Whether fuelled by low oil, gas and commodity prices or propelled by the huge potential of the Trump administration's promises of regulatory and tax reform, the Dow hit new record highs in October 2017 putting the cherry on the cake of a globally bullish stock market and boldly reaffirming that investor confidence is on an incredibly heady high. It is no surprise then that interest in SPACs or special purpose acquisition companies is surging yet again.
SPACs go by many names – they are also referred to as "Blank Check" companies in the US and "Cash Shells" in the UK. At their root they are simply companies created specifically to raise capital through a stock market listing of their securities, which then go on to use the cash raised to make strategic acquisitions. At the date of its initial public offering (IPO), the SPAC has no business operations and no tangible assets. Instead, investors put their funds and faith in the hands of an experienced management team whose sole purpose is to identify a target company or group which will be purchased outright or which will be merged with the SPAC. Often, the target is an unlisted company, and part of the deal consideration will be shares in the SPAC, which means that the target company's shareholders end up being investors in an enlarged, publicly listed company with a top tier management team.
A SPAC typically has 18-24 months to lock in on a target. Under US regulations, during that period the funds raised are required to be held on trust. If the SPAC fails to find a worthy investment option then the IPO proceeds are released from trust and returned to investors.
Despite general volatility in the IPO market internationally, in recent years, SPACs are seeking and capitalising on business combination opportunities.
Dealogic quantified SPACs' share of the global IPO volume at 3.1 per cent in 2016, which is the highest since 2008. SPAC IPOs in 2016 included the US$450 million listing of Silver Run Acquisition Corporation with its focus on the undervalued oil and gas sector emerging as one of the biggest IPOs for the first quarter, the US$690 million listing of CF Corp in May and the US$552 million listing of GTY Technology Holdings in October.
The last two years also saw SPACs making serious strides in the Canadian market. Acasta Enterprises Inc raised US$404.5 million in its IPO in July 2015 and then went on to identify not a single target but instead multiple targets to allow for acquisition of three companies with an aggregate enterprise value of US$1.2 billon. In Q1 in 2017 Acosta reported quarterly revenues amounting to C$92.97 million versus the previous year's C$457,000.
But Bloomberg observed that SPACs are "poised for their biggest year ever" in 2017, pointing to the Silver Run Acquisition Corp. II's US offering which raised US$1.035 billion in March. The article also identified the biggest jewel in the SPAC resurgence crown - J2 Acquisition Ltd - a BVI registered company, which raised a whopping US$1.25 billion via its London Stock Exchange IPO in September 2017.
SPACs, it seems, are back, so it's definitely time for management teams and investors to consider the benefits of using an offshore vehicle.
The Offshore Advantage
The advantages of a BVI incorporated SPAC are generally the same as for any other offshore listed vehicle but the top three advantages are:
One of the best features offered by BVI companies is their flexibility. BVI law provides that companies need not set out their specific purpose(s) in their constitutional documents but may instead engage in any act or activity.
This flexibility is critical, as although a SPAC may identify a sector within which to hunt for an investment opportunity, at the time of the IPO, the management team may not have identified the target or indeed the manner in which the acquisition is to be structured.
In keeping with the focus on flexibility, BVI law allows the constitutional documents of a company to be specifically tailored so that they reflect the requirements of the relevant stock exchange and the demands or concerns of investors. The documents may be crafted so that to the fullest extent possible they closely resemble those of an onshore listed company (if that is what is required). Alternatively, there can be a much gentler approach to with minimal changes being made to standard incorporation documents.
BVI companies may offer an unlimited number of shares of different classes and different types of securities. If different classes of shares are to be offered by a company, each class and their respective rights must be reflected in the company's constitutional documents but there is no requirement to reference any other types of securities to be issued, so a BVI SPAC has the ability to freely offer units comprised of the shares and warrant combinations which are a standard feature of SPACs.
Corporate Governance Requirements – Options to gear up or gear down
BVI companies are not required to provide shareholders with pre-emptive rights, have no prohibition against financial assistance and have flexibility with respect to share dealings with related parties. Standard asset acquisitions are typically approved by the directors only with no general need for shareholder consent – although this may be required under applicable listing rules (eg where the transaction is a reverse takeover).
If the intention is to list on the Alternative Investment Market (AIM) or by way of a Standard Listing on the London Stock Exchange then it is worthy to note that BVI companies are not automatically subject to corporate governance codes such as the UK City Code on Takeovers and Mergers. Further there is no equivalent BVI takeover code and the BVI securities legislation applicable to listed companies is not yet in effect. BVI companies may however elect to adhere to the onshore codes.
If the SPAC is looking to list on a US stock exchange then the United States Securities and Exchange Commission (the SEC) makes several concessions for companies registered offshore and which qualify as a Foreign Private Issuer (FPI). FPIs notably, unlike domestic US issuers are not required to file quarterly reports. In addition, they have the flexibility to choose the reporting currency to be presented in their financial statements. They are exempt from US proxy rules and therefore may send proxy materials to investors without the SEC's approval. They are, in certain instances, permitted to submit draft registration statements to the SEC on a confidential basis so that any issues may be resolved before the documents are in the public domain with the additional benefit that registration fees need not be paid until a final statement has been approved and filed on EDGAR. There are other noteworthy exemptions and SPACs may therefore choose to take advantage of a slew of more relaxed disclosure requirements or they may choose to make filings and report in the same manner as their US domestic counterparts. The thing is... offshore SPACs have options.
To maintain FPI status, it is suggested that the SPAC hold escrow funds in an offshore account, have a board with a majority of foreign directors and seek a non-US company as its acquisition target.
User-Friendly Merger Rules
Since 1984, BVI company law has allowed a BVI company to merge with another company (or companies) with a single entity emerging as the survivor entity vested, by operation of law, with the assets and liabilities of the constituent companies to the merger.
A BVI company is permitted to merge not only with another BVI company but also with a company registered in any other jurisdiction where the laws allow for cross border mergers. This clearly facilitates the acquisition of the target company wherever it has been incorporated.
The BVI's merger regime is modelled on Delaware law so US counsel will be familiar with the ease of the process and its general popularity means is also well known to UK and Canadian counsel as well.
Essentially a plan of merger setting out the terms of the merger, including how securities issued by the merging companies are to be treated or converted after the merger takes effect, must be approved by directors and shareholders of the merging companies. Helpfully, BVI law demands only majority shareholder consent for a merger unless the BVI company's constitution sets a higher threshold.
There is no requirement under BVI law for any other consents or pre-approvals from regulatory or other authorities so once the directors and shareholders approve the plan of merger, articles of merger may be signed and filed with the BVI Registry of Corporate Affairs (the BVI Registry) to bring the merger into effect.
We understand that the SEC doesn't review proxy statements for mergers by FPIs, which may reduce the time needed for effecting a merger by as much as three to four months. A reduced time frame, needless to say, has obvious advantages especially since SPACs are literally on the clock where it comes to closing a deal.
If the BVI company is to be the surviving company to the merger, then the effective date of the merger is the date the articles of merger are filed with the BVI Registry or a date no later than 30 days after the filing date.
If the acquisition of the target company is to be effected by a means other than a merger then shareholder consent for the acquisition may not be required in many instances unless special provisions in the BVI company's constitution demands it.
Deal or No Deal
Other benefits for using a BVI registered company as a SPAC include the reasonable costs of its incorporation and maintenance and the ease with which a BVI company may effect redemptions or a liquidation, if no acceptable target is found by the SPAC within the time frame allocated post listing.
BVI companies are undoubtedly a prominent feature on the international transactional stage and have been (and are currently) listed on recognised stock exchanges around the world including NASDAQ, AIM, the Hong Kong Stock Exchange, the Toronto Stock Exchange and the London Stock Exchange.
They have successfully been used as SPACs in the past, with J2 Acquisition Ltd's US$1.25 billion IPO being the most recent success story, but also quite notable is Justice Holdings Limited (JHL), which closed a business combination with Burger King Worldwide Holding Inc, leading to shareholders of the world's second largest fast food chain receiving US$1.4 billion in cash and JHL's shareholders leaving the table with 29 per cent of the resulting combined publicly traded company.
Falling prices in certain sectors have created a treasure chest of target companies hungry for a cash injection or the allure of becoming a listed company. All these factors combine to create a global buyer's market with a BVI vehicle as a spectacular option for a SPAC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.