Hong Kong Stock Exchange Proposes Prudent Approach on SPACs

In its latest consultation paper on special purpose acquisition companies (SPACs), The Stock Exchange of Hong Kong Limited (the Exchange) has proposed to adopt a prudent approach on SPACs with multiple safeguards or restrictions at each different stage of a SPAC.

As the Exchange says, the proposals would represent a SPAC listing regime in Hong Kong more stringent than that of the United States.

A SPAC is a type of shell company that raises funds via an initial listing for the purpose of acquiring a business at a later stage (De-SPAC) within a pre-defined time period after listing (usually 24 months). If all necessary approvals for De-SPAC have been obtained, the company resulting from the De-SPAC transaction (Successor Company) becomes a listed issuer in place of the SPAC. However, if a De-SPAC cannot be completed within its lifespan, the SPAC will be liquidated.

Here we summarise the Exchange's key proposals in this recently published consultation paper through each different stage of a SPAC.

SPAC Formation and Listing

SPAC Promoters

According to the Exchange, SPAC Promoters are typically professional managers, usually with private equity, corporate finance and/or relevant industry experience.

It is now proposed that:

• SPAC Promoters must meet the Exchange's suitability and eligibility requirements.
• At least one of them must be an SFC licensed firm, either a Type 6 advising on corporate finance licence holder and/or a Type 9 asset management licence holder, holding at least 10% of the Promoter Shares.
• Promoters' nominated officers must constitute the majority of a SPAC's board of directors.
• Securities offered to Promoters (Promoter Shares and Promoter Warrants) will not be eligible for listing; and no transfer in beneficial ownership will be allowed (which will be eligible for conversion into the shares of the Successor Company).
• All expenses incurred by a SPAC are borne by Promoters (see below Initial Offering - trust account).

Investors/Shareholders

• Subscription for and trading of a SPAC’s securities before De-SPAC will be restricted to professional investors.
• Each type of SPAC securities (typically shares and warrants) must be distributed to at least 75 professional investors, of which 30 must be institutional professional investors.

Initial Offering

• Fund raising amount must be at least HK$1 billion.
• Issue price must be at least HK$10.
• Trust account: 100% of gross proceeds of the offering (excluding proceeds raised from the issue of Promoter Shares and Promoter Warrants) must be held in a ring-fenced trust account located in Hong Kong and operated by a qualified trustee/custodian, and funds must not be released other than to:

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

Redemption Option

• SPACs must, in specified circumstances, provide shareholders a redemption option so they may elect to redeem all or part of their shareholding at the price at which such shares were issued in the SPAC's initial offering, plus a pro rata amount of any and all accrued interest on such amount, as held in the trust account; with no redemption limits allowed.
• Shareholders may only redeem such part of their shares they use to vote against the resolution put forward at a general meeting in relation to (a) a material change in the SPAC Promoter managing the SPAC; (b) a De-SPAC; or (c) a proposal to extend the De-SPAC deadline.

Dilution Cap

• Promoter Shares - a cap of 20% of the number of shares the SPAC has in issue at initial offering date; plus a further 10% as earn-outs upon Successor Company meeting set performance targets.

• Promoter Warrants - a cap, upon exercise of the warrants, of 10% of the number of shares the SPAC has in issue at the time such warrants are issued.
• Prohibition from issuing warrants in aggregate (i.e., including SPAC Warrants plus Promoter Warrants) that, if exercised, would result in more than 30% of the number of shares in issue at the time such warrants are issued.

De-SPAC

Deemed New Listing – The business combination between a SPAC and the De-SPAC target that results in listing of a Successor Company (De-SPAC Transaction) will be considered a "reverse takeover (RTO)".

This means:

• Successor Company must meet all new listing requirements (including minimum market capitalisation requirements and financial eligibility tests).
• 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 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.

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.
• De-SPAC Transaction must be completed within 36 months of the date of SPAC's initial listing.
• SPAC may make, 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), a request to the Exchange for an extension approval. 
• The maximum extension will be six months.

Independent Third Party Investors

• Mandatory participation of independent third party investors, whose funds must constitute at least 25% of expected market capitalisation of the Successor Company at listing (or between15-25% if the expected market capitalisation is over HK$1.5 billion).
• Such investors must meet independence requirements consistent with those applying to an independent financial adviser.
• At least one of such investors must be an asset management firm (with assets/funds under management of at least HK$1 billion), holding at least 5% of issued shares of Successor Company at listing.

Shareholders' Approval

• De-SPAC Transaction must be conditional on approval by SPAC shareholders at a general meeting (written shareholders’ approval will not be accepted).
• SPAC Promoters and their close associates must abstain from voting at that general meeting.
• If the De-SPAC Transaction results in a change of control, the outgoing SPAC controlling shareholders and their close associates must not vote in favour of the relevant resolution.

Open Market Requirements

• Successor Company must ensure that (a) its shares are held by at least 100 shareholders; (b) at least 25% of its total number of issued shares are held by the public; and (c) not more than 50% of its securities in public hands are beneficially owned by the three largest public shareholders.

Liquidation and Delisting

Trading Suspension - The Exchange 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 to those deadlines); or obtain requisite shareholder approval for a material change in SPAC Promoters within one month of the change.

Return of funds to shareholders - SPAC must, within one month of such suspension (above), return to its shareholders (excluding, for the avoidance of doubt, holders of Promoter Shares), on a pro rata basis, 100% of funds it raised at initial offering, at the price those shares were issued, plus accrued interest.

Cancellation of Listing - After returning funds to its shareholders, the SPAC must liquidate. The Exchange will automatically cancel the SPAC listing upon completion of its liquidation.

Comment

Given the Exchange's proposed stringent controls, it will be interesting to see how the market responds, with consultation ending on 31 October 2021.