Author: Syedur Rahman
24 June 2021
5 min read
Syedur Rahman of Rahman Ravelli details the Financial Conduct Authority’s plans to change the UK’s company listings regime to attract special acquisition companies.
The Financial Conduct Authority (FCA) set out proposals for a more flexible listings regime that will bring the UK closer to the approach being taken by its major financial rivals.
The ultimate aim is to lure SPACs (special purpose acquisition companies) to the City. Having put out its proposals to consultation, the FCA is now set to have its new rules in force in the coming months.
Although SPACs have been around for years, they are currently an immensely popular draw for investors. With no detailed business plan and no commodity or service, they exist to raise money from investors to facilitate a merger with a private company. The appeal of such a “backdoor’’ initial public offering (IPO) is that the private company goes public without the need to go through the normal process of filing for an IPO. As a SPAC IPO can be completed much quicker than the conventional process, it is appealing for investors looking for a swift return on their investment.
It came as no surprise, therefore, that the FCA embarked on an exercise to determine what structural features and enhanced disclosure measures were necessary in order to provide investors in SPACS with the protection they required. The FCA recognised that changes needed to be made to the UK Listing Rules if there was to be any chance of creating a market environment here that was conducive to SPACs.
On 30th April 2021, the FCA published a consultation that detailed its proposed investor protection measures for listed SPACS. Its proposals came after recommendations made by Lord Hill following his review of UK listings.
In his review, Lord Hill said the current Listing Rules presumption that trading in a SPAC’s shares should be suspended when an acquisition is announced was a key deterrent to potential investors. Investors in SPACS are unable to sell their shares during the suspension period - which can be lengthy – even if they wanted to. They may disagree with the SPAC’s acquisition target but cannot remove themselves from it – and sell their shares in it – because of the suspension period.
The US and a number of other leading SPAC markets do not require there to be a suspension. US SPACs can contain certain protections for investors, such as allowing shareholders to vote for or against an acquisition before it is completed.
The FCA is proposing removing the Listing Rules presumption that suspension of trading in a SPAC’s shares is necessary when there is an announcement of an acquisition, providing the SPAC complies with certain conditions. These conditions include granting SPAC shareholders redemption rights and requiring the approval from the SPAC’s public shareholders before the acquisition can go ahead. If a SPAC does not comply with these requirements, it will remain subject to the current rules.
The FCA has made it clear that it wanted to devise proposals that would ensure that SPACs could operate in the UK while subject to a framework of high regulatory standards and oversight. It has talked of “aligning this element of our rules more closely with other major jurisdictions.’’
Removal of the requirement for a SPAC to be suspended when it makes an acquisition is arguably the major point in the FCA’s proposals. But the proposals also include other significant changes.
With the period of consultation on the proposals having ended on May 28, the FCA is currently considering the response to them. There are aspects of the proposals - such as excluding sponsors’ investment from the £200 million minimum and preventing sponsors voting on the acquisition – that are more far-reaching than what is required in other jurisdictions. Yet it is likely that the market will be broadly in favour of the proposals, as they are intended to ensure the UK can compete with other financial centres for the rapidly-increasing volumes of SPAC business.
The consultation exercise has helped focus attention on the need for caution and diligence to be exercised by SPACs, sponsors and acquisition targets. The FCA has emphasised the importance of assessing any possible conflicts of interest between the sponsor and the investor, with the timeline and incentives for sponsors possibly creating the risk of poorer-quality transactions being proposed late in the SPAC’s lifespan or sponsor’s decisions being driven by other conflicts of interests around the proposed target.
While SPACs would have to comply with the FCA’s Market Abuse Regulation, not much has yet been said about this. But there is little doubt that accounting and internal controls will need attention. Those involved with SPACs also need to be aware that there may well be litigation arising out of any breaches of fiduciary duties, such as undisclosed conflicts of interests or a company not performing its duties as expected.
As yet, it remains to be seen whether the proposed reforms will generate the same interest in SPACs that we are seeing in the US. Nevertheless, both the target company and the SPAC should be careful to ensure that the newly- combined company is prepared to meet the audit, regulatory, governance, legal and investor relations standards expected of a public company on an ongoing basis after the de-SPAC transaction; including meeting required internal controls and disclosure expectations.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.