On November 3 2020 we highlighted the principal differences between the process for listing a SPAC (special purpose acquisition company) in London and the US, and the marked difference in the volume of SPAC IPO listings in the two jurisdictions.  As we predicted at the time in our briefing note the recommendation for changes to London’s SPAC listing process contained in the 3 March 2021 report by Lord Jonathan Hill has been quickly implemented by the UK's Financial Conduct Authority (FCA) and new rules and guidance as regards the listing of SPACs on the London market came into force on 10 August 2021.

The principal regulatory obstruction to increasing SPAC IPOs in London was seen as the presumption that trading of a London-listed SPAC's shares be suspended once the acquisition of a de-SPAC target (a “reverse takeover”) was announced. This presumption of suspension was mandated because of concerns about the adequacy of information available to investors on the unlisted de-SPAC target.  A suspension effectively locked-in shareholders in the London SPAC once a target was announced; in contrast to the ability of a US SPAC shareholder to exit from the SPAC through the redemption of its shares and/or to vote against the de-SPAC acquisition. Under the new rules and guidance there will no longer be a presumption of suspension of a London-listed SPAC's shares following a de-SPAC announcement, provided the SPAC meets certain requirements: 

1. The SPAC raised at least £100million in cash from public shareholders at listing.

Comment: The FCA believes this amount should ensure the SPAC has an institutional investor base, which will result in desirable improvements in its corporate governance, given the risks inherent with its business model.

2. Funds raised by the SPAC from public shareholders are ring-fenced with an independent third party.

Comment: There are certain permitted uses for the ring-fenced cash, consistent with the SPAC’s purpose to identify an acquisition target.  This change does not go as far as requiring the funds to be held in trust, as is the case in the US (although the FCA noted a trust or escrow arrangement may be appropriate).  The independent third party should be a separate legal entity not under the SPAC’s control or influence and have relevant experience. A bank or other company with which the SPAC has an existing affiliation or service relationship may not necessarily be excluded.

3. The SPAC’s constitution requires it to make an acquisition within 24 months (subject to a shareholder-approved extension by 12 months and/or by (a further) 6 months if the de-SPAC transaction has been approved but not yet completed.

Comment: Whilst previously there was no time limit for the SPAC to make a de-SPAC acquisition, this new requirement (i.e., 24, 30, 36 or 42 months) is more in line with the 18 to 24 month period common in the US.

4. The de-SPAC acquisition is approved by its board, with certain directors excluded from discussions and voting.

Comment: This is a new requirement .  Excluded directors are those who are directors of, associated with, or have a conflict of interest in relation to the de-SPAC target group. In the US, the law of the jurisdiction of organisation typically requires a board vote for the business combination transaction, which may (or may not) require director recusal, a committee of independent directors or other procedural steps. 

5. The de-SPAC acquisition is approved by its shareholders, with certain shareholders excluded from voting.

Comment: The first part of this rule change is a new requirement bringing the London regime into line with that for US-listed SPACs where it has been typical to require a shareholder vote for most business combination transaction structures.  Excluded shareholders are founding shareholders, sponsors and director-shareholders.  On US national securities exchanges, similar shareholders may be ignored in calculating the required majority approval based on applicable law of the jurisdiction of organisation.  However, often the business combination is structured to avoid this requirement, and investors expect these insiders to be bound at the SPAC IPO to vote in favour of the transaction approved by the board.   

6. If a SPAC director has a conflict of interest in relation to the de-SPAC target group, the SPAC must publish a statement by its board, based on advice from an independent adviser, that the proposed de-SPAC transaction is fair and reasonable as far as the public shareholders of the SPAC are concerned.

Comment: The FCA has made no requirements or guidance as to who should be considered an appropriately qualified and independent adviser.  In the US, such a statement is often provided where appropriate as part of the board of directors’ recommendation for the shareholder vote in favour of the transaction, though the SPAC typically only commits to provide a third party opinion as to fairness to unaffiliated shareholders where the business combination transaction is with an affiliate of the SPAC’s sponsors or officers.  We expect the market will seek similar commitments from London-listed SPACs.

7. The SPAC shareholders have a redemption right over their shares before the de-SPAC acquisition.

Comment: This is consistent with the position in the US, where shareholders may redeem their shares in the SPAC if they disagree with the acquisition.  The FCA stated it is giving further consideration to use of the ‘unit’ structure (representing a share and warrant) typical in many US SPACs and how it may interact with the UK’s Listing Rules.

8. The SPAC must disclose matters (2) to (7) in the prospectus published in relation to the SPAC’s listing.

Given how important it will be for those organising a London-listed SPAC to know whether the SPAC falls outside the presumption of suspension, the FCA has stated its expectation that a SPAC meeting the criteria when the de-SPAC acquisition is announced would not be subject to the presumption of suspension. The FCA will work with SPACs and their advisers, based on principles of transparency and predictability, to provide comfort as regards the presumption of suspension as part of the initial vetting of the SPAC’s prospectus and eligibility for listing.

These changes will be welcomed enthusiastically by those looking to see London “close the gap” with the US and other SPAC listing jurisdictions and more cautiously by those concerned about a regulatory “race to the bottom”.  However, given the glut of US SPACs already looking for de-SPAC targets inside and outside the US, notwithstanding the speed of implementation of these regulatory changes, they may be too late to enable London to claim its share of the SPAC boom. 

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.