The role of Private Investment in Public Equity (PIPE) in financing SPACs business combinations

Why are PIPEs typically used to finance a SPAC’s business combination?

PIPEs offer an alternative funding option for a SPAC seeking to finance its business combination rather than raising additional finance from traditional sources. Some traditional methods of fund raising (e.g. secondary equity offerings or the issue of convertible securities) are not appropriate for SPACs because they involve a significant amount of time and cost to complete. Therefore, if a SPAC requires a level of investment to fund a business combination that does not warrant the costs and time associated with a further issue of shares or other securities, a PIPE offers a speedier and certain alternative. The PIPE may also mean there is a cushion of capital in case investors in the SPAC decide to sell their shares after a target is announced.

How may PIPEs be structured?

• These may be undertaken by way of;
• third party allotment of new shares or other securities on a non-pre-emptive basis to institutional investors;
• contractual agreement between the company and an institutional investor permitting the investor to purchase shares in the future; or
• acquisition of shares from existing shareholders.

Under certain conditions PIPEs can be achieved in the London market although they remain relatively rare:

• in 2020, Allen & Overy advised the first PIPE in a London-listed company since 2009. Advising SIG plc on sale of stake to CD&R.

Key laws and regulations

Allotment of new shares to third parties

The articles of the company and company law will usually require the shareholders to approve the increase by way of ordinary resolution. The company will also need to comply with the requirements of the relevant Stock Exchange in order to list any additional shares.

Directors of a company with a standard listing on the London Stock Exchange may be granted a general mandate by the shareholders which allows them to allot a stated percentage of the existing share capital of a company each year on a non-pre-emptive basis. If a PIPE requires the issue of more than that percentage of the issued share capital then the effect of company law means they must seek shareholder approval for authority to allot shares on a non-pre-emptive basis.

The Code on Takeovers and Mergers (Code)

If the PIPE involves an investor acquiring 30% or more of the voting shares in the public company, the UK Takeover Panel may require the investor to make a mandatory offer for the company.. This rule also extends to persons acting in concert, which means that if more than one investor acquires shares as part of the PIPE and the relevant thresholds in the UK Takeover Code are breached the Panel could require a mandatory offer to be made. If at the outset the investor ultimately intends to launch a takeover bid for the company then it is advisable to avoid triggering a mandatory offer because launching a voluntary bid is much more flexible (especially as to the level of acceptances required and the form of the consideration).

Where there is a possibility of a takeover offer in the future, the investor needs to be mindful that the acquisition of shares in connection with the PIPE could fix the price and form of consideration payable for the remainder of the shares pursuant to an offer.. In addition to the general disclosure requirements set out below, the Code imposes certain disclosure obligations on the company making an offer (Offeror) and on the target company (Offeree) (including any of their respective associates) in relation to dealings in relevant securities for their own account during the offer period.

If the Offeror and Offeree (including any of their respective associates) possess price-sensitive information concerning an actual or contemplated offer they need to comply with the insider dealing restrictions contained in the UK Market Abuse Regulation. Essentially, the only person with confidential price-sensitive information relating to the proposed offer that is able to lawfully deal in relevant securities prior to an announcement is the Offeror. However, if the Offeror has acquired other confidential price-sensitive information about the Offeree, perhaps through the due diligence process, it is prevented from dealing in the securities of the Offeree until the price sensitive information is made public.

Disclosure of interests

Chapter 5 of the FCA’s Disclosure Guidance and Transparency Rules require that certain substantial shareholders of a public company should disclose their interests to the market. The overriding objective of the disclosure regime is to provide investors with complete and accurate information on a timely basis to enable them to make informed investment decisions. In summary, a substantial shareholder holding 3% or more of a class of voting shares must disclose this interest. Additional notifications are required by a substantial shareholder if there is an increase or decrease in the percentage figure of the shareholding that crosses over a whole percentage threshold (i.e. a 0.2% increase from 5.9 to 6.1%).

Protecting the investor's investment

Some of the options that may be used to provide minority investors with a special right to appoint a director are set out below. The related corporate law issues will require careful consideration in the specific situation:

• the articles of the company can be amended so that the minority shareholder benefits from a right to appoint directors.
• the majority shareholders could agree to use their voting rights to procure that directors nominated by the investor are appointed.
• the board of directors could agree to recommend directors nominated by the investor for election at the annual general meeting. This does not provide an absolute right to appoint directors because it will be subject to approval by the shareholders. In addition, the directors could face claims for breach of their fiduciary duties owed to the shareholders of the company because they have fettered their discretion.