I Want You SPAC for Good – The FCA Publishes Listing Rule Changes for UK SPACs

As outlined in our 30 April 2021 insight, Exit through the SPAC door? UK FCA publishes proposed changes to the Listing Rules, the UK Financial Conduct Authority ("FCA") published a consultation paper (the "Consultation") which proposed changes to the Listing Rules in respect of special purpose acquisition companies ("SPACs").

In response to feedback received on the Consultation, the FCA published a policy statement on 27 July 2021 (the "Policy Statement"). The Policy Statement sets out the FCA's policy response, and the final Listing Rule changes relating to SPAC listings which will be effective from 10 August 2021.

THE KEY CHANGES

In response to feedback, the Policy Statement amended the FCA's original proposals to:

• lower the minimum capital raising threshold at initial listing from £200 million to £100 million (the "size threshold");
• introduce an option to extend the proposed 2-year time-limited operating period (or 3-year period if extended with shareholder approval) by 6 months, without the need to seek shareholder approval. The additional 6 months will only be available in limited circumstances and is intended to provide more time for a SPAC to conclude a reverse takeover where a transaction is "well advanced" (the "acquisition deadline"); and
• modify the FCA's supervisory approach to provide more comfort prior to admission to listing that an issuer is within the guidance which disapplies the presumption of suspension, rather than only at the point of an announcement (the "supervisory approach").

Size threshold

Respondents to the Consultation largely agreed that a size threshold was needed, however most thought that a threshold of £100 million was more suitable and a better reflection of the UK/European SPAC market, relative to the size of prospective target companies. The FCA noted that proceeds raised by SPACs at IPO may only account for approximately one-fifth of the amount used for the actual acquisition, therefore a SPAC raising £100 million may seek to acquire a target company valued at up to £500 million. The FCA also determined that the £100 million threshold would achieve the desired policy objective by ensuring the terms of the SPAC and credibility of its management would be sufficiently scrutinised by institutional investors. Where a SPAC does not meet the size threshold, it can still apply for listing, however it will not be able to use the alternative approach and the presumption of suspension will remain (unless the SPAC can provide detailed information about the target to the market).

Acquisition deadline

The FCA agreed with respondents that there is justification for allowing an extension to a SPAC's operating period, without the need for shareholder approval, in circumstances where a proposed takeover is "well advanced". In such case, the FCA has determined that a period of up to six months' is reasonable. Consequently, the maximum operating period for a UK-listed SPAC following the Policy Statement's approach to suspension will be 42 months (i.e., a three-year period with shareholder approval plus a six-month automatic extension).

The six-month extension cannot be triggered solely by the announcement of a proposed target, as this may encourage early or speculative announcements to trigger said extension. The FCA emphasised that an extension without shareholder approval should only be permitted in limited circumstances, such as where the SPAC is in the process of seeking shareholder approval for a transaction or has already secured approval, and time is required to finalised the transaction.

Use of the further six-month extension must be notified to the market before the conclusion of the preliminary two-year period (or three-year period if extended with shareholder approval).

Supervisory approach

The FCA modified its supervisory approach to offer more comfort prior to listing that an issuer is within the guidance which disapplies the presumption of suspension, opposed to only at the point of announcement. During the prospectus review and eligibility vetting stage, the FCA will work with SPACs and their advisers to achieve comfort over the presumption of non-suspension.

Such comfort will not continue where circumstances or arrangements have changed or have been inaccurately described to the FCA, although the FCA has confirmed that it would not expect to revisit a previous assessment if the SPAC confirms the requisite conditions are met. Upon satisfaction of the conditions, the SPAC will be treated akin to a commercial company and the FCA expects compliance with the UK version of the Market Abuse Regulation ("UK MAR") and has suspension powers under Listing Rule 5.1.1R.

The FCA suggested, irrespective of whether or not the SPAC has received comfort prior to admission, that the SPAC should still contact the FCA: (i) before announcing an agreed or proposed reverse takeover (i.e., the de-SPAC transaction), in order to reconfirm the SPAC has satisfied the requisite conditions and to discuss its announcement of a target; and (ii) where a leak has occurred, to provide the FCA with the action taken or contemplated to inform the FCA. In the event of a leak, the Listing Rules require a shell company to contact the FCA to request a suspension (Listing Rule 5.6.6R(2)). While the FCA expects that it will not reconsider its previous assessment of whether the SPAC meets the conditions for non-suspension or take action to suspend the SPAC if it has acted in compliance with UK MAR, suspension may still be necessary under the FCA's general suspension powers.

OTHER PROPOSALS

Other proposals, as detailed in our earlier insight, include:

Ring-fenced proceeds

The approach to ring-fencing remains unchanged, therefore proceeds from public shareholders must be adequately ring-fenced via an independent third party, to ensure such proceeds are only used to fund:

• an acquisition (approved by the board and public shareholders);
• a redemption of shares from shareholders; and
• a repayment of capital to public shareholders if the SPAC winds up/fails to make an acquisition within the time limit.

Ring-fenced proceeds may exclude such sums as the SPAC requires to fund its operations, provided the quantum of such funds is disclosed in its IPO prospectus.

The FCA noted that it may be appropriate to ring-fence proceeds in a trust or escrow account.

Fair and reasonable statement

The SPAC's articles of association (or equivalent constitutional document) must provide that, where a SPAC's director has a conflict in relation to the target or the target group, the board of the SPAC must publish a statement that the proposed transaction is fair and reasonable as far as the public shareholders of the SPAC are concerned, supported by the advice of a qualified and independent adviser.

Board approval of a transaction

The SPAC's articles association (or equivalent constitutional document) must provide for:

• board approval of any proposed acquisition (excluding any interested director); and
• approval by a majority of public shareholders (i.e., excluding the SPAC's sponsors).

Disclosure

The SPAC's IPO prospectus must include sufficient disclosure, including the full structure of the offer (including any warrants and their terms), details of management's experience, their strategy, risk factors and conflicts of interest.

The announcement of any acquisition must contain:

• a description of the target business and the material terms of the proposed transaction (including the expected dilution effect on public shareholders from securities held by, or to be issued to, the sponsors);
• links to all relevant publicly available information on the target (e.g., its most recent publicly filed annual report and accounts);
• proposed timeline for negotiation of the transaction;
• the SPAC's valuation methodology, as applied to the target;
• any other details of which investors should be aware in order to make a properly informed decision; and
• if applicable, an acknowledgement where certain information has been omitted because it is not known at the time of the announcement.

The FCA noted that, prior to the shareholder meeting to approve any acquisition, the SPAC must keep shareholders updated regarding the above, and that, in any event, the SPAC will remain subject the Disclosure Guidance and Transparency Rules and UK MAR.

Shareholder redemption option

SPACs should provide a redemption option to shareholders to exit before any acquisition completes.

Any redemption option must specify a predetermined price at which shares will be redeemed (either a fixed amount or fixed pro rata share of the ring-fenced cash proceeds, less pre-agreed amounts the SPAC retains for its running costs).

The terms of the shareholder redemption option must be set out in the IPO prospectus.