SPAC to the future
On 10 August 2021, the UK Financial Conduct Authority (FCA) introduced changes to the Listing Rules designed to make the UK a more “SPAC-friendly” jurisdiction.
What can potential SPAC sponsors and investors – and, indeed, those looking to sell a business to a SPAC - expect from the new UK regime? This note explores some of the important considerations for these key constituents as SPACs become more mainstream across the UK corporate finance landscape.
What is the new regime?
As we previously discussed, Lord Hill’s recent review (which we covered in a previous article) identified a major barrier in the old UK SPAC regime (particularly for larger SPACs) in that any SPAC identifying a potential acquisition would have its shares automatically suspended from trading until the acquisition completed – effectively locking investors into the SPAC for the duration of the acquisition process.
The new regime, following the recommendations of the Hill review, allows a SPAC to avoid an automatic suspension of its shares provided that the SPAC meets the following conditions:
Redemption option. Prior to completion of the proposed acquisition (also known as the “de-SPAC” transaction), the SPAC’s shareholders must be offered the option to redeem their shares at a pre-determined price as a means of exiting their shareholding. The terms of the redemption option must be detailed in the SPAC’s prospectus.
Time limit. The SPAC’s constitution must impose a time limit of two years from listing to make an acquisition. This can be extended to three years with the approval of the SPAC’s public shareholders (and by an additional six months, provided that shareholder approval to implement the acquisition is obtained during that six-month period). If the SPAC does not make an acquisition within the time limit, it must return the funds to its shareholders.
Ring-fencing of proceeds. Proceeds raised by the SPAC in the IPO must be ring-fenced via an independent third party (i.e. in a trust account). Funds can only be released to fund an acquisition, redeem shares in the SPAC or return capital to the SPAC’s public shareholders if the SPAC fails to make an acquisition within the time limit.
Shareholder approval. The SPAC must provide its shareholders with the right to vote on a proposed acquisition. For these purposes, the SPAC’s founding shareholders and sponsors (i.e. the non-public shareholders) must be excluded from voting. The SPAC must disclose to its public shareholders sufficient information on the proposed transaction to enable them to make a properly informed decision when voting.
Board approval of acquisition. The SPAC’s board must approve any proposed acquisition by the SPAC. For these purposes, any director of the proposed target, or anyone with an interest in the proposed target, is excluded from voting.
Fairness opinion. If any of the SPAC’s directors has a conflict of interest in relation to the target of the proposed acquisition, the SPAC must publish a statement in advance of the shareholder vote to provide assurance that the proposed transaction is fair and reasonable as far as the public shareholders of the SPAC are concerned, supported by an appropriately qualified and independent adviser.
Size. The SPAC must raise at least £100m gross cash proceeds from public shareholders at the date of listing. “Public shareholders” does not include directors, founders or anyone promoting the SPAC, and funds provided by sponsors do not count towards the threshold.
Disclosure. The SPAC must disclose details of the target’s business and material terms of the proposed transaction (including any expected dilution of public shareholders) along with all the other information necessary to enable SPAC investors to make an informed decision. It must also disclose how it has assessed and valued the target.
How might this develop in practice?
Those who are familiar with US SPAC structures will see that the FCA has borrowed heavily from the US regime in order to provide further investor protections – in particular, the ring-fenced “trust account” designed to ensure a pool of cash is available to facilitate shareholder redemptions, and the requirement to subject the de-SPAC transaction to a shareholder vote.
It will be especially interesting to see how the UK SPAC regime develops for three key constituents: those sponsoring a SPAC, those investing in a SPAC and those selling to a SPAC.
PE Sponsors. A feature of the US SPAC landscape has been high-profile private equity houses sponsoring SPAC vehicles. This raises a question: will a PE-sponsored SPAC be able to acquire an asset from one its own affiliated funds?
- Size requirements. An initial hurdle for a PE-sponsored SPAC to consider will be in relation to the size requirements: funds provided by sponsors or by anyone promoting the SPAC do not count towards the minimum £100m gross cash proceeds described above. Fairly broad public investor buy-in will therefore be required to launch a SPAC.
- PE houses may own an asset in an existing fund which either needs additional funding at a time when the investment period of the fund has expired, or which the PE house wants to maintain some exposure beyond the life of the fund. To achieve this, a fund may sell the asset, on third-party terms, to an affiliated fund, which will hold that asset going forward. If the PE fund has sponsored a SPAC, the fund could instead sell the asset to this SPAC – which could provide the PE house with some useful additional optionality on these types of “continuation” transactions.
- Safeguards. Although such a connected acquisition would not be prohibited outright, the UK regime puts a number of safeguards in place for the SPAC’s public shareholders in this scenario: disclosure, independent board approval (backed by a fairness opinion) and the requirement for a vote of the independent shareholders - coupled always with the right of redemption.
SPAC Investors. The combination of adopting tried-and-tested US market aspects with additional protections for investors may well have the effect of tempting investors to a new UK SPAC market:
- Risk profile. One reason for the ongoing US SPAC phenomenon is that SPACs arguably carry relatively little risk for investors. In a world of low interest rates, an investment in a SPAC represents a strategy through which an investor can deposit cash with a potential for future upside but with a right to get it back before the cash is invested in an acquisition. Not only are SPAC investors able (as a collective body) to vote against a proposed de-SPAC transaction, but they can also (individually) redeem their shares in full before the de-SPAC transaction takes place.
- Exercising redemption rights. The UK regime provides that shareholders may exercise their redemption rights regardless of the way in which they vote on the de-SPAC resolution. This provides SPAC investors with increased flexibility to exit the SPAC where the de-SPAC transaction is approved but remains subject to completion conditions, such as merger control or national security approval.
- Share warrants. In the US, SPAC investors typically also subscribe for share warrants which give a right to take further shares in the SPAC at a certain point after the de-SPAC transaction. These warrants are typically traded separately from shares in the SPAC, meaning that an investor can redeem their shares but keep their warrants (potentially providing them with some future upside after the de-SPAC transaction takes place). The new UK SPAC regime should be compatible with this structure, and it will be interesting to see if concurrent warrant issues become a feature of UK SPAC IPOs.
De-SPAC transactions. We have already seen some UK companies being acquired by US SPACS (See our press release for an example on which we acted) – and we expect SPACs to play a bigger role in the M&A landscape in the future. However, when considering selling to a SPAC, there are some key considerations for selling shareholders to bear in mind:
- SPAC investor protections. SPAC investors will be able to redeem their cash prior to completion of the sale. Sellers to a SPAC therefore need to consider whether the SPAC will have sufficient cash in the ring-fenced trust account to pay any cash consideration due on completion of the sale.
- Additional capital requirements. Will redemptions be so significant that they trigger the need for additional external capital to fund the acquisition? In the US, any such additional capital is typically provided through a PIPE (a “private investment in public equity”) whereby a private equity fund will acquire a minority stake in the SPAC at a discount to the market price of the SPAC's shares at the time of the de-SPAC transaction. This will necessitate an additional workstream and the dilutive impact of any PIPE needs to be carefully considered by the sellers of the target business to the SPAC.
- Shareholder vote. The UK regime provides that the parties that sponsor the SPAC (who are also likely to be the SPAC’s largest shareholders) will not be able to participate in the shareholder vote to authorise the sale, creating heightened execution risk for a seller.
- Timing. The SPAC will be required to complete its acquisition within two years of closing the IPO. This can lead to significant pressure on the SPAC to complete a sale quickly, which a seller may be able to leverage so as to obtain to more favourable terms.
- Life as a public company post-sale. A business that is being sold to a SPAC will need to consider life as a public company after the sale. Along with additional disclosure obligations and the rigour of regular financial reporting, there is a potential liability profile too. This will be especially relevant to founder-led early-stage growth companies looking to exit via a SPAC, which will need to be confident that they can deal with the demands of being a listed company.
The changes to the UK Listing Rules are promising and represent the start of a platform through which the UK SPAC market can develop. Although the new regime will rely on the SPAC companies to adopt constitutional documents that reflect the features set out in this note (i.e. rather than mandating them through regulation), the FCA has said that it will work with issuers and their advisers to provide comfort, as part of vetting the SPAC’s prospectus and assessing eligibility for listing, that a SPAC meets the relevant requirements.
We are just at the nascent stages of the new UK SPAC ecosystem and there are significant practical questions as to how the features of the US SPAC market can be incorporated in the UK. However, as we previously noted, any efforts to invigorate the UK capital markets are welcome, and the new SPAC regime is a step in the right direction for all participants.