UK SPACs - FCA relaxes rules including presumption of suspension on announcement of business combination
30 July 2021
With effect from 10 August 2021, the UK Financial Conduct Authority is implementing its Listing Rule changes and guidance for UK Special Purpose Acquisition Companies.
The FCA is proceeding with its keystone proposal to remove the general presumption that the FCA will suspend the listing of a SPAC when it identifies a potential acquisition target and will be satisfied that a suspension of a listing is not required, if the UK SPAC has certain optional features built into its structure and makes certain disclosures to protect investors. As this feature of the Listing Rules (LR5.6.8) was seen as a deterrent to listing a SPAC in London, the move is designed to attract more SPAC listings to London while maintaining protection for investors. If a SPAC chooses not to meet the criteria for avoiding suspension or cannot do so, it will continue to be subject to the presumption of suspension.
The factors that a UK SPAC must meet to reverse the FCA’s presumption of suspension of listing were announced in FCA Policy Statement 21/10, dated 27 July 2021 and are briefly set out below. The most notable of the changes from the consultation set out in FCA CP21/10, is the FCA’s new express willingness to engage with applicants during the eligibility and review process ahead of listing to provide soft comfort that the SPAC is within the FCA guidance which disapplies the presumption of suspension. This is a helpful reversal of the consultation-stage position that the FCA would only confirm whether a SPAC met the criteria to avoid suspension once it had identified its target.
Size thresholdA UK SPAC needs to raise GBP100 million or more on its initial listing, from public shareholders, excluding the founder, sponsor and directors, in order to achieve a high level of institutional investor participation. This is a reduction from the GBP200 million threshold contemplated in the FCA consultation.
Ringfencing of SPAC proceeds for business combination, redemption or repayment purposes onlyProceeds raised from the public on listing need to be held via an independent third party, for example in escrow or via a trust, to protect investors from expropriation or the risk of the SPAC’s management incurring excessive running costs. They may only be used to fund a business combination or be returned (on investor redemption or winding up) or to repay certain costs.
Time limit for completing business combinationThe SPAC has to identify its target and complete its business within two years of its admission to listing, subject to extension of this operating period to three years, with public shareholder approval. There is an option to extend the relevant operating period by a further six months without shareholder approval, in limited circumstances e.g. if the acquisition process is well advanced (there are criteria) and more time is needed to complete the reverse takeover. The time limit has to be included in the SPAC’s articles of association or equivalent constitutional document.
Board and shareholder approval of business combinationThere is a need to ensure (1) board approval for any proposed business combination and (2) shareholder approval for any proposed business combination, excluding the SPAC sponsors, founders and directors. The exclusion of the sponsors, founders and directors diverges from European and U.S. practice. The FCA believes this approach is necessary to manage the inherent conflict; the net result being that a higher percentage of public shareholders is required to approve the business combination.
Conflicts with respect to a business combinationWhere any director is conflicted with respect to a business combination (1) the conflicted director needs to abstain from director deliberations and voting and (2) the directors need to receive independent advice that the proposed acquisition is fair and reasonable so far as the SPAC’s public shareholders are concerned, and the advice needs to be publicly disclosed. A conflict is likely to include where the business combination is a related party transaction with the sponsor.
Redemption option for shareholdersThere must be a redemption option permitting investors to exit a UK SPAC before completion of any business combination. Any redemption option should specify a predetermined price at which shares will be redeemed. This could be fixed amount or a pro rata share of cash proceeds.
DisclosureThis is required at certain stages in the “SPAC lifecycle”, from the point of listing to completion of the business combination. The SPAC must undertake to provide to the extent possible, at the point of the initial target announcement, a description of the target business and the material terms of the business combination, an indication of how the SPAC has assessed the value of the target business and any other material information investors should be aware of to make a properly informed decision. There is an obligation to update disclosures as and when material information becomes available. Helpfully, the FCA notes in its policy statement that such information need only be published when ready to be published, so the SPAC is able to ensure a more managed release at information than publishing draft information before it is final. Key disclosures will be through announcement of the deal, the circular to accompany any shareholder vote, and publication of the prospectus. The scope for being able to publish the prospectus later than publication of the circular is not clear at this stage.
Alongside the specific criteria in the FCA’s SPACs policy statement, a SPAC with shares admitted to trading on a UK market will be treated in a similar way to a commercial company for the purposes of the application of the UK Market Abuse Regulation.
On AIF and other regulatory regimes, the FCA has declined to comment on the treatment of SPACs under such regimes, and a SPAC therefore needs to be assessed against such regimes. However, the FCA is clear that its rules are not intended to change the underlying analysis. Note that in Europe, SPACs have not been considered AIFs by various regulators.
UK SPACs will continue to be subject to the UK Prospectus Regulation and the Transparency Rules in the Disclosure Guidance and Transparency Sourcebook together with potentially the UK AIF, UK PRIIPs and UK MIFIR regimes and also ESG laws and regulations, among others. A number of specific issues concerning the scope of the UK regulatory environment for SPACs were raised with the FCA during the consultation process by industry groups. However, the FCA response does not comment or create guidance at this stage and any emerging industry consensus on these topics is therefore likely to be important.
Please contact your usual Allen & Overy contact if you have any questions.