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SPAC or Not To SPAC: An Alternative Route to Go Public Without an IPO (I)

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SPACs have made a comeback in the equity capital market in recent years, particularly in 2020 where the global economy is adversely affected by the COVID-19 pandemic. What are SPACs, what do they do and why are they becoming so popular? Part I of this article will discuss the history and characteristics of SPAC, where and how they get listed. Part II will focus more on what investors get from investing in SPACs and what SPACs do with the money raised. 

History and characteristics of SPAC

SPAC, also known as Special Purpose Acquisition Company, is a company established solely for the purpose of raising capital through IPOs. SPAC is not a newly developed vehicle or concept, it has been around for some decades and there have been ups and downs for SPACs. Recently, there has been an increase in the number of SPAC IPOs. Total funds raised jumped from approximately US$3.5 billion through 13 SPAC IPOs in 2016 to approximately US$13.6 billion through 59 SPAC IPOs in 2019 and so far in 2020, there has been 178 SPAC IPOs raising a total of approximately US$64.8 billion1. The average SPAC IPO size also increased from less than US$250 million to approximately US$370 million in 2020. The SPACs and SPAC IPOs referred to in this article generally refer to those in the US market.

The main difference between a SPAC and other companies that raise funds through IPOs is that SPACs have no commercial operations at the time of listing. There is only one purpose of the listing of a SPAC and that is to raise funding for its business combination, merger with or acquisition of other private operating companies post-IPO such that the private operating company would be able to achieve a listing status without the need to go through the traditional lengthy IPO process. The post-IPO acquisition of or business combination with the private business by a SPAC is generally known as the “de-SPAC transaction”.

SPACs have always been viewed as an alternate route for private operating companies which otherwise may not satisfy listing requirements or find the traditional IPO route too costly and time consuming to go public. SPAC acquires private companies with funds raised from its IPO to achieve this. SPACs offer investors a chance to invest in a fund which are then used to acquire one or more target businesses after the SPAC IPO. The target businesses are usually not identified prior to the IPO to avoid extensive disclosures during the listing process and generally there is a statement in the IPO prospectus specifically to inform investors that there is no identified business combination, acquisition or merger targets nor substantive discussion with any potential target has been initiated. This is why SPACs are also referred to as “blank check companies”, since investors in the IPO do not know which company will ultimately receive their money. 

Where can SPACs go for an IPO? 

The United States stock exchanges such as New York Stock Exchange and NASDAQ have been the popular choice for SPAC IPOs. Certain stock exchanges in the UK (London Stock Exchange) and Europe (Euronext Paris, Euronext Amsterdam) also welcome listing by SPACs but the number of IPOs are not comparable with that in the US. In Asia, several countries accept listing of SPACs, including Malaysia, Singapore and South Korea. The number of IPOs and the capital raised in these Asian countries are not comparable with that in the United States. While the timeframe for US listed SPACs to complete the subsequent merger is 18-24 months, SPACs listed in Malaysia and South Korea are generally allowed up to 36 months after the IPO to complete the merger. 

What are the criteria for a SPAC to get listed and the structure of the listing? 

A SPAC IPO in the US will typically consist of “units” where each unit usually consists of a share of common stock and a fraction of a warrant to acquire a share of common stock in the SPAC. The warrant is normally exercisable after the de-SPAC transaction. The sponsor of SPAC will typically retain around 20% of the shares in the SPAC known as “founder shares” at a nominal consideration. This allows the sponsor to achieve a fairly high return regardless of the value of the SPAC. However, there is a major change in the investment structure of a recent SPAC IPO in the US, where the sponsor does not acquire any founder shares at nominal consideration but rather acquire sponsor warrants which are not exercisable until a certain period of time after completion of the de-SPAC transaction at the fair market value. This arrangement substantially reduced the dilution effect on the investors’ interests which makes the investment more attractive to investors when compared with investing in traditional SPACs2 .

There are generally a few criteria built into the structure to protect public investors including:

  1. a deadline for SPACs to conclude its first business combination or acquisition, typically within 18 to 24 months (maybe extendable);
  2. a right for investors to approve the proposed target business and/or a right for investors to have their shares redeemed by SPACs;
  3. a requirement for the IPO proceeds to be held in a segregated trust account; and 
  4. minimum deal value requirements (e.g. where the SPACs is listed on the NYSE, the fair market value of the target company(ies) must equal at least 80% of the SPACs’ assets in the trust account at the time of signing the definitive agreement of business combination/merger/acquisition.)

Disclaimer: Nothing in this article is meant to be or shall be construed as any legal advice on Hong Kong, US or the laws of any other jurisdictions referred to in this article or as any legal advice on SPACs to any person.   

1 SPAC Statistics by SPAC Insider
2 Prospectus of Pershing Square Tontine Holdings, Ltd.

SPAC or Not To SPAC: An Alternative Route to Go Public Without an IPO (II)

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In Part I of this article, we have examined the history of SPACs, let’s now turn to examine what investors get from investing in a SPAC, what SPACs do with the money raised and what the future looks for SPACs.

What are investors investing in and what do they get?

In a typical SPAC IPO, the SPAC is a newly incorporated company and does not have any operating history, financials nor performance record. What do investors base their investment decisions on then? In traditional IPOs, the listing vehicle will have operating history and a particular operating business, whether or not the company has been operating in profit in the past is not necessarily a key criterion depending on where the company proposes to list its shares. The company will need to disclose in the prospectus matters such as its business, financial performance, risks involved so that potential investors will be able to have an understanding of how good or bad the company has been performing and assess its future prospects before making an investment decision. 

For a SPAC, no such information is available to investors as the SPAC is only a shell company. What they have, on the other hand, is a management team and an investment team typically with experiences in specific industries or sectors which the SPAC intends to acquire potential targets with capital raised from the IPO. Further, in a SPAC prospectus, there is no information on any potential targets of business combination or acquisition because stating the potential target would mean information on the target will be required to be disclosed as in any traditional IPO of companies with operating history. Hence, what investors invest in is not any specific operating company but rather their trust and confidence in the management team and investment team of the SPAC and their experiences in finding a most suitable target for business combination, merger or acquisition and bring it public.  

In return for their investment, investors receive units of the SPACs, with each unit comprising a share of common stock and a fraction of a warrant to purchase a share of common stock after completion of the de-SPAC transaction. Shareholders are generally given the right to approve or reject any proposed de-SPAC transaction. The SPAC will provide its shareholders with the opportunity to redeem their shares upon the completion of the de-SPAC transaction either (i) in a shareholder meeting called to approve the proposed de-SPAC transaction or (ii) by means of a tender offer. Whether the SPAC will seek shareholders’ approval of a proposed de-SPAC transaction or conduct a tender offer will be made by the SPAC at its sole discretion taking into account factors such as the timing of the transaction and whether the terms of the transaction would require the SPAC to seek shareholders’ approval by law or pursuant to regulatory requirements. Upon a de-SPAC transaction, shareholders can choose to maintain their investment in the newly acquired or merged company or redeem their shares.

What do SPACs do with all the moneys raised?

The capital raised by SPACs through IPOs are held in a trust. Usually, after setting aside some portions of the funds to meet the listing expenses, underwriting commission and the SPACs’ ongoing operational costs, the remaining IPO proceeds are segregated in a trust account with a third-party financial institution. The funds can only be used for the post-IPO business combination, merger with or acquisition of a target business or for the redemption of the SPAC shares upon request by the shareholders. If the business combination, acquisition cannot be achieved within the specified timeframe, i.e. 18 – 24 months after the SPAC IPO, the SPAC shall be liquidated and the funds returned to the shareholders to redeem their shares in the SPAC. 

Since SPAC shareholders have the right to request the SPAC to redeem their shares, the SPAC shall redeem the shares with the funds set aside in the trust account upon receiving such request. A huge number of shareholders requesting redemption of SPAC shares means that a large portion of the funds in the trust account will be required to be paid out as redemption money, which the trust account may end up not having sufficient funds left to consummate any de-SPAC transaction. If the SPAC fails to raise additional financing for the de-SPAC transaction, it may end up not being able to complete the business combination, acquisition within the timeframe which will then lead to the liquidation of the SPAC.

 Future of SPACs?

Not knowing how much longer the COVID-19 pandemic will continue to affect our daily lives and the economy, particularly with the second, third or fourth wave hitting different parts of the world one after another and the record breaking high of daily new cases, it is difficult to predict market reaction to traditional IPOs and investors tend to adopt more conservative approaches in making investment decisions. While there are big name IPOs which the general public has been waiting for and current economic environment is not expected to have significant negative impact on their subscriptions, other small to mid-size IPOs are nonetheless going to be the hardest hit. Instead of going through the lengthy and costly IPO process and not knowing how well-received by the public their shares will be, a business combination, merger with or an acquisition by a SPAC would seem to be the more realistic way of exit of private companies. With the ever-growing number of SPAC IPOs and the funds raised through them, we can only expect to see the continuous thrive of SPACs at least during this period of uncertainty.

Disclaimer: Nothing in this article is meant to be or shall be construed as any legal advice on Hong Kong, US or the laws of any other jurisdictions referred to in this article or as any legal advice on SPACs to any person.

December 2020

Integrated Plan for Cross-Border Assets Recovery

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How to join all the dots in collection and enforcement

The continued increasing popularity of offshore vehicles being used as a tool for asset protection has made debt collection and asset recovery more challenging for lenders. The enforcement process would often come to a halt when the subject asset is found to be held by an offshore entity, most likely a BVI company if the borrower is a Hong Kong or PRC entity. This bulletin seeks to provide practical guidance on how lenders could plan their cross-broader actions to maximize recovery. 

Secured Indebtedness

In the preferred scenario where the indebtedness is secured, for instance by a share mortgage, upon default the lender should promptly take steps to enforce the secured interest pursuant to the mortgage document. 

Most share mortgages are equitable mortgages with the beneficial title being transferred to the lender, and a set of pre-executed documents to facility the transfer of legal title at the lender’s disposal. However, the execution and filing of the transfer documents would not by itself give the lender a free and clear title, as the ownership would be subject to the borrower’s equitable interest to redeem the shares once the indebtedness is repaid. 

To extinguish the said equitable interest, the mortgagee would have to, subject to the provisions in the mortgage, sell the shares by either 1) itself being the mortgagee in possession; 2) a power of attorney; or 3) appointing a receiver. As simple as it seems, in exercising his power of sale there is a general duty owed to the mortgagor to take due care to obtain the best price reasonably obtainable; there is also a rule against self-dealing (i.e. the mortgagee could not purchase the interest itself). With these restrictions it is often advisable for a mortgagee to delegate the duty to sell to a professional receiver. 

Checklist

1)    What is the governing law of the security document?
2)    Is there a mechanism in place for the transfer of legal title?
3)    What are the contractual options for enforcing the secured interest?
4)    What is the best way to exercise the right to sell?

Unsecured Indebtedness

Where the indebtedness is not secured, assistance from the Court is necessary to recover debt through assets owned by the borrower. If the indebtedness is governed by Hong Kong or PRC law, many lenders understand that as a first step a judgment should be sought from the Court to confirm the validity of the debt. If the subject asset is held offshore, an extra step should be taken to domesticate the judgment for the debt to be recognised by the Court where the asset is located.  

Although there is no reciprocal recognition arrangement between Hong Kong and the BVI, a recent decision is notable as being the first case where the BVI Court has recognised and enforced judgments from the PRC Courts (and may assist future applicants seeking reciprocal relief from the PRC Courts for recognition of BVI Court orders). The application arose out of judgments against the debtor in the PRC, which were subsequently recognised in the BVI. The debtor is the sole shareholder of a BVI company, which in turns own shares in a Hong Kong listed company. Following proceedings to domesticate the PRC judgments, judgment was entered in the BVI, and a final charging order was made with respect to the shares. 

This put the bank in the position as a secured lender. However, as it was practically difficult for the bank to sell the shares with virtually no books and records, it then decided to apply for the appointment of receivers, who can exercise shareholder voting powers to take control of the company, for the purpose of liquidating its assets to ultimately repay the bank.

In granting the application, the Court confirmed that a receiver can be appointed over the shares in a BVI company and can then use those powers to realise value from the shares by appointing directors over the company and selling assets down the chain in order to satisfy the judgment debt. The Court determined that it would be expedient to appoint a receiver rather than order a sale of the shares where the value of the underlying assets was unknown.

The practical approach adopted by the BVI Court to assist foreign lenders is welcomed.  

Checklist 

1.    What is the governing law of the indebtedness?
2.    Will the indebtedness be disputed?
3.    Where are the assets located?
4.    Is there sufficient information regarding the value of the assets which would assist disposition of the same?

Conclusion 

The key takeaway is that lenders should be encouraged to seek integrated advice covering both onshore and offshore aspects of a defaulted indebtedness, which would enable effective recovery of assets.  

China Trademark Practice – A Letter of Consent

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When trademark applicants/owners receive refusal of their trademark applications due to prior similar mark(s) flagged by the examiner, how can the applicants overcome the citation(s) by way of filing an application for review of the refusal with the China Intellectual Property Administration (“CNIPA”), in order to eventually have the applied-for mark approved for registration?  

To overcome the citation(s) in the review proceedings, apart from arguing against the similarities between the respective marks, it will be very helpful to overcome the prior similar mark(s) by way of submitting  a letter of consent (“LoC”) issued by the cited owner of the prior similar mark(s) agreeing on the use and registration of the applied-for mark in China, which is alternatively is called “co-existence agreement” in China. 

We would like to share with you our views of the functions and practice of the LoC/co-existence agreement in China.

RELEVANT LAW/RULES/GUIDELINES

The PRC Trademark Law does not have specifical content and definition about LoC or co-existence agreement.

Nevertheless, in the “Trademark Trial and Appeal Rules” issued by CNIPA, Article 8 shows the parties can reach settlement dealing with the trademark rights. This is regarded as a basis of the LoC.

  • Article 8 During the trademark review and hearing, a party shall have the right to, in accordance with the law, dispose of his own trademark right and the rights in connection with the trademark review and hearing. On the premise of considering public interests and the third-party rights, both parties concerned may reach a reconciliation agreement in written form, and the Trademark Review and Hearing Board may also hold mediations in this regard.

In addition, in the “2019 – Beijing High People’s Court Guidelines for the Trial of Trademark Right Granting and Verification Cases“ issued by the Beijing High People’s Court, the following three Articles are in relation to the nature, formalities, and legal effects of LoC:

  • 15.10 When determining whether the respective marks are similar, a LoC could be prima facie evidence to obviate the confusion of the marks.
  • 15.11 The LoC must be issued in written form by the cited owner specifying particulars of the applied-for mark and agreeing on use and registration of the applied-for mark. The LoC cannot have any condition and time limitation, otherwise, it shall not be accepted.

         The LoC shall be genuine, legal, and valid, and not harm the interests of the state, the public and the third party, otherwise the LoC shall not be accepted.

  • 15.12 If the respective marks are identical or substantially identical with each other, and their designated goods/services are identical or similar, the applied-for mark shall not be approved for registration based on the submitted LoC only.  

           If the respective marks are similar, their designated goods/services are identical or similar, and there is no evidence showing public confusion of the sources of goods/services caused by the marks’ co-existence, the respective marks shall be considered dissimilar under the LoC submitted.

OUR COMMENT

In accordance with the above-mentioned relevant Rules and Guidelines and the practice below, similar to other countries/jurisdictions like the U.S. and Hong Kong, the examiner at CNIPA, in particular the judge at the Courts tends to withdraw the citation(s) and approves the registration of the applied-for mark, if a LoC is submitted either in review proceedings or in Court proceedings. 

To illustrate the acceptance of the LoC, we set out some landmark precedents in the table below for your reference:

Table to illustrate the acceptance of the LoC

In conclusion, we have successfully overcome prior marks by way of submitting LoCs. Despite the fact that China adopts case-by-case principle and precedents are not binding in China, based on the current practices, we believe that a LoC will be very helpful to overcome the prior similar mark(s). Although the examiner/judge has her/his discretion whether to accept a LoC based on the possibilities of confusion, there is a good chance that they will withdraw the citation(s) if the LoC is submitted; unless the marks are too similar, and the goods/services are identical.

One point to note is that the LoC must be notarized, if the cited owner is a foreign company/individual, the notarized LoC must be legalized by the local Chinese Consulate. 

If you have any questions in relation to the LoC and/or protection of your trademark in China, please feel free to contact please contact evelyne.yeung@oln-law.com or angel.luo@oln-law.com,. We are happy to assist you in the matter, e.g. assessing the chance of acceptance of the LoC, approaching the cited owner for a LoC, preparing a LoC that is acceptable by CNIPA/Court, submitting the notarized and legalized LoC to CNIPA/Court, and requesting the examiner/judge in charge of the case to accept the LoC and approve your applied-mark for registration.   

Oldham, Li & Nie Launches Document Automation Platform

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Oldham, Li & Nie Solicitors OLN, a leading Hong Kong law firm, announced today its partnership with Zegal for the launch of OLN online: www.oln-online.com , a cloud based document automation platform, powered by Zegal. The platform, which is the first to be introduced by a Hong Kong law firm, provides its clients and its lawyers with seamless solutions and instant access to a wide range of legal documents, 24/7, remotely, with online support from OLN’s professionals.

The platform offers a documentary archive and other resources for various practice areas, instantly accessible by clients to generate time-critical transactional documents with ease, when and where such need arises.

Gordon Oldham, Senior Partner of OLN said: “The legal profession has been slow to embrace technology. Our new platform and a number of other client communication technology tools and resources we are introducing acknowledge the changing landscape of what professionals and their clients want and their need to communicate and collaborate. OLN online is designed for the provision of better service to Clients and efficiency of work for OLN lawyers and support teams.”

Hung-Chou Tai, CEO of Zegal said: “We are extremely excited to be working with OLN to launch the first truly digital “Law as a Service” offering in Hong Kong. The OLN online platform will allow an unprecedented level of customer service and convenience with consistent quality. Companies in Hong Kong will now have access to their legal partners anywhere and at any time.”

Oldham, Li & Nie Solicitors was founded in 1987 with offices in Hong Kong and Shanghai with a business-centric practice in:  

•    Corporate and Commercial;
•    Dispute Resolution;
•    Tax and Business Advisory;
•    Insolvency & Restructuring;
•    Intellectual Property;
•    Insurance; 
•    Private Client Services; and
•    Family law, Trusts and Succession.

OLN has consistently been ranked as a top tier Hong Kong law firm by Chambers Asia Pacific and Legal 500 Asia Pacific. For more details, please visit https://oln-law.com.

Media Contact:
Oldham, Li & Nie Marketing Team
Ruby Ng, (852) 2868 0696 
marketing.oln@oln-law.com
 

OLN Nominated for Six Awards in the ALB Hong Kong Law Awards 2020

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Oldham, Li & Nie is pleased to be shortlisted as finalist in the following six categories:

Firm of the Year categories:-

  • Civil Litigation Law Firm of the Year 
  • Intellectual Property Law Firm of the Year
  • Labour and Employment Law Firm of the Year
  • Restructuring and Insolvency Law Firm of the Year

Congratulations to the teams! 

For more information, please visit the link here: https://www.legalbusinessonline.com/law-awards/alb-hong-kong-law-awards-2020?utm_source=ALB+ALL+-+Events&utm_campaign=aa8ef9ecfe-EMAIL_CAMPAIGN_2020_01_24_03_11_COPY_01&utm_medium=email&utm_term=0_c7f887c850-aa8ef9ecfe-55528184#edit-group-finalists