The London market has changed its rules on SPACs, removing the presumption that a SPAC should have its listing suspended as soon as it announces a de-spac process (FCA PS21/10) if it has certain features in place. The new rules implement one of the recommendations of Lord Hill’s UK Listing Review.
SPACs raising at least £100 million at IPO with specified investor protections embedded in their structure can expect to be able to maintain trading in their shares throughout a de-spac process (which is typically a ‘reverse takeover’ for the purposes of the Listing Rules). This levels the playing field with commercial companies (which have benefited from the same approach since rule changes at the start of 2018).
So how will the changes impact key players in the SPAC market?
What does it mean for SPAC founders?
The changes remove a significant disincentive to list larger SPACs in London. Freedom to trade out during the de-spac process should make it easier to attract investors to a SPAC’s initial capital raise, boosting the attractiveness of the London market. Removing the threat of suspension should also significantly reduce transaction costs for IPO investors that seek to use the shares as loan collateral.
A further positive is that the FCA has indicated it will work with SPACs to provide comfort that a structure is within the scope of the new approach up-front, as part of the eligibility and prospectus vetting process. This is a welcome change from the original consultation which proposed SPACs waiting until the point of de-spac to engage with the regulator, showing the FCA’s willingness to respond to feedback from market participants. SPACs will be required to confirm to the FCA that all conditions to the new rules remain fulfilled at the point of announcing a de-spac, but the FCA does not expect to revisit its initial assessment of eligibility at that point.
What does it mean for SPAC investors?
The new rules have a strong focus on investor protection.
One of the key features that SPACs will have to have to benefit from the FCA’s new approach is for a redemption option to be available to shareholders at their discretion prior to completion of the de-spac: any shareholder must be able to redeem, whether or not they voted in favour of the transaction. Shareholders that redeem their IPO shares may also retain any IPO warrants that they are issued as part of a unit.
SPACs must ring-fence proceeds received from public shareholders so that they can only be used, broadly, for an acquisition or to fund redemptions. This will add to investors’ comfort on the ability of the SPAC to fund any redemptions, although UK companies also benefit from flexible reduction of capital processes making it relatively easy for IPO companies to comply with distributable reserves requirements.
Investors also get a say in whether a de-spac is taken forward. De-spacs must be approved by both the board (excluding directors with a conflict in relation to the de-spac target – and if there is such a conflict, the board must make a statement that the terms of the transaction are ‘fair and reasonable’ for public shareholders and that they have received independent advice to that effect) and shareholders (excluding SPAC directors, founders and ‘sponsors’).
What does it mean for de-SPAC targets?
De-spac targets will be looking at the new rules carefully to assess their impact on deal certainty.
While the requirement to get both board and shareholder approval for a transaction may not be seen as a positive, the final rules do contain some helpful elements for de-spac targets, including flexibility around the time limit within which a de-spac transaction can be completed. To fall within the new regime, SPACs must find and acquire a target within two years, subject to a 12-month extension with approval from shareholders. In response to feedback, however, the FCA has also allowed an extension of up to six months, at the end of the initial two or three year period, without shareholder approval, where a de-spac transaction is well-advanced. The additional time can be used to complete a transaction that shareholders have already approved, or to finalise a shareholder approval process where this has already been begun. Additional time at the back-end of an acquisition timeline will be welcome.
Disclosure challenges remain for SPACs, but here too significant improvements have been made. In addition to the prospectus and ongoing UK MAR disclosure obligations applicable to all public companies, SPACs will be required to make specified disclosures on announcement of a de-spac transaction, including all material details that the SPAC is – or ought reasonably to be – aware of about the target and the proposed deal. Helpfully, however, avoiding suspension of trading is no longer conditional on meeting prescribed target financial disclosure obligations, meaning target financials will only need to be disclosed where they are available (where they are inside information in relation to the SPAC).
If you would like to discuss any matters related to the new regime, please get in touch with your usual Freshfields contact.