SPACs, also known as “blank cheque companies,” are re-emerging as a powerful alternative to traditional IPOs in the current volatile market. Dealogic reports that in 2019 SPACs raised a record $13.4bn in proceeds. The trend has continued in 2020, in spite of (or perhaps because of) the market disruptions caused by Covid-19. According to Barrons, SPACs are on pace for another record year, having already “raised more than 75% of 2019’s record total”. Not convinced? Consider this: It was reported in the media in July 2020 that Bill Ackman’s blank cheque company, Pershing Square Tontine Holdings, had raised $4 billion for its IPO, the largest SPAC in history to go public. It did so at what may prove to be the nadir of Covid-19 related market uncertainty.
Why the sudden enthusiasm for SPACs? The markets were once enamoured with the notion of blank cheque companies; they provided an alternative route to the public markets which was particularly attractive to entrepreneurs in the technology industry; they were perceived as more democratic in that they are not restricted to institutional or sophisticated investors; and they were often less expensive than a traditional fund structure. However, critics felt that they were extremely risky for investors, and those doubts proved founded in some well- publicised cases of fraud. Now, in times of commercial uncertainty, the idea of a blank cheque company with a large war chest and a skilled management team poised and ready to identify profitable targets and move on them quickly has undeniable appeal. Many investors who have shied away from market volatility are experiencing “fear of missing out”. SPACs offer the promise of being back in on the action when the time is right.
Appleby has the expertise and experience to assist with all stages of the SPAC life cycle, from the initial formation and listing to advising on the business acquisition and de-SPAC.
What is a SPAC and How is it Structured?
SPACs are companies that are formed to raise capital through an IPO to fund a strategic acquisition down the road, typically within 18 to 24 months.
The IPO will typically consist of “units” comprised of shares and warrants (representing the right to acquire additional shares) in the SPAC. The sponsor will retain a minority ownership interest in the SPAC (typically around 20%) to make sure they have “skin in the game”, with the sponsor’s founder shares granting exclusive board appointment and removal rights during the period prior to the first business combination and “de-SPAC”. Warrants or long-term call options at a fixed price may also be separately issued to incentivise the management team.
The SPAC will have described in its offering documents the sector into which it is seeking to invest. The technology and energy sectors remain popular. The management team of the SPAC will be, or will be supported by, experts in the identified sector who are tasked with finding the right target for the business combination. Since the target is usually unidentified at the offering stage, and therefore not subject to the usual due diligence that an investor would undertake before deciding to buy shares in the ordinary fashion, confidence in the management team is key. Arguably, the investor is investing in the management team itself, rather than the company, as the success or failure of the venture will rest on the management team identifying the right target. There are, however, a number of protections built into the structure for the public investors which may include:
- a requirement for the SPAC to conclude its first acquisition within a stated timeframe, typically within 18 to 24 months depending on the rules of the stock exchange on which the SPAC is listed;
- a right for investors to approve the proposed investment once it is identified and/or a right for investors to have their shares redeemed or repurchased by the SPAC and exit the structure;
- a requirement for the IPO proceeds to be held in a segregated trust account (see the section headed “The Trust Account” below);
- minimum deal value requirements (e.g. where the SPAC is listed on the NYSE, the SPAC must complete one or more business combinations having an aggregate fair market value in excess of 80% of the assets held in the trust account); and
- independent valuation requirements where the target is affiliated with the sponsor or management team.
If a business combination is not concluded within the specified time period, the SPAC will be liquidated and the proceeds held in the trust account will be returned to the public investors. Sponsors do not participate in this capital return and are subordinated to the public investors.
The Trust Account
After setting aside a portion of the funds to meet the listing expenses and the SPAC’s ongoing operational costs, the bulk of the IPO proceeds are segregated in a trust account with a third party financial institution. The funds in the trust account may only be released in specific predefined circumstances, namely upon the earlier of the closing of the first business combination or the redemption of investors’ shares in the event that the SPAC is unable to complete an acquisition within its stated term.
A SPAC IPO is perhaps best described as “an IPO of a company to be named at a later date”. Popular SPAC listing venues include the NYSE, NASDAQ, and the LSE’s Main Market and AIM. See the section on Bermuda for a listing on the Bermuda Stock Exchange and the section on the Crown Dependencies for a listing on The International Stock Exchange. The listing process for a SPAC is generally quicker and more straightforward than listing an operating company. However, the lack of an operating history and business will limit the types of listing available (e.g. a SPAC is unable to obtain a premium listing on the LSE’s Main Market).
The method used to acquire the target business will depend on the identity of the target itself, but will commonly be affected by way of a merger, stock/share exchange, asset acquisition or other similar business combination.
The SPAC may raise additional funds to help fund the business combination, including through borrowings under loans or bond issuances, further share and warrant issues or a combination of the foregoing.
After the company ‘de-SPACs’ and becomes a normal operating company, the business continues to operate as a publicly listed company under the rules of the relevant stock exchange and any securities commission or similar authority having jurisdiction, with the management team working to create value for investors and the sponsor.
Located in the Atlantic in a time zone that is ideal for serving global markets, Bermuda is a popular jurisdiction for SPACs. Bermuda has a reputation as a first class center for international business, benefiting from a robust regulatory regime which provides protection and clarity. In Bermuda, exempted companies, which are companies incorporated for the purpose of conducting business outside of Bermuda, are used most often for SPACs. An exempted company can be incorporated with unrestricted objects under the Companies Act 1981 (Companies Act) very quickly. Exempted companies are designated as non-resident for exchange control purposes. Bermuda does not impose taxes on profits, income or dividends.
The Bermuda Stock Exchange (BSX) is the world’s largest offshore fully electronic securities market, offering a diverse range of listing and trading opportunities for both international and domestic issuers of equity, debt, depository receipts, insurance securitisation and derivative warrants. The first stage in the making of an application for admission to listing on the BSX is the appointment of a sponsor; the applicant must have a sponsor at all times while making the application. Once the SPAC is listed, the sponsor assists it in maintaining compliance with ongoing obligations. The second stage is to ensure that the listing complies with the BSX listing regulations. In general, the application will include a prospectus, offering memorandum, offering circular, scheme particulars or equivalent, together with supporting documentation such as financial statements when necessary, constitutional documents, and declarations or undertakings made by the directors, issuer and sponsor.
There are essentially four ways of acquiring a publicly traded company; namely merger, amalgamation, scheme of arrangement or an offer to the shareholders of a publicly traded company to acquire their shares. The method Bermuda SPACs most often use to acquire the target business is a merger.
A merger between two (or more) Bermuda companies is typically effected pursuant to section 104H of the Companies Act and, upon completion, the undertaking, property and liabilities of each merging company are vested in the surviving company while the other merging company or companies cease to exist.
In order to effect a merger, the merger (including its terms) must be approved by the shareholders of the company, whether or not they ordinarily have a right to vote. This means holders of non-voting preference shares may also vote on a merger.
There are often two agreements in the context of a merger. The main transaction agreement (the “Agreement and Plan of Merger” (in the case of US transactions) or “Implementation Agreement” (in the case of English law transactions)) which sets out the terms and means of effecting the transaction and which will include comprehensive warranties, indemnities, conditions precedent, and deal protection mechanisms (if any). In addition, a statutory merger agreement will also be used, which sets out that which is required to be approved by the shareholders under section 105 of the Companies Act.
British Virgin Islands
British Virgin Islands (BVI) active business companies number approximately 373,000, some of which are listed on international exchanges including NASDAQ, NYSE, HKSE, LSE and AIM. BVI-incorporated listed SPACs have seen substantial growth over the past decade, both in terms of numbers of BVI SPACs listed and the aggregate raised capital.
The BVI company and the BVI as a jurisdiction favour the concept and utilisation of SPACs. This is because BVI corporate law provides for unique flexibility in its corporate vehicles. A BVI company is not required to stipulate its objects in its constitution, granting it unrestricted flexibility in its operations, business activities and investments. BVI has done away with mandatory concepts of share capital and par value. Therefore, the requirements of capital maintenance or share premium for dividend payments have fallen away. The founders of a BVI company may nevertheless elect to include these concepts in its constitution and this is permissible.
The flexibility of BVI corporate law suits the issue of common shares and warrants or other rights to equity which are often a key feature of SPACs and an attraction to their investors. Multiple classes of shares may be issued with varying voting rights, thereby guarding against potential SPAC shareholders blocking the target acquisition or other required corporate actions. Furthermore, BVI companies are often the listing vehicle of choice for emerging market-focused companies or those vehicles involved in commodities, resources, energy, healthcare and technology; sectors in which the targets of SPACs over the preceding years have operated.
The above factors are coupled with the additional BVI attractions of:
- a zero corporate, withholding tax and stamp duty environment;
- lender and creditor-friendly laws (including a regime of public and private registration of security interests which ensures priority of security rights and a sophisticated and robust insolvency regime) enable BVI SPACs to make use of leveraged financing and thereby increase the resources available to fund the target acquisition;
- a BVI statutory merger regime that provides for a great degree of flexibility of structure; mergers can be achieved through asset, cash, equity or equity interest transfers or exchanges or combinations of consideration (acquisitions made by BVI companies are often effected by merger);
- the BVI not having a takeover code or other statutory prescriptions dealing with takeovers, acquisitions, mergers or consolidations of listed companies (accordingly, a BVI listed company may adapt provisions that best suit its needs for the acquisition of the specific target); and
- no mandatory pre-emption rights in BVI’s corporate legislation (this facilitates further capital raising by the directors of a BVI SPAC without requiring shareholder approval).
BVI companies have been the vehicle of choice of Asian investors in preceding years. In the event that the founders of the SPAC are contemplating listing on an Asia exchange or targeting Asian investors, the form and attraction of that vehicle and its jurisdiction of incorporation should be carefully considered.
Cayman Islands exempted companies are one of the most popular vehicle choices for SPACs owing to their flexibility and their familiarity to international investors and stock exchanges. A Cayman Islands exempted company may have unrestricted objects, making it ideal for use as the SPAC vehicle, and can be incorporated in as little as 24 hours. Moreover, the Cayman Islands levies no capital gains, income, profits, corporation or withholdings taxes – whether on the Cayman-incorporated SPAC or on holders of securities issued by the Cayman SPAC.
The Cayman Islands has a well-understood, straightforward and flexible statutory merger regime that allows the SPAC to move quickly and efficiently to complete its acquisition once a target has been identified. The Cayman Islands merger regime is permissive and offers flexibility for Cayman SPACs to merge or amalgamate with one or more Cayman Islands and/or foreign targets (where the laws of the foreign jurisdiction permit), and the merger consideration may generally take any form approved by the shareholders (including cash, asset transfer or issuance of shares or any combination of the foregoing). The shareholder approval threshold for a statutory merger (subject to any higher threshold or additional requirements in the articles of association) requires only a special resolution passed in accordance with the articles of association – typically, a two-thirds majority of those shareholders attending and voting at the relevant meeting. Court approval is not required. Although the prior consent of any secured creditors of the merging entities will need to be obtained for the merger, if a secured creditor refuses to consent this requirement can be waived with permission of the Cayman Court (upon such terms as to security to be issued by the consolidated or surviving company or otherwise as the Court considers reasonable).
A SPAC is not itself a mutual fund or a private fund under the Cayman Islands Mutual Funds Law or Private Funds Law, as companies the investment interests of which are listed on a stock exchange (including an over-the-counter market) are exempt.
Crown dependencies: Guernsey, Isle of Man, Jersey
The Crown Dependencies of Guernsey, the Isle of Man and Jersey are all first-class international financial centers in their own right, with robust regulatory regimes. They also have the advantage of being geographically proximate to sponsors, management teams and investors who are based in the European time zone and benefit from their very strong connections to the City of London. Appleby is uniquely positioned as the only law firm with leading corporate practices in all three Crown Dependencies.
All three Crown Dependencies will zero rate a SPAC incorporated in its jurisdiction for tax, and none of the Crown Dependencies applies withholding tax to distributions made to non-resident shareholders. Companies in the Crown Dependencies may have unlimited objects and can be incorporated on very short notice.
All three Crown Dependencies have flexible legislation in respect of distributions to shareholders, facilitating rapid payment of dividends and a simplified regime for share buy-backs, all such companies being capable of distributing assets subject only to the requirement that the company remain solvent after doing so.
SPACs incorporated in the Crown Dependencies will often acquire unlisted target companies by way of a straightforward share purchase, but it is also possible to structure such acquisitions as mergers, if that is preferred for tax or other reasons. The merger regime in each of the Crown Dependencies permits the merger or amalgamation of companies and requires the support of a specified majority of the members of each company. In Guernsey and Jersey, the Guernsey Financial Services Commission or Jersey Financial Services Commission (respectively) must consent to a merger between a Guernsey or Jersey company (as applicable) and a foreign company. In the Isle of Man, such a merger could be structured as a scheme of arrangement, or the shareholders of the foreign company could interpose a new Isle of Man parent company, which would merge with the SPAC. No Court consent is required.
A SPAC that is incorporated in one of the Crown Dependencies can be listed on all of the world’s major stock markets, but there is also a specific regime for listing SPACs on The International Stock Exchange (TISE), which is headquartered in Guernsey and has offices in each of the Crown Dependencies.
Listing a SPAC on TISE is a two-stage process. Some of the key features and benefits of that listing are set out below:
- a low minimum market capitalisation (£1,000,000);
- a requirement that capital raised by a SPAC less operational costs be held in escrow prior to completing an acquisition;
- a permitted acquisition timeframe of 36 months (or less as set out in the listing document);
- a requirement for a SPAC to obtain approval from the majority of its directors and shareholders in respect of qualifying acquisitions;
- working capital requirement in any 12-month period must not be exceeded unless a majority shareholder resolution is passed;
- sufficiently adequate detail must be included in an investment policy which will allow investors to form an adequate assessment of the SPAC;
- management team shareholdings must be disclosed in the listing document and the management team are subject to a 12-month lock-in period in respect of their equity interests;
- following the completion of a qualifying acquisition, the SPAC will be classified as an investment vehicle or trading company; and
- comparatively low listing fees of £5,000 for the initial listing and £2,000 for the annual fees.
If qualifying acquisitions are not made within the permitted timeframe:
- suspension: securities issued by the SPAC will be suspended on the first day after the expiry of the permitted timeframe;
- liquidation: the SPAC must propose a special resolution of the shareholders to be passed for its voluntary liquidation; and
- distribution: a distribution must be made to all shareholders of the SPAC within 60 calendar days after the expiry of the permitted timeframe.
TISE’s rules therefore strike a balance between being commercially attractive for management teams and being sufficiently robust for investors.
There are no specific structures for SPACs under Mauritius laws. From the perspective of a foreign investor wishing to set up a SPAC in Mauritius, the entity is usually structured as a Global Business Company (now an Authorised Company). Authorised Companies are regulated and licensed by the Financial Services Commission.
Protections built into the structure for public investors include the requirements that the entity:
(a) carry out its core income generating activities in or from Mauritius by:
(i) employing either directly or indirectly a reasonable number of qualified persons to carry out the core activities, and
(ii) having a minimum level of expenditure, which is proportionate to its level of activities;.
(b) be managed and controlled from Mauritius; and
(c) be administered by a Management Company.
One of the main incentives to choose Mauritius is its favourable tax regime. Generally, the income tax rate for an Authorised Company is 15%, but (subject to meeting certain prescribed conditions) a partial exemption of 80% may be allowed against certain types of income such as foreign source dividend and interest. Where the Authorised Company derives income which is subject to foreign tax, and where the said partial exemption has not been applied, the amount of foreign tax paid may be allowed as a credit against income tax payable in Mauritius in respect of that income. There are other incentives under the Income Tax Act 1995 and investors may also benefit from treaties Mauritius has signed with other jurisdiction for the avoidance of double taxation.
In addition, since 2007 Mauritius has positioned itself in attracting SPACs through “green bonds” as it is believed that such type of funding assists economies in addressing infrastructure, climate and broader economic challenges. A green bond is a type of fixed income instrument with the sole purpose of financing projects that include a focus on renewable energy, waste management, pollution prevention, conservation and environmentally-friendly transport. In 2015, the Mauritius Stock Exchange launched the SEM Sustainability Index, which identifies companies based on strong sustainability practices, using a set of internationally aligned and locally relevant economic, environmental, social and governance criteria. Furthermore, Mauritius made provisions in the 2017/2018 budget so that the interest income derived by both individuals and corporate entities from debentures issued to finance renewable energy projects would be granted tax-exempt status. Recently, the Financial Services Commission signed the Marrakech Pledge, a coalition of African capital market regulators and exchanges committed to acting collectively in favour of green finance. It has been at the forefront of the development of green finance in Africa, helping private and public issuers of bonds and equity raise finance for sustainable projects. There are provisions in the 2020/2021 budget to enable the Bank of Mauritius to issue green bonds.
In the context of IPOs and international investment, the most commonly used vehicle incorporated in the Seychelles jurisdiction is the international business company (IBC) under the International Business Companies Act 2016 (IBC Act). It is rare to see an IBC being used as the main SPAC that is listed; an IBC is more often used as a subsidiary special purpose investment vehicle in the IPO structure, where a Cayman Islands or BVI SPAC is the entity being listed.
Given that Seychelles has been declared a tax territorial system, the necessary consequential amendments have been made to the IBC Act and came into effect in January 2019. The major impact is that an IBC may now be registered as a tax resident in the Seychelles and, if it wishes to do so, carry on business in the Seychelles (as opposed to being restricted to carrying on business abroad only) and own immoveable property situated in the Seychelles (which was previously prohibited), but subject to the government’s sanction where the directors/shareholders are non-Seychellois. The full tax exemption under the IBC Act has been removed. In the event that an IBC carries on business in the Seychelles and receives any income from a source or activity carried out in the Seychelles, it must pay business tax in the Seychelles. In order to do so, the IBC must register with the Seychelles Revenue Commission via its registered agent in the Seychelles to obtain a tax identification number. Only IBCs deriving “assessable income” (as defined under the Business Tax Act 2009) in the Seychelles will be required to submit to the Financial Services Authority annual returns and audited accounts (in line with the Companies Ordinance 1972). The Business Tax Act now defines “assessable income” as:
- income deriving from business activity in the territory of Seychelles;
- income deriving from assets situated in Seychelles; and
- income deriving from rights used in Seychelles.
The standard corporate business tax rates in the Seychelles are as follows:
- 25% for the first 1,000,000 Seychelles Rupees (approximately USD73,000); and
- 33% for the amount exceeding 1,000,000 Seychelles Rupees.
In addition to business tax, an IBC that generates Seychelles-sourced income is subject to (a) withholding tax (15%) if it distributes profits to non-residents; (b) value added tax in particular cases; and (c) stamp duty if it owns any immovable property or interests therein in Seychelles.
On the other hand, of great benefit to an international investor is the fact that an IBC that does not carry on any business in Seychelles or earn any assessable income in the Seychelles is still not liable to pay any tax in the Seychelles. Further, an IBC that does not own or have any interests in any immovable property in the Seychelles is exempt from stamp duty in Seychelles on:
- transfers of assets/property (outside Seychelles);
- transactions in respect of its shares, debt obligations or other securities;
- the creation, variation or discharge of a charge or other security interests over any asset/property of the IBC; and
- other transactions relating to the business or assets of the IBC.
Hence, when considering a SPAC IPO, the Seychelles IBC remains very relevant and useful in a global corporate structure for international investors, especially for the Asian market given the Seychelles’ favourable time zone.