IPOs of Special Purpose Acquisition Companies (SPACs) have boomed in 2020 and Bermuda is ideally placed to provide an offshore domicile for these acquisition vehicles.
For decades Bermuda has been the preferred jurisdiction for many offshore companies listed on the NYSE, NASDAQ, Hong Kong Stock Exchange, Toronto Stock Exchange, and London Stock Exchange. Currently, around 70 Bermuda companies maintain listings on the NYSE or NASDAQ, including companies such as Arch Capital Group Ltd (insurance), Marvell Technology Group Ltd (IT), Nabors Industries Ltd. (oil & gas), Credicorp Ltd. (financial services), and many others across a wide range of industries such as shipping, media, pharmaceuticals, communications, aircraft leasing and biotechnology. In 2019, US$19.5 billion in capital was raised by Bermuda companies listed on the NYSE and NASDAQ, up from US$13.2 billion in 2018. In total, more than 700 Bermuda companies are listed on various stock exchanges around the world.
The Year of the SPAC
SPACs, or "blank-check companies", have been in existence for the better part of thirty years, but have risen to prominence over the last couple of years as a vehicle to access public markets, due to market desire for new-growth companies in combination with a high level of liquidity. In addition, the market disruption caused by the impact of COVID-19 in 2020 has created an appetite for acquisition vehicles with large amounts of ready capital and experienced management teams.
2020 has already seen over 100 SPAC launches on the US public market, raising in the region of US$40 billion. This represents around twice the deal volume of 2019, which was, itself, an annual high until this year.
Unlike in a traditional IPO, SPACs are incorporated with no underlying business. Instead, they raise capital from investors on the basis of a business model and the expertise of the acquisition and management team. The IPO proceeds are typically placed in trust then deployed once the acquisition target is identified, usually through a merger acquisition in the following one to three years. Given the inherent risk associated with investing in a company with no operations of its own, a number of investor protections are typically provided for in the structure. These include a requirement to return IPO proceeds to investors if no acquisition is completed; investor approval rights before the investment is acquired along with a redemption/repurchase right enabling investors to have their investment returned; a requirement for third party valuation of the target asset; and minimum deal value stipulations to ensure a sufficient amount of the IPO proceeds are deployed rather than remaining in the trust account.
Offshore, SPACs have been formed this year across a number of sectors, particularly in private equity and, recently, in the aviation industry, with a view to taking advantage of the current market disruption.
Why Bermuda?
Bermuda's corporate regime is based largely on English company law. Consequently, its principles are similar to corresponding concepts in the US. Indeed, the number of Bermuda companies listed on US exchanges has resulted in the development in Bermuda of several corporate features frequently used by US companies.
Principal among these are Bermuda's prospectus requirements. Bermuda's regulatory regime has been tailored so that listed companies effectively no longer have to comply with Bermuda's prospectus requirements provided that the company has already filed a prospectus with an appointed stock exchange (which includes most of the world's major exchanges),or a competent regulatory authority (which includes organisations such as the Securities Exchange Commission (SEC), the UK's Financial Conduct Authority, the Ontario Securities Commission and the Securities and Futures Commission of Hong Kong).
In addition, Bermuda law permits the use of blank-check preferred shares, as well as the takeover defences of staggered boards and poison pill rights plans.
In terms of restructuring protections, another component of US law that features in Bermuda practice relates to restructurings. While Bermuda law does not have an equivalent of Chapter 11 of the US Bankruptcy Code, there have been a number of examples of Bermuda public companies with a sufficient nexus to the US to have enabled them to file for protection from their creditors under Chapter 11. In these cases, the Chapter 11 proceedings have often been combined with proceedings in the Bermuda courts to enable the company to effectively reorganise itself and continue as a going concern in much the same way that it could have reorganised had it been a US company.
It should also be noted that Bermuda law expressly provides for the merger of a Bermuda company with a foreign corporation. Accordingly, the preferred method of acquisition by reverse merger deployed by SPACs is available with a Bermuda-domiciled SPAC.
Bermuda's tax neutrality, respected reputation and modern legal structure have all helped to make the jurisdiction a leading domicile from which to raise capital. These features, together with the predictability and adaptability of Bermuda's corporate law regime, are particularly attractive to both investors in, and management of, public companies, particularly those listed on US stock exchanges. It follows that Bermuda is the ideal offshore jurisdiction in which to domicile SPACs looking to raise capital in the public markets.
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