FCA Moves to Deregulate SPACs
Following the release of the Hill Report, the FCA has moved quickly to consult on proposals intended to provide an alternative route to market for larger Special Purpose Acquisition Companies (“SPACs”). The broad proposal is that if a SPAC can meet additional investor protection requirements the FCA will not generally require that the listing of its shares be suspended once an acquisition is announced. It is intended that these rules will come into force in the summer, in the anticipation of increased market activity following quickly. However, some of the proposed rules are onerous, and there is a risk that they will not result in increased SPAC activity.
To qualify for the new treatment, it is proposed that a SPAC will need to raise at least £200 million, excluding sums raised from its sponsors.
The intention of setting such a high level of minimum fundraise is to ensure that:
the investors are institutional rather than retail, and therefore will carry out due diligence on the SPAC and its management team; and
the management team and their advisers are more likely to be experienced.
While the intention behind imposing a size threshold is understandable it remains to be seen whether the effect of the threshold being so high will be to prevent the new rules having a helpful impact on the UK SPAC market. While it reflects the levels of funding raised by US SPACs, it seems disproportionate to the UK market. For example, the FCA’s own figures show there are currently only two SPACs listed in the UK which have a market capitalisation in excess of £100 million, and the vast majority of UK listed SPACs (23 of 33) have a market capitalisation of less than £5 million. It is notable that AIM’s requirement for minimum fundraisings by investing companies (currently only £6 million) has resulted in new listings of investing companies on AIM becoming extremely rare.
A SPAC wishing to take advantage of the new rules will need to ensure that the money it raises from the public, less any allowance for operating costs clearly disclosed in the prospectus, is ring-fenced via a third party service provider such as an escrow agent or trustee.
The ring-fenced proceeds can only be used by the SPAC for:
an acquisition approved by its board and public shareholders;
redemption of shares from shareholders; or
repayment of capital to public shareholders if the SPAC winds up or fails to find a target and completion an acquisition within the required time limit.
Limiting the use of the proceeds of a fundraising on listing in this manner should not create issues in most cases. However, issuers will need to ensure that any allowance for operating costs includes appropriate contingencies in case a transaction does not happen as quickly as anticipated or a proposed transaction does not complete and the SPAC has to identify a new target and start the process again.
The FCA considers that having SPACs which are not time limited exposes investors to an unacceptable level of uncertainty. They therefore propose to introduce a time limit of two years (extendable to three years with public shareholder consent) from admission for the SPAC to identify and acquire a target.
If the SPAC does not acquire a target before the deadline it will be required to return the ring-fenced proceeds of its fundraising to its public shareholders. The FCA expects that after returning that money the SPAC will no longer need meet the listing requirements (eg because of lack of an adequate free float) and its listing will need to be cancelled.
The proposed timeline for an acquisition should be more than adequate for most SPACs, and it seems unlikely that this requirement will be materially off-putting.
The FCA’s view is that it is important to make sure SPACs taking advantage of the new rules are accountable to shareholders and that they apply a high standard of due diligence to potential targets. To encourage this, it proposed a dual-approval structure for target acquisitions:
first, the Board of the SPAC must approve the transaction. In doing so any board member who is, or has an associate who is, a director of the target or any of its subsidiaries, or who otherwise has a conflict of interest in relation to the target or its subsidiaries must be excluded from both discussion and voting; and
then the public shareholders must give their approval to the transaction by ordinary resolution. Before any shareholder vote, the shareholders must be given sufficient disclosure on the proposed transaction to allow them to make a properly informed decision.
While the requirement for board approval of a transaction does not really change what should be the position anyway, the requirement for shareholder approval of a transaction is new. However while the requirement for shareholder approval will result in additional costs being incurred it seems unlikely to be determinative as to whether listing a SPAC in London is appropriate.
Where any of a SPAC’s directors have a conflict of interest in relation to the target or one of its subsidiaries, the Board will be required to publish a statement that the proposed transaction is fair and reasonable so far as the public shareholders are concerned. This statement has to reflect advice from an appropriately qualified and independent adviser.
It would broadly be expected that the board would consider the terms of any transaction fair and reasonable before entering into it even without this requirement, and it is therefore unlikely to be a show-stopper. However, the requirement for independent advice will add costs to any transaction.
The FCA proposes that SPACs should provide a redemption option for shareholders who do not like the target or final terms of the proposed transaction. The redemption terms will need to be set out in the SPACs prospectus, and could be either a fixed amount or a fixed pro rata share of the cash proceeds ring-fenced for investors.
Redemption options to not seem to have been off-putting for management teams listing SPACs in the US, but in particularly controversial transactions SPACs may find that redemptions mean that they do not have sufficient funds to complete and this would need to be catered for in the transaction documents.
In addition, it remains to be seen how the redemption options will be structured in the light of the Companies Act 2006 maintenance of capital requirements, and in particular the provisions of s.687 which provides that only private companies can redeem shares out of capital. It may be that as a result of these requirements companies incorporated in the UK cannot take advantage of the proposed new rules.
In addition to the usual information listed companies are already required to set out in their prospectus, the FCA is proposing to impose additional disclosure requirements for SPACs wishing to avoid suspension. At the point of an initial target announcement a SPAC must disclose:
a description of the target business, links to all relevant publicly available information on the proposed target company (eg its most recent publicly filed annual report and accounts), any material terms of the proposed transaction (including the expected dilution effect on public shareholders from securities held by, or to be issued to, sponsors), and the proposed timeline for negotiations;
an indication of how the SPAC has, or will, assess and value the identified target, including by reference to any selection and evaluation process for prospective target companies as set out in the SPAC’s original prospectus; and
any other material details and information that the SPAC is aware of, or ought reasonably to be aware of, about the target and the proposed deal that an investor in the SPAC needs to make a properly informed decision.
It must also update that information as necessary if new information becomes available prior to the shareholder vote.
Again this requirement will impose additional costs on SPACs, but they may not be too onerous. However, some management teams may have concerns about disclosing their valuation methodologies.
Even if a SPAC complies fully with the FCA’s requirements, this only results in there being a presumption that suspension could be avoided. The FCA may decide to suspend anyway, if it has concerns that the smooth operation of the market is may be jeopardised or that doing so is necessary to protect investors. It has also clearly stated in its consultation paper that it will suspend listing where news of a potential transaction leaks. While the FCA has indicated it intends to be transparent about circumstances in which it would suspend this remains a risk for SPACs attempting to take advantage of the new rules.
In addition, the new rules will not change the requirement that the listing of the SPAC be cancelled on completion of the transaction and an application for re-admission, with new prospectus, is made.
While many of the new rules proposed by the FCA seem sensible and proportionate to achieving its objectives, it remains to be seen whether they will actually result in more SPACs being attracted to the UK and if SPACs listing in the UK will choose to take advantage of them to avoid suspension of their shares. In particular the proposed size threshold may just be too high to make taking advantage of the relaxation viable and the combined additional costs and time required to comply with the FCA’s other requirements may push companies to either find alternative jurisdictions or proceed under the current rules and accept their shares will be suspended.
This blog has been drafted and provided by Kingsley Napley LLP. It should be used for informational purposes only. The information is based on current legislation and should not be relied on as an exhaustive explanation of the law or issues involved without seeking legal advice.
John Young is a partner in the corporate and commercial team and specialises in the business needs of entrepreneurial, high growth and family businesses, advising them throughout their lifecycle - from start-up through to listing and beyond.
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