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 Post notes 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 public company.
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 update.
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