While the CPC program has existed for a number of years under
the TSXV and Special Purpose Acquisition Companies
(SPACs) have long been a feature of American
capital markets, as we alerted in October of last year, SPACs are
a relatively new arrival in Canada, with the first Canadian SPAC
created in April 2015. The TSX has described SPACs as giving investors the
ability to participate in the acquisition of private operating
companies. Despite their attractions, SPACs have so far failed to
meet investor expectations, both with respect to their ability to
close transactions and their effect on private M&A.
A SPAC (also known as a "blank cheque company") works
by raising capital from investors in order to acquire a company. In
many respects, SPACs are similar to Capital Pool Companies on the
TSXV, though with higher capital requirements and slightly
different rules. In simple terms, a SPAC will complete an IPO by
issuing units typically comprised of a share and a warrant. Once
the capital has been raised, the SPAC holds the proceeds of the IPO
in escrow (where it earns interest at typically treasury yields)
pending completion of an acquisition during the next 21 months (or
in certain circumstances 36 months) period. Acquisitions require
shareholder approval, and dissenting shareholders will receive the
opportunity to redeem their pro rata share of the escrow funds. If
no acquisition is completed, investors will receive back their pro
rata share of the escrow funds.
The TSX first adopted rules on SPACs 2008, and to date a total
of 6 SPACs have completed IPOs in Canada, attracting more than $1
Billion in capital. Two of these SPACs have so far announced
transactions. Yet, as the Financial Postnotes in a recent article, the two deals
announced so far "seem different from what some investors were
hoping for when they piled $340 million into those two companies in
the early part of last year." Neither of the two announced
transactions have had any effect on the private M&A market as
the SPAC program expects. In one case, Dundee Acquisition Corp. has
agreed to acquire CHC Student Housing Corp—a micro-cap public
company listed on the TSXV. In the other, INFOR Acquisition Corp.,
has agreed to be bought by a unit of Element Financial—a
Despite their failure to meet expectations so far, there are
several factors in favour of continued investor interest. Usually
there is relatively little downside: investors will receive at
least treasury yield if a qualifying transaction is not completed.
If there is a qualifying transaction and they do not dissent, they
will capture upside from gains on their equity. For private
companies that are potential targets, SPACs can offer a more
convenient means of taking private companies public. They may also
provide an attractive management team and strategic direction for
the target. Nonetheless, the future success of SPACs will also
depend on how well they fare in finding targets and making
acquisitions. Only time will tell if the first two announced
transactions are indicative of the future or if the SPAC market
will develop in Canada as it was originally contemplated.
The author would like to thank Joe Bricker, articling
student, for his assistance in preparing this legal
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