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.
Suspension
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 Proposals
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.
These include:
- SPACs would have to raise a minimum of £200 million. This could only be used to fund an acquisition. If that does not happen within two years, it should be returned to shareholders. The FCA believes such a minimum – which excludes sponsors’ investment - will mean that high-level institutional investment would be needed, which would ensure due diligence being conducted on both the SPAC and its managers. It also believes this would encourage both proper scrutiny of the proposed investment and the involvement of experienced management.
- Money from public markets being ring-fenced to protect investors from misappropriation of funds. Money raised from public shareholders would be kept solely to fund an acquisition. If no acquisition is made, the money should be returned to investors, minus any sums that were used for the SPAC’s running costs; which have to be detailed to investors in the prospectus at the IPO.
- A time limit for making an acquisition. The FCA is proposing that the limit should be two years from IPO. Money should be returned to investors if no acquisition has been made by the end of this period. This two-year proposal reflects US market practice. If a SPAC has identified a target by the end of the two years but the acquisition has not been completed, the SPAC can be allowed to keep operating for another 12 months if its public shareholders give their approval.
- Any proposed acquisition to require shareholder approval. Any acquisition would require a majority vote of public shareholders, as is the case with many US SPACs. The sponsors of the SPAC would not be able to take part in the vote.
- A fair and reasonable statement from the directors. If any of the SPAC’s directors have a conflict of interest regarding the acquisition target, a statement would have to be published by the board (reflecting advice from an appropriately qualified and independent adviser) that the proposed transaction is fair and reasonable as far as the SPAC’s public shareholders are concerned.
- Investors to be allowed to leave the SPAC. SPACs would have to give investors redemption rights so that they can leave the SPAC before any acquisition is completed if they dislike either the terms or the target of the deal. This exit would be conducted at a pre-arranged price – either a set amount or a fixed, pro rata share of the ring-fenced IPO proceeds minus agreed running costs. This is an approach that is similar to US market practice.
- Adequate public disclosure. There would be a requirement to disclose information at all appropriate stages in the SPAC’s development, from listing through to either an acquisition or its dissolution. This disclosure would cover the SPAC’s structure, its strategy, the IPO arrangements and relevant information when the announcement of initial acquisition is made; including updates on any new information that arises before the shareholder vote.
- Supervisory approach. A SPAC would still have to contact the FCA before announcing an acquisition. In order to avoid a suspension, it would need to indicate to the FCA that it has met the relevant criteria from IPO and will do so until completion of the acquisition. If there is a leak, the FCA says the presumption of suspension will still apply, although this would be lifted if the issuer can show it meets the relevant criteria. The FCA has emphasised that it will not indicate at the time of listing whether it is satisfied that a suspension at a future date will be unnecessary. This can only be done when a SPAC notifies the FCA about a potential acquisition.
After Consultation
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.
