Special Purpose Acquisition Companies (“SPACs“) are companies, at the point of their proposed listing on the Singapore Exchange (“SGX“), without an operating history, business or assets generating revenues. The listing is undertaken primarily to raise capital to acquire a business or businesses, as the case may be, and complete a business combination. In this article, I set out the second and final part of the key requirements, both quantitative and qualitative, for the listing of a SPAC on the SGX.
Key Requirements
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Approvals
The acquisition of a company (or companies) is commonly referred to as a “business combination”. The business combination must be approved by:
- a simple majority of the independent directors of the SPAC (> 50%); and
- an ordinary resolution passed by the shareholders of the SPAC at a general meeting (> 50%)
All shareholders are allowed to vote on the business combination based on their individual SPAC holdings. This includes the sponsor, management team, and their respective associates. However, it excludes the promote (whose role is explained in Part 1 of the guide). The sponsor and the management team are not authorized to vote on the business combination using shares bought for little or no consideration prior to or at the SPAC’s IPO.
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Warrants
As mentioned in Part 1, each SPAC security may consist of a share and a warrant. The warrants can be detached from the shares, allowing the shares and warrants to be traded independently of each other.
The detachability of the warrants mirrors the framework adopted in the US. It provides investors with the option to trade or retain the warrants (to be exercised for additional shares after the business combination). Thus, this allows investors to profit from either (a) selling the warrants, or (b) exercising the warrants for additional shares and then selling them at a price potentially higher than the issue price. Essentially, the warrants compensate investors for taking the risk of investing in the SPAC for up to 36 months.
Despite the potential benefits of the detachability of the warrants, it risks diluting the existing investors’ shareholdings upon conversion of the warrants. To address this issue, SGX has introduced a cap on the maximum dilution to shareholders upon such conversion. The maximum dilution to shareholders is limited to 50% of the SPAC’s issued share capital (including the promote).
Further, SGX has announced that it is open to relaxing the 50% dilution cap on a case-by-case basis. This is only if the SPAC can provide good reasons to do so.
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Independent Valuation
Following stakeholder feedback, SGX has concluded that when a Private Investment in Public Equity (PIPE) investment is made, an independent valuation of the target is not required. PIPE refers to when the SPAC’s securities are sold in a private transaction to institutional and/or accredited investors. This means that PIPE investors provide additional supervision and accountability. As a result, the appointment of an independent valuer to value the target company is only required for limited scenarios. One example is when the private placement of the SPAC’s securities does not occur at the same time as the business combination.
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Value of Target
To determine whether the 80% threshold has been met, SGX will first compute the total value of the funds in the escrow account subsisting at the point in time when the binding agreement for the acquisition has been entered into. Thereafter, SGX will compare the value of the acquisition to the total value of the funds in escrow. If multiple acquisitions are needed to satisfy the 80% threshold in aggregate, SGX would consider a waiver of the threshold only on a case-by-case basis.
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Redemption
SGX did not attach the redemption rights to the shareholders’ voting decisions on the business combination. These redemption rights play a vital role in providing protection for investors. Such investors/shareholders are allowed to redeem their SPAC shares and receive a pro rata portion of the escrow account balance. This is regardless of whether they voted in favour of or against the business combination.
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Liquidation
Where the SPAC is unable to complete a business combination within the prescribed timeframes (as elaborated upon in Part 1), or where it fails to obtain the relevant approvals for the business combination or where SGX orders the SPAC to delist, the SPAC will be liquidated.
Upon liquidation, the outstanding funds will be distributed on a pro rata basis back to (a) the independent shareholders and (b) the founding shareholders and the management team.
The shareholders in (b) have to waive their right to participate in the distribution in respect of any equity securities owned by them before the IPO or derived from the IPO. They can only receive distributions from equity securities obtained post-IPO.
Conclusion
The new SPAC framework represents the broadening and deepening of our capital markets. In particular, SPACs democratize private equity and venture capital investments by being offered to a broader set of investors (i.e. retail investors) and enhance SGX’s capital market offerings. In light of the foregoing and Part 1 of the guide, the SGX’s SPAC framework is a welcome addition to our capital markets as it achieves a reasonable balance between investor protection, increased liquidity, and improved capital market attractiveness.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.