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“SPAC” to the Future?

October 13, 2020

By Roger Barron & David Prowse

We explore whether the resurgence of Special Purpose Acquisition Vehicles in the U.S. will prompt a return of similar transactions to the U.K. market.

Special Purpose Acquisition Vehicles, or “SPACs”, are being touted by some as the hottest asset class in the U.S. equity markets.

SPACs have raised more than $48bn in the U.S. so far this year—the most recent of which being Romeo Power’s $1.33 billion merger with RMG Acquisition Corp., on which Paul Hastings advised.

Meanwhile, in the U.K., the number of SPACs launched so far in 2020 is zero.

There are various market and regulatory reasons for this, but the recent activity in the U.S. has not gone unnoticed and the London Stock Exchange (LSE) is reportedly in the process of exploring how to facilitate bringing these so-called “blank cheque companies” back to the U.K. market.

What is a SPAC?

A SPAC is, essentially, a newly-incorporated company which achieves a listing on the public markets through an IPO with no tangible assets or business operations. The SPAC will seek to raise capital from investors on the basis of its management team, who will be tasked with identifying and merging with a target company.

Upon completion of the IPO, investors will typically receive shares and warrants in the new vehicle alongside the management team, who will hold a combination of ordinary shares and preference shares as part of a “promote” structure.

Once a SPAC has raised funds pursuant to an IPO, it will have a defined period of time (usually between 18–24 months) to identify and merge with a target company, failing which the SPAC will be dissolved and the funds returned to its shareholders.

Why are SPACs so popular?

From a target company perspective, merging with a SPAC is viewed as a quicker, more efficient and cost-effective route to going public than a more traditional IPO and deal values can be higher.

From an investor perspective, SPACs offer the opportunity to invest in a private-equity style transaction with the liquidity and regulatory comfort offered by the capital markets. For retail investors, investing in a SPAC has the potential to open up a wider spectrum of companies that may otherwise have stayed private.

What about SPACs in the U.K. market?

SPACs have been deployed in the U.K. market before, with a particular surge in the years following the 2007/2008 financial crisis, where investors were seeking alternative ways of investing their capital.

However, SPACs have never really taken off in the way we are now seeing in the U.S. There have been a few high-profile failures in the U.K., which may have impacted market sentiment, but that is no different than the U.S. market or, indeed, any other asset class.

The U.K. rulebook does allow SPACs to be listed in the U.K., but there are some regulatory issues to navigate. The principal constraint is that the Financial Conduct Authority will generally seek to cancel the listing of a SPAC’s shares where it completes a reverse takeover, leaving the SPAC to re-apply for the admission of its shares to trading in the traditional way. This additional burden immediately removes one of the key advantages of using a SPAC.

It is, therefore, likely that the reverse takeover rules will be amongst the factors being looked at by the LSE as it explores how best to facilitate a resurgence of SPACs in the U.K. market. For example, it may consider some of the relaxations of those rules under the existing Specialist Fund Segment.

How can Paul Hastings help?

We have deep experience of advising on transactions involving SPACs in the U.S., both from an issuer and a target company perspective. That experience, combined with our extensive M&A and listed company capability in London, will be vital in helping our clients navigate the challenges and opportunities, both in the U.S. market and in the U.K. as and when the market opens up to SPACs in a more meaningful way.

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