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FCA flexes UK Listing Rules for SPACs



United Kingdom

The regulator has responded to calls to boost the UK's attractiveness to companies seeking alternative ways to float, while keeping a firm line on transparency requirements and investor protections.
In June 2021, we reported on the Financial Conduct Authority's (FCA) consultation on proposals to amend the Listing Rules governing Special Purpose Acquisition Company (SPAC) acquisitions.

The consultation proposed removing the presumption to suspend trading in a SPAC shares, currently provided for under Listing Rule 5.6, if certain criteria are met. These provisions are designed to protect investors, maintain market integrity, and provide competition in the interests of consumers.

The FCA has now published Policy Statement PS 21/10, setting out the final rules and changes to be made to the Listing Rules for SPACs. These new provisions provide an alternative route to market for SPACs that demonstrate enhanced investor safeguards.

Where a SPAC fails to exhibit these structural features, the presumption that the SPAC's listing will be suspended at the point a potential acquisition is announced to the market will continue to apply.

Criteria for SPACs to avoid suspension

The Policy Statement confirms the proposals put forward by the consultation will all be implemented, subject to certain amendments in the case of a few proposals.

Consequently, for the presumption of suspension of a SPAC's listing to be disapplied, the SPAC must demonstrate the following features:

  • Minimum size threshold of £100 million

A minimum of £100 million must be raised when a SPAC's shares are initially listed. The consultation had proposed a minimum threshold of £200 million, however, most respondents felt this figure was too high and that £100 million better reflected the size of SPAC likely to be seen in the UK and European markets.

As SPAC IPO's often account for only a proportion (e.g. one fifth) of the amount raised for the acquisition of a target company, a SPAC raising £100 million may look at a target valued at £500 million. The FCA believes this threshold is sufficiently high to ensure proper scrutiny of the company and protection for less sophisticated investors.

A minimum size threshold will usually ensure the SPAC has an experienced management team with supporting advisers.

  • Ring-fencing funds raised

The consultation proposed that any funds raised from public markets be ring-fenced by an independent third party (i.e. held in escrow or trust) and only used to fund:

(i) An acquisition;
(ii) Redemptions of shares from shareholders; or
(iii) Repayment of capital to public shareholders, if the SPAC winds up or fails to complete an acquisition in the prescribed time period.

Due to the positive feedback received, the Policy Statement confirms the FCA will implement the proposals set out in the consultation.

The guidance states that the independent third party should have the requisite level of experience and must not be under the SPAC's control or influence.

  • Time limit for acquisition

The Policy Statement deviates slightly from the proposals outlined by the consultation regarding the time limit for a SPAC to make an acquisition.

This time limit will be included in the SPAC's constitutional documents and will require the SPAC to find and acquire a target within two years of admission to trading. This may be extended by a further 12 months (on a one-time basis) by shareholder approval.

However, the FCA agreed with various responses that there is merit in allowing a period where extension to the time limit is allowed without shareholder approval. As a result, there will be an option to extend this two year period (or three if extended) by a further six months without shareholder approval in certain circumstances, such as where additional time is needed to complete the final stages of a transaction.

  • Board approval of acquisition

As proposed in the consultation, board approval of the proposed transaction will be required to make use of the alternative approach to suspension.

Approval must be given with the exclusion from discussion and vote from any board member who is:

(i) A director of the target or a subsidiary of the target, or who has an associate who is a director of the target or any of its subsidiaries; or

(ii) Has a conflict of interests in relation to the target or its subsidiaries.

  • Shareholder approval of the transaction

The Policy Statement confirms this criterion will also be unchanged from the consultation.

A majority of respondents agreed with the FCA's proposal for shareholder approval (with the exclusion of founders, sponsors and directors) of the transaction being a prerequisite for the SPAC to use the alternative approach to suspension.

A majority of shareholders will be required to vote in favour of the acquisition before this can proceed.

  • Shareholder redemption rights

Nearly all responses to the consultation agreed that a requirement for SPACs to provide a redemption option to shareholders should be a criterion for allowing the alternative approach to suspension.

The Policy Statement confirms this requirement, and that guidance on the redemption process is for the SPAC to provide in its listing documentation, and not a matter for the FCA to prescribe.

  • Board ''fair and reasonable'' acquisition statement

The consultation sought views on whether (in scenarios where any directors have a conflict of interest with the target or its subsidiaries) the SPAC's board should publish a statement that the proposed transaction is fair and reasonable as far as public shareholders are concerned. 

This statement should reflect independent advice, and was broadly supported by respondents as a further criterion for using the alternative approach.

The FCA has confirmed this requirement will be included, however it will not provide further guidance on who will be considered an appropriate independent adviser (suggestions given by respondents included an approved "sponsor" as defined in the Listing Rules).

The Policy Statement states, for example, that a private equity firm having a director on the SPAC board while also having ownership in the target represents a typical scenario where such a statement will be required.

  • Disclosure

In addition to compliance requirements under the Market Abuse Regulation (MAR), the Disclosure Guidance and Transparency Rules (DTRs) and the Prospectus Regulation, the consultation proposed that SPACs provide high-level disclosures to the market when it announces a target, to provide adequate transparency around a SPAC's activities.

The FCA confirms this will be required for the use of the alternative approach. The information the SPAC will be required to disclose includes a description of the target business, links to all relevant public information on the target company, material terms of the proposed transaction and an indication of how the SPAC has, or will, assess and value the identified target.

  • ESG

The consultation sought preliminary views on whether the FCA should propose different measures for ESG-focused SPACs.

According to the FCA, respondents largely felt that this was an issue pertaining to the broader market and issuers as a whole, and not something appropriate to consider purely for SPACs.
FCA supervision

In addition to outlining the criteria that must be satisfied for a SPAC to qualify for the alternative approach to suspension, the Policy Statement also details the FCA's supervisory approach for SPACs that wish to make use of these amendments.

The FCA notes issuers will want comfort prior to admission that the SPAC is within the guidance, rather than waiting until an announcement of a reverse takeover is made (as was proposed by the consultation).

Accordingly, the FCA will work with issuers to ensure comfort is provided as part of the vetting of the prospectus and assessing the SPAC's listing eligibility. At the point of such an announcement, the FCA does not expect to revise its previous assessment given to the issuer, provided the SPAC meets the relevant criteria.

The FCA has also clarified that where a SPAC has received comfort prior to admission that it is within the guidance, the issuer must consult with the FCA:

(a) Before announcing a reverse takeover (for the SPAC to re-confirm via board confirmation) that it meets the required criteria for the alternative approach; and/or

(b) If there has been a leak, to inform the FCA of the action the SPAC will or intends to take.

Looking ahead

The FCA's changes, which come into force on 10 August 2021, will be made to Listing Rule 5.6 (Reverse Takeovers), with a new LR 5.6.18A outlining the criteria SPACs must meet to qualify for the alternative approach to suspension.

It is worth noting that, even where a SPAC qualifies for the alternative approach to suspension, the new combined company will still have to re-apply for listing, and the accompanying prospectus must set out all necessary information on the issuer and its securities.

Where a SPAC cannot meet the criteria of LR 5.6.18A, the SPAC can still apply for listing, however the presumption of suspension will remain, unless the issuer can provide detailed information about the proposed target to the market (i.e. it uses the existing approach under the Listing Rules).

The changes prescribed by the Policy Statement coincides with the FCA's consultation on various other amendments to be made to the Listing Rules, which are designed to modernise the UK's capital markets environment.

These include:

  • The reduction of the proportion of shares a company is required to have in public hands from 25% to 10%;

  • Increasing the minimum market capitalisation threshold from £700,000 to £50 million; and

  • Allowing a form of dual class share structure to encourage potential ''unicorns'' to join the public markets earlier.

These proposals are set to be introduced before the end of the year, and together with the changes to SPAC acquisitions, demonstrate the flexibility of the UK Listing Regime to adapt to market conditions.

This article was authored by Jack Mason-Jebb, corporate solicitor at Fieldfisher.

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