BACKGROUND

 

A Special Purpose Acquisition Company ("SPAC") is a type of shell company which raises funds through its listing for the purpose of acquiring a business (a "De-SPAC Target") at a later stage (a "De-SPAC Transaction") within a pre-defined period after listing. If a De-SPAC Transaction cannot be completed within the pre-defined period, the SPAC will be liquidated.

 

Listing via SPAC has increasingly become an attractive alternative compared to listing via traditional initial public offering ("IPO") as doing so could potentially result in shorter listing time, greater price certainty and flexibility in structuring a De-SPAC Transaction. Therefore, in order to enhance Hong Kong's competitiveness as a capital raising hub, the Stock Exchange of Hong Kong Limited (the "HKEx") published a consultation paper in September 2021 to seek market feedback on its proposal to create a listing regime for SPACs in Hong Kong.

 

On 17 December 2021, the HKEx published the conclusions to its consultation, "Consultation Conclusions on Special Purpose Acquisition Companies" (the "Consultation Conclusions"), which broadly implemented the proposals set out in its consultation paper with several amendments. A new Chapter 18B has been introduced to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited ("Listing Rules") to create the listing regime for SPACs. The amendments to the Listing Rules together with the guidance letter on SPACs will become effective on 1 January 2022.

 

SUMMARY OF THE SPAC LISTING REGIME

 

1. Eligibility and suitability of SPAC promoters

SPAC promoter is a professional manager, usually with private equity, corporate finance and/or industry experience, who establish and manage a SPAC. At least one SPAC promoter in a SPAC must be:

1. the beneficial holder of at least 10% of the promoter shares issued by the SPAC (which must not be transferred to another person); and
2. a firm that holds a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) licence issued by the Securities and Futures Commission ("SFC").

Waiver may be granted on a case-by-case basis if the SPAC promoter has overseas accreditation issued by the relevant regulatory authority which HKEx considers to be equivalent to a Type 6 and/or Type 9 license issued by the SFC.

 

A material change in a SPAC promoter will trigger a right of redemption by SPAC shareholders and the continuation of the SPAC following any material change in SPAC promoters requires approval by (i) a special resolution of the SPAC shareholders; and (ii) the HKEx.

 

2. Requirements for SPAC Board

The HKEx no longer requires the majority of the SPAC board to be composed of representatives of the SPAC promoters who nominate them instead the HKEx requires that the board to have at least two Type 6 and/or Type 9 SFC-licensed individuals, one of whom must be a director representing the licensed SPAC Promoter.

 

3. Subscription and trading requirements, minimum fundraising size and share issue price

Subscription and trading of SPAC securities will be limited to professional investors only. A SPAC will be required to have a board lot size and subscription size of a value of at least HK$1 million for its SPAC shares.

The minimum fundraising size for a SPAC listing is HK$1 billion and the issue price of SPAC shares must be HK$10 or above.

 

4. Open market requirement at initial listing

A SPAC’s securities must be distributed to a minimum of 75 professional investors, of which at least 20 (reduced from 30 in the original proposal) must be institutional professional investors. In addition, at least 75% of the SPAC securities to be listed must be distributed to institutional professional investors.

 

The usual requirements of (i) not more than 50% of securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders; and (ii) at least 25% public float remain unchanged.

 

5. Promoter shares and warrants

1. Promoter shares

A SPAC is not allowed to issue promoter shares to SPAC promoters which represents more than 20% of the total number of shares the SPAC has in issue as at the date of its listing.

ii. Warrants and promoter warrants

The HKEx has increased the warrant dilution cap from 30% to 50% and the minimum exercise price of the warrants must be at a price that represents at least a 15% premium to the issue price of the SPAC shares. However, a SPAC must not issue promoter warrants at a price that is less than 10% of the issue price of the SPAC shares. There are no separate caps on warrant to share ratio and promoter warrants.

 

6. Rights to additional successor company shares (earn-out rights)

A SPAC is permitted to issue earn-out rights to SPAC promoters which are convertible into ordinary shares of the successor company if the successor company meets pre-defined performance targets. The total number of shares issued under the earn-out rights and all promoter shares must altogether represent not more than 30% of the total number of shares the SPAC has in issue as at the date of its listing.  

 

Share price of the successor company's shares will be used as a performance target for the earn-out rights as long as the share price is (i) at least 20% higher than the issue price of the SPAC share; and (ii) exceeds a pre-defined volume weighted average share price over a set period of time, with such period commencing at least 6 months after the listing of the successor company.

 

7. Alignment of redemption with voting will not be adopted

A SPAC must provide its shareholders with the opportunity to redeem all or part of their shares but the HKEx no longer adopts the proposal that SPAC shareholders must only be able to redeem the SPAC shares if they vote against:

1. a material change in the SPAC promoter managing a SPAC or the eligibility and/or suitability of a SPAC promoter;
2. a De-SPAC transaction; or
3. a proposal to extend the De-SPAC announcement or transaction deadline.

8. Proceeds held in escrow account

A SPAC must hold 100% of the funds raised from its initial offering in a ring-fenced escrow account excluding interests accrued on the initial offering proceeds and proceeds raised from the issue of promoter warrants and promoter shares. The funds held in the escrow account should be held in the form of cash or cash equivalents and the SPAC should ensure that the funds are in a form that allows the SPAC to meet the requirement to give full redemption to its shareholders.

 

Funds held in the escrow account must not be released to any other person other than to:

1. meet the redemption requests of the SPAC shareholders;
2. complete a De-SPAC Transaction; or
3. return the funds to the SPAC shareholders following a suspension of trading in the SPAC securities or upon the liquidation or winding up of the SPAC.

9. Requirement of De-SPAC Transactions

The HKEx will consider a De-SPAC Transaction in the same way as a reverse takeover and in addition requires the successor company (i.e. the listed issuer resulting from the completion of a De-SPAC Transaction) to meet all new listing requirements (including minimum market capitalisation requirements, financial eligibility tests, IPO sponsor appointment requirements, due diligence requirements and documentary requirements). The purpose of the IPO sponsor requirement is to ensure the quality of assets and businesses listed via a De-SPAC Transaction.

Further, a De-SPAC Transaction must be made conditional on approval by SPAC's shareholders at a general meeting in which SPAC promoters and their close associates must abstain from voting on the De-SPAC Transaction. Written shareholder's approval will not be accepted.

 

10. Eligibility and size of De-SPAC Targets

A De-SPAC Target must have a fair market value of at least 80% of the funds raised by the SPAC from its initial offering (prior to any redemptions) and investment companies are not eligible De-SPAC Targets.

 

11. Mandatory PIPE investment (i.e. independent third party investment)

To provide sufficient regulatory safeguards on the terms and valuations of the De-SPAC Transaction and mitigate the effect of the removal of the requirement of the alignment of redemption with voting, the HKEx has strengthened the requirements on PIPE investments.

 

Mandatory independent PIPE investments must be made in the form of shares in the successor company which are in the same class as the shares to be listed and must be a term included in a De-SPAC Transaction. In addition, all PIPE investors must be professional investors.

 

The minimum amount to be raised from independent PIPE investors will adopt the following independent PIPE investment size threshold relative to the negotiated value of a De-SPAC Target.

 

Minimum percentage of independent PIPE investment	Negotiated value of De-SPAC Target
25%	Below HK$2 billion
15%	HK$2 billion or more and less than HK$5 billion
10%	HK$5 billion or more and less than HK$7 billion
7.5%	HK$7 billion or more
Waiver to be considered on a case-by-case basis	More than HK$10 billion

At least 50% of the independent PIPE investment must be contributed by at least 3 sophisticated investors (i.e. an asset management firm with assets under management ("AUM") of at least HK$8 billion or a fund with a fund size or AUM of at least HK$8 billion).

 

The requirements applicable to an independent financial advisor will be used to determine the independence of a PIPE investor.

 

12. Deadline for completion of a De-SPAC Transaction

A SPAC must make an announcement of the terms of a De-SPAC Transaction within 24 months of the date of its listing and must complete a De-SPAC Transaction within 36 months of the date of its listing.

A SPAC may request for an extension of the deadline by making a submission to the HKEx and the HKEx retains the discretion to approve or reject such request. In any event, any extension granted will be for a period of up to 6 months.

 

13. Return of funds and De-listing

The HKEx may suspend the trading of the SPAC's securities and the SPAC must, within one month of such suspension, return to SPAC shareholders, on a pro rate basis, 100% of the funds it raised from its listing at its issue price if the SPAC fails to:

1. announce or complete a De-SPAC Transaction within the deadlines (including any extension granted); or
2. obtain the requisite shareholder approval for a material change in SPAC promoters within one month of the material change.

Upon the return of the funds, the HKEx will cancel the listing of the SPAC's securities following the HKEx's publication of an announcement notifying the cancellation of listing. A SPAC must also publish an announcement regarding the return of funds and the subsequent cancellation of listing. Subsequently, liquidation of the SPAC will take place.

 

14. Open market in successor company's securities

The successor company's securities must be distributed to a minimum number of 100 professional investors at the time of listing of the successor company. The successor company must also meet all other open market requirements applicable to a new listing and the controlling shareholders of the successor company are subject to a lock-up period of 6 months following its listing. However, the restrictions on marketing to and trading by the public in respect of the successor company's securities will not be applicable.

 

WHAT TO LOOK OUT FOR:

• The SPAC listing regime and the guidance letter on SPACs will become effective from
  1 January 2022.
• The SPAC listing regime only aims to provide an alternative to the traditional IPO route but does not replace the traditional IPO route.
• A successor company must still appoint an independent IPO sponsor to conduct due diligence as it is usually done in a traditional IPO.

 

About Us

 

Howse Williams is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; fraud; financial services/corporate regulatory and compliance.

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.