Mooted rule changes to facilitate SPACs seek to give the City a boost while avoiding a race to the bottom, explains Marcus Young
In the corporate world, one of the buzzwords of the past year has been SPACs – short for special purpose acquisition vehicles. In a nutshell, SPACs are publicly traded companies formed for the purpose of effecting an acquisition of one or more businesses.
The SPAC structure has been around for decades; but exploded in popularity in the US during the Covid-19 pandemic as their advantages – primarily speed and increased deal certainty – made them the structure of choice in volatile markets.
The recent statistics for SPACs make compelling reading. The US saw 248 SPAC IPOs raise $83.3bn in 2020, against 59 SPAC IPOs raising $13.6bn the previous year. Transactional activity has also been surging; the first quarter of 2021 saw global deal activity involving mergers through SPACs hit record highs of US$170bn in Q1 2021, easily eclipsing the $157bn haul for the whole of 2020.
Despite the impetus, this boom has yet to fully materialise in the UK, largely due to certain features of the UK Listing Rules, which present key drawbacks in comparison to the US rules. As a result, UK SPAC activity has been relatively limited, certainly compared to the US. Last year there were just four UK SPACs listed raising £0.03bn. The UK authorities, however, recently unveiled proposals to make the London Stock Exchange a significantly more attractive destination for SPACs.
The UK government has made no secret of the desire to cement London as a hub for global capital markets, especially in the post-Brexit era. The SPAC boom across the Atlantic and the success of Amsterdam in attracting listings has led to fears of a lack of competitivity. To this end, an independent UK Listing Review report commissioned by the UK government recommended a wide selection of regulatory overhauls in March 2021.
The need for regulatory reform in relation to SPACs was a key feature of the Listing Review. Crucially, under the current UK Listing Rules, an initial acquisition made by a SPAC will constitute a “reverse takeover” and on announcement of the acquisition, trading in the SPAC shares will generally be suspended.
'The rule regarding trading suspension is seen as a key deterrent for potential investors in UK SPACs,' the Listing Review states. 'It exposes investors to the possibility that they will be “locked into” their investment for an uncertain period following the identification by the SPAC of an acquisition target, even if they wish to exit – due to differences of view over the target or for other reasons.'
The rationale for the rule was that most SPACs had very small capitalisations so were 'liable to experience high levels of volatility around the time of a proposed transaction'. The Financial Conduct Authority (FCA) estimated in May that, of the 33 listed UK SPACs, 40% currently had their listing suspended, while only two had a market-cap of more than £100m.
The Listing Review recommended that the FCA should consider changing the listing rules to:
• Remove the presumption providing for suspension of a SPAC's listing on announcement of an acquisition; and
• Provide for additional investor protections proposed at the time of the acquisition, such as giving shareholders the right to vote on whether or not to proceed with the acquisition and also the right to redeem their investment when the acquisition takes place if they so choose.
Last month, following the Listing Review, the FCA opened a consultation on the proposed changes to the Listing Rules. The short consultation period, due to end on 28 May 2021, reflects a marked urgency to implement reform and attract new SPACs to list in London.
The FCA consultation paper seeks to strike a balance between the competing objectives of protecting investors whilst removing some of the perceived structural impediments. The paper proposes that for certain SPACs with investor-friendly features, the trading suspension presumption will be removed. In order to qualify, SPACs will need to:
• raise a minimum amount of £200m when the SPAC’s shares are initially listed, to encourage a high level of institutional investor participation
• ensure monies raised from public shareholders are ‘ring-fenced’ to fund an acquisition
• ensure shareholder approval for any proposed acquisition, based on sufficient disclosure of key terms and a confirmation that terms are fair and reasonable if any of the SPAC’s directors have a conflict of interest relating to a target company
• include a ‘redemption’ option allowing investors to exit the SPAC prior to any acquisition being completed, and a time limit on the SPAC’s operating period if no acquisition is completed (24 months following IPO, extendable by 12 months on independent shareholder approval)
• ensure sufficient disclosures are provided to investors on key terms and risks from the SPAC IPO through to the announcement and conclusion of any reverse takeover deal
A new wave of UK SPACs?
If implemented in substantially their current form (which seems likely), the proposed reforms are a potential gamechanger for London as a potential SPAC destination. There are still obstacles: for example, a SPAC will need to meet the minimum size requirement. Further, the FCA will not agree in advance that a SPAC qualifies to avoid suspension, and the redemption option will need to be set out in the initial prospectus, so careful transaction structuring will be required.
Many market participants in the UK are keen that the UK does not engage in a ‘race to the bottom’ which may result in attracting lower quality/speculative offerings. Viewed in this light, the balanced regulatory approach mooted by the FCA may in fact strike the right balance between key investor-protection measures and ensuring the commercial attractiveness of the UK markets for SPACs and their sponsors.
Marcus Young is a partner in King & Spalding's London M&A practice
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