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SPACs: Proposed UK listing rule changes

  • United Kingdom
  • Corporate

11-05-2021

The Financial Conduct Authority (FCA) has published a consultation paper proposing changes to the Listing Rules and technical guidance as they apply to Special Purpose Acquisition Companies (SPACs) in the UK.

The consultation follows a significant increase in listed SPAC transactions in both the US and certain EU jurisdictions, such as the Netherlands and France, throughout 2020 and especially in the first quarter of 2021, as well as Lord Hill’s Listing Review (see our briefing here), which included a recommendation that the rebuttable presumption that the shares of a SPAC be suspended on the announcement of a potential acquisition be removed. This presumption is seen as the major obstacle to successful SPAC listings in the UK and Lord Hill’s recommendation to remove it, and the FCA’s proposal to introduce an alternative approach, are designed to align the UK more closely with other major financial markets which have regimes more disposed to SPAC listings and to make the UK a more attractive destination for listed SPACs.

The key proposal set out in the consultation paper is, therefore, to remove the existing presumption in the Listing Rules that a SPAC’s listing will be suspended when it identifies a potential acquisition target. The alternative approach set out by the FCA would apply where SPACs are able to demonstrate certain structural features and incorporate certain investor protections.

The FCA also does not rule out the introduction of a separate listing category for SPACs in the future, allowing for a more rules-based framework than the changes which are the subject of the consultation, and it intends to discuss this in later publications on its review of the UK primary markets and its response to Lord Hill’s report.

What is a SPAC?

A SPAC is a shell company with a management team that raises funds, through an IPO, with the objective of deploying them on an acquisition or acquisitions of one or more operating companies. SPACs generally identify mature private operating companies with established businesses to purchase in a reverse takeover transaction, forming a new operating company which will then need to apply to be listed on the public markets.

The FCA’s proposals

The FCA’s proposals entail a combination of changes to the Listing Rules as well as to the guidance currently set out in Technical Note 420.2 relating to cash shells and SPACs. The FCA’s proposals as to when the alternative approach to the suspension of listing for SPACs will apply are summarised below.

  • Size threshold

The FCA’s proposed alternative approach to suspension would apply to SPACs that raise gross proceeds of at least £200 million from ‘public shareholders’ on the initial listing. This means that funds provided to the SPAC from its sponsors (i.e. the founders, directors, or others who otherwise promote or support the SPAC operationally), whether by way of general cash injection or for shares on the IPO, would be excluded from this amount.

The idea behind this level of threshold is that a SPAC raising this amount of cash at IPO is likely to have (i) a higher level of institutional investment, with those investors doing their own due diligence on the SPAC and its management; and (ii) a more experienced management team and supporting advisers, from which other investors can take comfort.

  • Ring-fenced proceeds

The SPAC should adequately ring-fence, via an independent third party, proceeds raised from public shareholders (so as to protect against misappropriation or excessive running costs). The proceeds would only be available to fund:

  • an acquisition (approved by the board of the SPAC and public shareholders (see below));
  • redemptions of shares from shareholders; and
  • repayment of capital to public shareholders in circumstances where the SPAC has failed to find a target or complete an acquisition within the required time period (see below).

It will be possible to specify in the prospectus on admission any portion of the proceeds that the SPAC will retain to fund its operations. The ring-fenced proceeds will then be reduced by this agreed amount.

  • Time limit for making an acquisition

A SPAC should have a time limit to focus management on identifying appropriate targets and executing acquisition(s) and should not be “open-ended” so as to expose investors to an unnecessary level of uncertainty. This time limit should be built into the SPAC’s constitution. In summary, the FCA has proposed a deadline of two years, which can be extended by up to 12 months with the approval of the SPAC’s public shareholders, and if no acquisitions have been completed in this period, the SPAC’s funds would be returned to shareholders.

  • Board and shareholder approval of a transaction

In order to ensure that the management of SPACs apply a high standard of due diligence to acquisitions so as to protect investors against poor choices of target(s), proposed acquisitions should be subject to the approval of the board. This would exclude any board member that either:

  • is a director of the target or one of its subsidiaries (or an associate of such a director); or
  • has a conflict of interest in relation to the target group.

Acquisitions would also be subject to the majority vote of public shareholders. The SPAC sponsors would not be able to vote. Shareholders must be given sufficient disclosure of all terms and information on a proposed transaction to allow them to make a properly informed decision. This would include details of the impact on ordinary shareholders of shares or warrants held by the SPAC’s sponsors (e.g. dilution), any conflict of interest the sponsors have in the proposed transaction and any additional dilution effects on existing shareholders from potential redemptions or the terms on which additional investment is provided from private placements to finance the transaction.

  • Fair and reasonable statement

Where any of the SPAC directors has a conflict in relation to the target group, the board of the SPAC would also be required to publish a statement that the proposed transaction is fair and reasonable as far as the public shareholders of the SPAC are concerned. This statement should reflect advice given by an appropriately qualified and independent adviser. The statement should be made available ahead of any shareholder vote.

  • Redemption option for shareholders

Shareholders should have a redemption option at the time of any acquisition. Allowing a SPAC to continue to be traded following the announcement of a target when publicly available information on the transaction may be limited potentially exposes investors to increased risks. A redemption option, together with ring-fencing of proceeds and a time limit on the life of a SPAC, are intended to give investors a ‘way out’ if they do not like the target or the final terms of any deal.

Any redemption option should specify a predetermined price at which shares will be redeemed, which could be a fixed amount or fixed pro rata share of the cash proceeds ring-fenced for investors, less pre-agreed amounts the SPAC retains for its running costs. The terms of such redemption option would be detailed in the initial prospectus (and the SPAC’s constitutional documents) as a right attaching to shares.

  • Disclosure

Appropriate disclosures must be made to investors at appropriate stages in the SPAC’s lifecycle, including disclosures in the initial prospectus. These disclosures would include ring-fencing arrangements, time limits for making an acquisition, a commitment to publish a fair and reasonable statement and voting and redemption rights attached to the shares in the SPAC (albeit that such disclosures may be incorporated by reference from elsewhere, e.g. the SPAC’s constitutional documents). The FCA considers that the Prospectus Regulation also requires disclosure of warrants issued alongside shares, the expertise of management, the strategy of the SPAC, identified risk factors and conflicts of interest.

SPACs will be subject to continuing obligations under the market abuse regime and the FCA’s transparency rules.

On announcement of an acquisition, a SPAC would be required to provide, to the extent possible:

  • a description of the target business and the material terms of the proposed transaction;
  • an indication of how the SPAC has assessed the value of the target business; and
  • any other details of which investors should be aware in order to make a properly informed decision.

This information must be updated if new information comes to light prior to the shareholder vote.

  • FCA’s supervisory approach

The FCA will require SPACs to contact them prior to announcing a transaction. To avoid suspension, the FCA will require a board confirmation that the SPAC satisfies the specified conditions above and will continue to do so until a reverse takeover is completed (and may require evidence). The FCA will only agree that a suspension will not be required at this point prior to announcement of a target, notwithstanding that some of the criteria need to be met at the time of listing. The FCA specifically states that, whilst it will be open to discussing disclosures to be included in a SPAC’s listing prospectus designed to ensure that it would be capable of taking advantage of the proposed alternative approach to suspension when it identifies an acquisition target, as part of the listing process it will not provide an indication as to whether it is satisfied that the SPAC meets the relevant criteria such that suspension at a future date will not be necessary and specifically states that the prospectus must include a disclosure to this effect.

Next steps and impact of the proposals

The FCA consultation is open until 28 May 2021 and it intends to introduce new investor protection measures in this area by the Summer.

The proposals are part of a wider review of the operation of the UK listing regime and public markets after Brexit, which is designed to make them more attractive for investment and more competitive on a global stage, and are intended to address a specific area where the UK is perceived to have fallen behind competitor financial centres in the US and certain EU jurisdictions, where SPAC listings are seeing significant interest and growth. It is this current focus on SPACs, and the sense that London is missing out, that has caused the FCA to act quickly to seek to introduce these specific changes ahead of a wider review of the UK primary markets and the potential introduction of a separate listing category for SPACs in the future.

The proposed changes are designed to balance the inherent complexities in SPACs and the necessity to ensure that investors in them are adequately protected with a more flexible approach to raising equity finance for private companies. They are likely to be broadly welcomed by investors and are in line with the recommendations made by Lord Hill in his UK Listing Review and should go some of the way to putting the UK onto a more equal footing with the regulatory regimes in the jurisdictions referred to above.

However, there are aspects of the proposed changes, such as the FCA’s reluctance to give an opinion on a SPAC’s qualification for the alternative approach at the time of listing, that may still mean that the regimes in other jurisdictions continue to be more attractive for SPAC listings, at least in the short term.

Useful Links

CP21/10 Investor protection measures for special purpose acquisition companies: Proposed changes to the Listing Rules