting process. (The Sustainability Accounting Standards Board’s Apparel, Accessories & Footwear standards are worth noting within the context of fashion/apparel space, as they comprehensively take into account an array of ESG targets.)

Because ESG ratings rely largely on voluntary and survey data provided by companies, themselves, the data is often incomplete, inconsistent, and lacking in rigor compared to companies’ financial data. It was precisely this voluntary data that enabled fast fashion company Boohoo to achieve a AAA ESG rating from MSCI in 2020.

While many consumers and investors want to view such ESG ratings with the same credibility as the company credit ratings that Moody’s or S&P assigns, there are critical differences that exist between these ratings. For example, credit ratings are based on precise, publicly available market information and companies’ audited financial statements, and are calculated using similar methodologies across the various rating agencies. Companies’ financial statements are compiled according to the strict and legally enforceable GAAP or IFRS guidelines and then audited by an independent auditor registered with the Public Company Accounting Board in the U.S. for compliance with those standards. Auditors then prepare a report that is filed with the Securities and Exchange Commission (in the U.S.), where omissions and errors are met with sanctions, fines, and potential jail time.

In lieu of a standard framework or industry-specific guidelines, and reliable audited data, each individual company is left to decide how it calculates its impact and risks, and how it tracks its progress in furtherance of ESG targets. In a best-case scenario, even if companies are honest with their data, the lack of a uniform reporting standard still leads to inconsistent comparisons across companies – a well-documented complaint from parties ranging from asset managers to regulators. In a worst-case type of scenario, this lack of standardization invites companies that do not like the results of their current methodologies or their progress towards certain targets to simply change how they calculate their impact or to exclude problematic suppliers and products altogether. 

Hardly a hypothetical issue, Brookings found that while more than 80 percent of major global companies report on some aspects of their social and environmental impacts, the data required to assess whether such ESG efforts have achieved a positive social and environmental impact is “often missing, incomplete, unreliable, or unstandardized.” 

More than that, industry-wide standardization is critical because corporations notoriously have a mixed track record when it comes to voluntary disclosures – and this happens across industries. Research from individuals at the Center of Economic Research at ETH Zurich, University of Zurich, and University of Erlangen-Nuremberg-Friedrich confirms that while voluntary disclosures have been hailed as an effective measure for better climate risk management, corporations tend to cherry pick their data when it comes to climate-related data and report non-material information.

Still yet, in an article for the Harvard Law School Forum on Corporate Governance, Timothy M. Doyle essentially asserts that ESG ratings do not really rate anything given that companies are making “select and unaudited disclosures,” and that even third parties’ ESG ratings can “vary dramatically … due to differences in methodology, subjective interpretation, or an individual agency’s agenda.” 

Without a standard framework or government mandated guidelines to calculate key environmental risks (in something of the same way as how banks or other highly regulated industries are given standards by the government, which sets the parameters and standards of key metrics like leverage or capitalization ratios), and given the overarching pattern of companies putting forth carefully curated information on the ESG front (and downplaying the negative aspects) of their operations in order to showcase themselves in their best light to consumers, investors, and regulators, greenwashing and gamesmanship scenarios are not difficult to imagine.

Not an Isolated Issue

Of course, the issue with data standardization, integrity, and transparency is not isolated to the fashion industry; it is a complex global market problem that regulators around the world are actively addressing with input from industry and the world’s leading experts in corporate finance and financial markets. Determining the right standard for each industry is what the SEC, the European Commission, and various other regulators around the world have spent years grappling with how to implement. The Global Reporting InitiativeTask Force for Climate Related Financial Disclosures, and Sustainability Accounting Standards Board have put forth the most widely accepted standards and are expected to be the benchmarks regulators will converge around to varying degrees. 

One such effort comes by way of the Corporate Sustainability Reporting Directive (“CSRD”), which the European Commission introduced in April 2021 in order to upgrade the 2014 non-financial reporting directive, and improve the coverage and reliability of sustainability reporting. When it comes into effect in 2023, the CSRD is expected to increase the number of companies that disclose sustainability information and require them to report their sustainability performance using EU-wide disclosure standards developed by the European Financial Reporting Advisory, a private association with strong links with the European Commission. (The CSRD will, nonetheless, give companies significant discretion on what and how to disclose, and imposes different requirements for companies that differ by sector and size.)

At the same time, the U.S. Securities and Exchange Commission is exploring a rule to adopt mandatory ESG disclosure rules that will apply to publicly listed companies. 

The general consensus among regulators appears to be that without standardized and accurate data, effective regulation is impossible, which is one reason why we have not seen more regulation in this realm. However, with rising ESG awareness and enduring calls from consumers and investors, alike, paired with dogged efforts from researchers, lawmakers and regulators, it appears as though the status quo is changing.

Ultimately, fashion is undoubtedly in need of greater regulation, and a state law that mandates greater transparency for the biggest players in the industry is a welcome start. 

Kristen Fanarakis is the founder of Los Angeles-made brand Senza Tempo. She spent over a decade working on Wall Street in foreign exchange investment, sales & trading, and works with the Center for Financial Policy in Washington, D.C.

The newly-rebranded Zegna Group is making its stock market debut on Monday. The Italian luxury goods group will become a New York Stock Exchange-traded company (ticker: ZGN) by merging with Investindustrial Acquisition Corp., a special purpose acquisition corporation (“SPAC”), in furtherance of a deal that will give it an estimated $3.2 billion valuation. The new cash sets the stage for further expansion of the almost 112-year-old Zegna’s key brands, its marquee Zegna label and suiting company Thom Browne, which it acquired in 2018, with CEO Gildo Zegna telling Italian media that while the group “would consider acquisitions should the opportunity arise,” it currently has “so much scope to grow organically” that it is in no rush to buy.

Zegna is the latest Italian company to bolster itself in a fiercely competitive and increasingly-less-independent fashion industry; formerly independently-owned Versace sold to Michael Kors-owner Capri in 2018, Missoni sold off a 41.2 percent stake to Italian investment fund FSI Mid-Market Growth Equity Fund in 2018, the outstanding 33 percent in Pucci was acquired by LVMH, L Catterton Europe revealed this year that it would acquire a majority stake in Etro, Tod’s let go of a bigger stake to LVMH this spring, and Armani has reportedly been eyeing a deal with a big group; although, no such Armani, Exor transaction has come into play

The other trend here is, of course, the rise of the SPAC, which as surged in popularity in recent years as an alternative to the traditional initial public offering (“IPO”), which is a notoriously costly and time-consuming transaction. “From a target company perspective, merging with a SPAC is viewed as a quicker, more efficient and cost-effective route to going public than a more traditional IPO and deal values can be higher,” according to Paul Hastings LLP’s Roger Barron and David Prowse. Meanwhile, from an investor’s point of view, “SPACs offer the opportunity to invest in a private-equity style transaction with the liquidity and regulatory comfort offered by the capital markets.” 

By removing some of the “negotiations with banks and investors,” and the “filing of complex documents with federal regulators,” Proskauer Rose LLP’s Corey Rogoff and Julia Alonzo claim that SPACs typically operate on “a much quicker timeline, and involve fewer parties.” They note that “in this environment, it is not surprising that investors have looked to other means to shepherd more ‘unicorns’ into the market.” And investors are, in fact, looking to other means: more than half of the companies that publicly listed in 2020 did so by way of a SPAC – or a “blank check” company that “has no commercial operations,” per CNBC. These types of firms “make no products and do not sell anything,” as their primary purpose is to take private companies public by way of a merger. 

Such momentum, as indicated by the Zegna SPAC among others, is expected to carry through 2022, thereby, raising questions about the nature of SPACs, and what the legal risks associated with the growingly-popular “alternative IPO” approach are.  

Zegna & the Lifecycle of a SPAC

“A publicly traded company created for the sole purpose of acquiring or merging with an existing operating company,” a SPAC often provides its target company with “an alternate route to a traditional IPO,” according to a note from Skadden Arps Slate Meagher & Flom LLP, which states that while SPACs can – and have – listed on various stock exchanges around the world, “most SPACs list in the U.S., with 298 American-listed SPACs holding approximately $92 billion in cash in trusts looking for potential business combination partners as of January 31, 2021.” 

SPACs – or better yet, the ultimate merger between the SPAC and its target company – is different from a traditional IPO on a number of fronts. For one thing, a SPAC – which does actually take part in a traditional IPO at the outset in order to raise funds – raises capital from public investors for the “purpose of identifying a target [company],” per Skadden. “Although at the time of a SPAC’s IPO, the acquisition target is not known,” and thus, “investors rely on the skills of sponsors” – such as Bernard Arnault, who launched his second SPAC earlier this month with former UniCredit head Jean Pierre Mustier or former Gap Inc. CEO Art Peck, who launched a $200 million SPAC early this year – “to identify the right target and create value for their investment through the business combination.” 

Through that business combination, the target company (once it is identified, and depending on the specific stock exchange rules, voted on by SPAC shareholders) merges with the SPAC. The life cycle of a SPAC ultimately “culminates in a de-SPAC transaction, at which point the SPAC transforms from a cash box vehicle run by the sponsors into a U.S. public company led by existing management of the target with the continued participation by the sponsors,” per Skadden, which states that “once a SPAC has identified a business combination partner, it can – and often does – raise additional capital through a private investment in public equity (‘PIPE’) process.”

At that point, the sponsors would then start the process again if they wanted to merge with another private company, as SPACs are essentially one-off transaction entities, hence, the IV in CCIV. The name of the Lucid Motors-focused SPAC – which closed this summer and has since come under Securities Exchange Commission scrutiny – is Churchill Capital IV, as the Lucid de-SPAC transaction was Churchill Capital’s fourth SPAC-specific deal. 

The Legal Issues

“With their limited downside and huge upside potential for companies and investors alike, SPACs are increasingly becoming a mainstream source of acquisition capital,” Carpenter Wellington PLLC asserted in a recent note, thereby, “bringing innovation to the capital markets, and attracting a diverse array of market participants.” These burgeoning new deals are not without potential legal complications, though. In fact, Rogoff and Alonzo assert that “SPACs bear many of the same risks that plague newly public companies.” Among them are potential challenges that result from “failing to act in the best interests of shareholders due to conflicts of interest” between directors and officers of the target company, and PIPE financers or the SPAC’s sponsor; and failing to disclose “material information.” 

In terms of potential conflicts, the U.S. Securities and Exchange Commission (“SEC”) stated in a December 2020 Guidance that “the economic interests of the entity or management team that forms the SPAC (i.e., the ‘sponsors’) and the directors, officers and affiliates of a SPAC often differ from the economic interests of public shareholders, which may lead to conflicts of interests as they evaluate and decide whether to recommend business combination transactions to shareholders.” With that in mind, the SEC asserted that “clear disclosures regarding these potential conflicts of interest and the nature of the sponsors’, directors’, officers’ and affiliates’ economic interests in the SPAC is particularly important because these parties are generally responsible for negotiating the SPAC’s business combination transaction.” 

When preparing disclosures, the government agency encourages a SPAC to “carefully consider its obligations under the federal securities laws as they relate to conflicts of interest, potentially differing economic interests of the SPAC sponsors, directors, officers and affiliates and the interests of other shareholders and other compensation-related matters” in order to avoid potential Securities Exchange Act of 1934 liability. 

In an IPO scenario, the SEC says relevant questions that SPAC sponsors should ask when considering disclosures, include (but certainly are not limited to): “Have you clearly described the sponsors’, directors’ and officers’ potential conflicts of interest?  Have you described whether any conflicts relating to other business activities include fiduciary or contractual obligations to other entities; how these activities may affect the sponsors’, directors’ and officers’ ability to evaluate and present a potential business combination opportunity to the SPAC and its shareholders; and how any potential conflicts will be addressed? Is it possible that you will pursue a business combination with a target in which your sponsors, directors, officers or their affiliates have an interest?  If so, have you disclosed how you will consider potential conflicts of interest?” 

Later on, when a SPAC prepares to present a business combination transaction to shareholders, it should ask (and address), “Have you provided detailed information about how you evaluated and decided to propose the identified transaction?  Have you explained how and why you selected the target company? Who initiated contact? Why did you select this target over other alternative candidates?  Have you explained the material terms of the transaction? How did you determine the nature and amount of consideration the SPAC will pay to acquire the private operating company? Have you clearly described the negotiations regarding the nature and amount of consideration?” 

Moreover, “What material factors did the board of directors consider in its determination to approve the identified transaction?  How did the board of directors evaluate the interests of sponsors, directors, officers and affiliates?” 

Based on SEC Guidance to date, the government agency “appears to be focused on disclosures, and specifically on potential conflicts of interest,” per Rogoff and Alonzo, making those particularly relevant considerations for sponsors, and SPAC targets. At the same time, given that the popularity of SPACs as a common mechanism for companies (particularly high-growth companies) to access the public markets, is still relatively newfound, they have “not yet faced a breadth of legal challenges” that will likely involve SPAC sponsors, as well as the directors and officers of the acquisition target, and the public entity that is born from the de-SPAC transaction. 

As such, while special purpose acquisition corporations, including the new Zegna SPAC, may prove to be a budding fashion trend in some sense, they are not without a slew of budding legal issues that will continue to develop throughout the year to come.