Will the FCA throw open the doors to more UK SPAC M&A?

Pending the outcome of the Financial Conduct Authority's recently concluded consultation on reforms to the UK Listing Rules, special purpose acquisition companies are likely to be given more freedom to make acquisitions.
 
The aim of the suggested changes is to make London more attractive for alternative types of public floats, in view of the (now fading) SPAC boom in the US and competition for listings from other European markets. The FCA consultation closed on 28 May.

The FCA has proposed the introduction of transparent conditions, under which it would not look to suspend a SPAC's shares upon it undertaking a reverse takeover (RTO) – according to what is known as the "rebuttable presumption" – provided certain criteria are met.

These changes would amend Chapter 5 of the Listing Rules. However, where the SPAC fails to satisfy these criteria, the existing rules would continue to apply.

Proposed criteria for suspension-free SPACs

Minimum size threshold

The FCA proposes applying a requirement that a minimum of £200 million is raised from public shareholders upon the date of admission, excluding any amounts raised previously by the SPAC's sponsors. The FCA set this threshold after analysis of recent SPAC IPOs in the US.

This stipulation is designed to ensure the SPAC can attract significant external investment, which is likely to involve closer scrutiny of its investment prospects.

Ring-fencing of public shareholder proceeds

To protect retail investors from excessive SPAC running costs and potential misappropriation of funds, proceeds raised from public markets would be ring-fenced by an independent third party.

This pool of finance would only be available to the SPAC to fund:

• An acquisition approved by the board and shareholders;

• A redemption of shares by shareholders; or

• A repayment of capital to shareholders.

The FCA has not specified whether ring-fenced funds must be held in escrow or trust, given that trust law can vary significantly between different jurisdictions.

Two-year acquisition time limit

The FCA proposes a two-year time limit from IPO for the SPAC to make an acquisition, which may be extended by a further year upon shareholder approval.

This is to prevent an unacceptable level of uncertainty for investors, and would be imposed via a provision in the SPAC's articles of association.

Upon the expiry of the two (or three) year period, the SPAC would be required to return money to its investors, and would subsequently apply for its listing to be cancelled (as the empty shell would no longer comply with Listing Rules requirements, such as a minimum number of shares in public hands).

Acquisition approval

The FCA proposes that an acquisition by a SPAC should be subject to both board and shareholder approval for the SPAC to use the alternative approach to the rebuttable presumption.

Any director with a conflict of interest regarding the target would be excluded from voting, and a majority of shareholders would be required to authorise the transaction for the acquisition to proceed.

This is designed to allow sufficient shareholder scrutiny of the acquisition and ensure conflicts of interest are adequately managed. In this light, the FCA proposes that SPAC sponsors should also be excluded from the shareholder vote.

However, if the acquisition is not made with the express backing and approval of the sponsorship team, this may dampen the attractiveness of the SPAC acquisition in the eyes of the target business.

Director statement

In combination with excluding interested directors from voting on the acquisition, directors with a conflict of interest in relation to the target (or any subsidiary of the target) would be required to publish a statement to the SPAC's shareholders that the proposed transaction is ''fair and reasonable'' as far as the public shareholders are concerned.

This would also need to reflect advice obtained by qualified independent advisers.

Shareholder redemption rights

As is the case under NASDAQ, NYSE and Euronext Amsterdam rules, under the FCA's proposals, shareholders would be provided with a redemption option to exit the SPAC before the acquisition, following the announcement of a target.

The FCA proposes that this option should be set at a predetermined price (either a fixed amount or a fixed pro-rata share of the ring-fenced cash proceeds) upon which shares could be redeemed.

Such redemption rights would be described in the SPAC's initial admission document/prospectus.

Enhanced disclosure

For a SPAC to comply with Article 6 of the Prospectus Regulations, it will have to provide all ''necessary information which is material to an investor'' in its initial prospectus.

The FCA therefore suggests this document should provide information on (in addition to the matters outlined above):

• The full structure of the offer;

• Details of the management's expertise;

• The SPAC's strategy;

• Conflicts of interest; and

• Identified risk factors.

SPACs trading on the Secondary Segment of the Main Market (which is the most likely venue for such structures in the UK) will need to comply with UK's Market Abuse Regulation (MAR) and the FCA's transparency rules under the Disclosure Guidance and Transparency Rules (DTRs).

This will include obligations on the SPAC to disclose inside information to the market as soon as possible. Under current requirements, a SPAC's key terms and activities are already largely protected by these rules.

However, the FCA proposes that, at a minimum, a SPAC issuer should undertake to provide various high level disclosures at the point of a target announcement, including:

• A description of the target, the material terms of the proposed transaction and the expected dilution on public shareholders;

• Details of how the SPAC will value the target;

• The proposed negotiation timetable; and

• Any other material details about the target that an investor may need to make a properly informed decision.

FCA supervision     
        
As a precondition for using this alternative approach to the rebuttable presumption, an issuer SPAC would have to consult with the FCA before announcing a transaction, or when details of a proposed target have been leaked.

This will require the SPAC to provide board confirmation to the FCA that the SPAC will meet the various requirements listed above, and will continue to do so until the RTO is completed.

The FCA notes that where details of the proposed transaction are leaked, the rebuttable presumption of a suspension of the SPAC's shares will remain unchanged, and will only be lifted once the FCA had confirmed the new criteria have been met.

The FCA also makes clear it will not be able to provide an indication during the listing process whether it is satisfied that suspension at a future date would not be necessary. This confirmation would only be given at the point when the listed SPAC contacts the FCA, before announcing the target.

ESG – a different approach?

The FCA has also indicated it is interested in exploring the possibility of a different approach for SPACs focusing on environmental, social and governance (ESG) investment factors.

Such modifications might include an extended acquisition period, or a lower initial capital raising threshold of £100 million.

The FCA is not looking to propose this approach initially, but is seeking feedback on whether it should explore this area in due course.

Comment

The FCA's proposals seek to align the UK listing regime more closely with the regimes in US markets and other European jurisdictions, which do not adopt the rebuttable presumption of suspension.

The FCA's concern that the current UK regime imposes a disproportionate barrier to listing for larger SPACs is supported by data on recent US SPAC activity – $90 billion was raised in 2020 by shell companies, and this is set to be bypassed in 2021 with over $50 billion being raised by the end of March alone, according to figures quoted in the FCA's consultation paper.

Pending the outcome of the consultation, the FCA hopes to introduce at least some new measures by summer 2021.

If the rules governing SPACs are relaxed, the UK's capital markets look set for a flurry of SPAC IPOs before the end of this year.

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