Hong Kong Stock Exchange Implements New SPAC Rules from 1 January 2022

The Stock Exchange of Hong Kong Limited (HKEx) is implementing new rules for special purpose acquisition companies (SPACs) that take effect from 1 January 2022.

Most significantly, the new rules are relaxed to allow more flexibility for SPAC Promoters in areas such as use of proceeds, earn-out rights and dilution caps – although the updated new SPAC listing regime remains more stringent than that of the United States.

The new SPAC rules were adopted expeditiously, concluded and implemented within just three months of a consultation review launched on 17 September 2021.

Here is a summary of the update with key features of the new rules:

SPAC

• A SPAC is an issuer with no operating business, established for the sole purpose of conducting a transaction in respect of an acquisition of, or a business combination with, a target (De-SPAC Transaction) – within a pre-defined time period (usually 24 months) to achieve listing of the target (thereafter the Successor Company).
• If a De-SPAC Transaction cannot be completed within its lifespan the SPAC will be liquidated.

Formation 

SPAC Promoters

• A SPAC Promoter is a person who establishes a SPAC and/or beneficially owns Promoter Shares issued by a SPAC.
• All SPAC Promoters must meet HKEx's suitability and eligibility requirements.
• At least one SPAC Promoter must be a Hong Kong Securities & Futures Commission (SFC) Licensed Promoter, namely a firm that holds: (a) a Type 6 (advising on corporate finance) or Type 9 (asset management) licence issued by the SFC; and (b) at least 10% of the Promoter Shares – although waiver may be granted on a case-by-case basis, for example if the SFC Licensed Promoter has overseas accreditation equivalent to a SFC Type 6/Type 9 SFC licence.
• Promoter Shares and Promoter Warrants issued exclusively to SPAC Promoters will not be eligible for listing; and no transfer in beneficial ownership will be allowed.

SPAC Board

• A proposal that the majority of a SPAC board be composed of SPAC Promoters' nominated officers is dropped.
• Instead, a SPAC board is now required to include at least two Type 6/Type 9 SFC-licensed individuals (one of whom must be a director representing the SFC Licensed Promoter).

Listing & On-going Obligations

Initial Offering

• Fund raising amount must be at least HK$1 billion.
• Issue price must be at least HK$10.
• Subscription for and trading of a SPAC’s securities (before a De-SPAC Transaction) will be restricted to professional investors only (meaning Institutional Professional Investors and Non Institutional Professional Investors as defined under the Securities and Futures Ordinance).
• Each type of SPAC securities (shares and/or warrants) must be distributed to at least 75 professional investors, of which 20 must be Institutional Professional Investors – a relaxation from the consultation proposal of 30 Institutional Professional Investors.

Proceeds Held in Escrow

• 100% of gross proceeds of a SPAC's initial offering (excluding proceeds raised from the issue of Promoter Shares and Promoter Warrants) must be held in a ring-fenced escrow account domiciled in Hong Kong and operated by a qualified trustee/custodian (the Escrow Account).
• Funds held in the Escrow Account must not be released other than to:

1. meet redemption requests of SPAC shareholders (below);
2. complete the De-SPAC Transaction; or
3. return funds to SPAC shareholders when a De-SPAC Transaction cannot be completed before deadline.

• Interests, or other income earned, on monies held in the Escrow Account may be used by a SPAC to settle its expenses – a major deviation from the consultation proposal that all such interests or income should form part of funds held in escrow; and that SPAC Promoters are to bear all expenses in relation to establishing and maintaining the SPAC.

Redemption Option

• SPACs must provide shareholders with the opportunity to redeem all or part of their holdings of SPAC shares (for an amount per SPAC share which must be not less than the price at which such shares were issued at the SPAC's initial offering – without interest) in the circumstances of a shareholder vote on:

1. a material change in (i) the SFC Licensed Promoter; or (ii) the SPAC Promoter who controls 50% or more of the Promoter shares, or in the absence of which, the single largest SPAC Promoter;
2. a De-SPAC Transaction; or
3. a proposal to extend the De-SPAC Transaction deadline.

• Acknowledging that the alignment of voting with redemption may not serve as a meaningful regulatory safeguard on the terms and valuation of the De-SPAC Transaction, the consultation proposal that shareholders may only redeem such part of their shares they use to vote against the resolution is now dropped. Shareholders may redeem their shares irrespective of how they cast their vote and no redemption limit may be imposed.

Promoters' Rights to Shares of Successor Company

• Promoter Shares and Promoter Warrants may be convertible into shares of the Successor Company on a one-for-one basis at, or after, the De-SPAC Transaction.
• Subject to HKEx approval, a SPAC may issue earn-out rights to SPAC Promoters that are convertible into ordinary shares of the Successor Company if the Successor Company meets pre-defined performance targets.
• As SPAC Promoters may not be involved in the management of the Successor Company, and may have no influence on its business performance, it is now allowed that share price performance targets may be used, provided that share prices are:

1. at least 20% higher than the issue price of the SPAC shares at listing;
2. satisfied by exceeding a pre-defined volume weighted average price of the Successor Company’s shares over a period of not less than 20 trading days within a period of 30 consecutive trading days, with such period commencing at least six months after the listing of the Successor Company.

Dilution Cap

• The proposed caps on (a) Promoter Warrant and (b) warrant-to- share ratio are now removed.
• The 20% cap on Promoter Shares remains. If earn out rights are to be granted to SPAC Promoters, an overall cap of 30% (for all earn outs plus Promoter Shares) applies.
• The cap on aggregate warrants (SPAC Warrants plus Promoter Warrants) is increased from the proposed 30% to 50% of the number of shares in issue when such warrants are issued.

Application of the Takeovers Code

• The Takeovers Code applies to a SPAC.
• A waiver from the application of Rule 26.1 of the Takeovers Code in relation to a De-SPAC Transaction (which results in the owner(s) of the De-SPAC target obtaining 30% or more of the voting rights in a Successor Company) should normally be granted. Practice Note 23 on De-SPAC Waivers which set out the application process is released, effective from 1 January 2022.

De-SPAC

• Most of the consultation proposals in relation to a De-SPAC Transaction are adopted.
• The most significant change is the strengthened requirements on independent PIPE investments (below) to support the valuation of the De-SPAC target, and the level of investor interest in the Successor Company, as a result of removing the alignment of shareholders' redemption with voting on a De-SPAC Transaction.

Deemed New Listing 

• The De-SPAC Transaction that results in the listing of Successor Company will be considered a "reverse takeover (RTO)", which means:

1. Successor Company must meet all new listing requirements (including minimum market capitalisation requirements and financial eligibility tests).
2. At least one sponsor must be appointed to assist Successor Company's listing application, and conduct sponsor due diligence.

• No public offer of Successor Company's shares is required as part of the De-SPAC Transaction.
• Trading of Successor Company’s securities is no longer restricted to professional investors.

De-SPAC Target

• The target must have fair market value representing at least 80% of all funds raised by the SPAC from its initial offering (prior to any redemptions).
• Targets must have business operations; and investment companies will not be eligible.

Mandatory PIPE Participation 

• In a US context, PIPE means Private Investments in Public Equity. In the Hong Kong context, it means third party investments, for the purpose of completing a De-SPAC Transaction committed prior to a De-SPAC announcement. All PIPE investors must be Professional Investors.
• Investment (resulting in investors having beneficial ownership of the listed shares in the Successor Company) from independent PIPE in a De-SPAC Transaction is mandatory.
• Independent PIPE investors must meet independence requirements consistent with those applying to an independent financial adviser and the minimum amount to be raised from them (as a percentage of the Negotiated De-SPAC Value, as stated in the De-SPAC announcement):
  
  

  Negotiated De-SPAC Value (A)	Minimum independent PIPE investment as a percentage of (A)
  Less than HK$2 billion	25%
  HK$2 billion - 5 billion	15%
  HK$5 billion - 7 billion	10%
  HK$7 billion or more	7.5%

• At least 50% of the independent PIPE investment must be contributed by at least three sophisticated investors as defined by HKEx (e.g. a fund with assets/funds under management of at least HK$8 billion).

Shareholders' Approval

• The De-SPAC Transaction, PIPE investment and earn-out rights granted (or to be granted) to SPAC Promoters must obtain approval of SPAC shareholders at the general meeting called to approve the De-SPAC Transaction (written shareholders’ approval will not be accepted).
• SPAC Promoters and their close associates must abstain from voting at that general meeting.
• The consultation proposal that outgoing SPAC controlling shareholders and their close associates must not vote in favour of the De-SPAC Transaction (if that results in a change of control) is now dropped.

Open Market Requirements 

• Successor Company must ensure that:

1. its shares are held by at least 100 Professional Investors;
2. at least 25% of total issued shares are held by the public; and
3. no more than 50% of its securities in public hands are beneficially owned by the three largest public shareholders.

De-SPAC Deadline 

• Announcement of the finalisation of the terms of a De-SPAC Transaction must be published within 24 months of the date of SPAC's initial listing.
• A De-SPAC Transaction must be completed within 36 months of the date of SPAC's initial listing.
• SPAC may request HKEx for a deadline extension upon obtaining approval of an extension of either of the above De-SPAC deadlines by an ordinary resolution of its shareholders at a general meeting (on which the SPAC Promoters and their respective close associates have abstained from voting). The maximum extension will be six months.

Liquidation and Delisting

Trading Suspension 

• HKEx will suspend trading of a SPAC’s securities if it fails to announce/complete a De-SPAC Transaction within applicable deadlines (including any extensions granted); or obtain requisite shareholder approval for a material change in SPAC Promoters within one month of the change.

Return of funds to shareholders

• Within one month of such suspension (above), SPAC must return funds to its shareholders (excluding, for the avoidance of doubt, holders of Promoter Shares) on a pro rata basis, for an amount per SPAC share not less than the price at which such shares were issued at the SPAC's initial offering - without interest.

Cancellation of Listing

• After returning funds to its shareholders, the SPAC must liquidate. HKEx will automatically cancel the SPAC listing before completion of its liquidation.