After a record year in 2020 and the first semester of 2021 that was even better, the U.S. market of special purpose acquisition companies (SPAC)1 has been slowing down for several months. That observation is somehow surprising since said slowdown led to the launch of 477 SPACs having raised more than 128.5 billion dollars on U.S. stock markets since January 1, 20212, which repre-sents the best year (although far from finished) since the launch of SPACs in the United States 20 years ago!
However, despite those still impressive figures, the SPAC mania in the United States is cooling off following various announcements of the Securities and Exchange Commission (change in the accounting treatment of warrants, announcements on the risks specific to SPACs, investigations being launched with respect to information given to the market), legal actions initiated by disap-pointed investors3, or increased competition between SPAC projects.
The European SPAC market, understood as the market on which SPACs are being launched and listed, does not seem to suffer the consequences of the excesses of the U.S. market and could even benefit from an increased interest from investors used to that kind of products. Between January and the end of August 2021, 26 SPACs were launched on European stock markets, i.e., five times more than during previous years.
Far from the U.S. figures that turn heads, the European SPAC market is booming and continues its development (re)started in 2019, at a pace admittedly slower but steady and, above all, untroubled. New trends have thus appeared since the end of 2020 regarding the conditions and the structuring of European SPACs.
Pre-launch announcement and placement period
Launching the first SPAC in a sector gives a significant advantage: in terms of reputation and interest of the inves-tors at the stage of the IPO but also, and above all, at the time of the search for a target in connection with the initial business combination of the SPAC. Thus, more and more founders of European SPACs announced their intent to launch a SPAC before the official launch of the SPAC.
Tikehau Capital, Financière Agache and Jean-Pierre Mustier announced their project to launch Pegasus (which became Pegasus Acquisition Company Europe B.V.) on February 15, 2021, or one month and a half before the approval of the SPAC prospectus and the announcement of the results of the capital raising, which occurred at the end of April 2021. However, founders should be careful of hasty announcements: the 360 Capital fund announced on March 25, 2021 its intent to launch a Tech-dedicated SPAC, which would have been the first French SPAC in that sector; on the date hereof, the 360 Disruptech EU SPAC has still not been launched and, in the meantime, the DEE Tech SPAC was listed on Euronext Paris.
Another trend consists in reducing the placement period to a few trading days only (two or three days) by carrying out pre-marketing operations before the launch, in accordance with applicable regulations. This enables the founders to reduce the time between the an-nouncement of the launch of the SPAC capital raise (or of the intent to launch a SPAC if a pre-launch announce-ment is made) and its result. That procedure thus enabled Accor to announce its project to sponsor the Accor Acquisition Company (AAC) SPAC on May 20, 2021, a few days before the announcement relating to the approval of the prospectus on May 26, 2021 and the announcement of the results of the placement on May 28, 2021.
Toward even more security and flexibility for investors
The capital raised from investors as part of the IPO of the SPAC is frozen and may be released by the SPAC only for the purposes of effecting the initial business combination and the buyback (or redemption) of the market shares of the investors requesting so on that occasion or, in the absence of an initial business com-bination, as part of the liquidation of the SPAC.
In Europe, and particularly in France, the funds are placed on an escrow account or a secured deposit account opened with a commercial bank as part of an escrow agreement entered into between the SPAC and the bank and, as the case may be, a public notary or another third party acting as escrow agent.
In the most recent French SPACs, the founders undertook to make an additional investment to cover the cost result-ing from any negative interest applying to the deposited funds, to ensure that the quantum of such funds does not vary before the completion of the initial business combina-tion and therefore to secure investors' investment.
Moreover, contrary to the first French SPAC Mediawan launched in February 2016, the most recent French SPACs providing for an approval of the contemplated initial business combination by the special meeting of holders of market shares, enable the investors to request the redemption of their market shares regardless of their vote during that meeting, like in the United States.
This flexibility enables any investor to have its shares redeemed at the IPO price, even if it voted in favor of the initial business combination. In exchange, that measure should also enable a higher number of investors to vote in favor of the initial business combination present-ed by the board of directors if that project is attractive, since such vote does not force them to remain share-holders of the company afterward.
Additional investment pari passu with the investors
Since the 2MX Organic SPAC, launched at the end of November 2020 by a trio comprising Xavier Niel, Matthieu Pigasse and Moez-Alexandre Zouari, it became good practice for all or part of the founders of the SPAC, in particular where it is a corporate or an invest-ment company, to make an additional investment in units or market units alongside the investors, in addition to their initial at-risk investment (founders' units)4
Moez-Alexandre Zouari, co-founder and CEO of 2MX Organic, thus announced his intention to subscribe units via his holding company for a maximum amount of 30 million euros, it being specified that such order was subject to reduction in case of oversubscription of the offering, in due proportion with any other investor receiving best allocation treatment in the placement. Pegasus' founders also participated in the SPAC offer-ing by subscribing together for 55 million euros in units, like two out of the three founders of Transition for 15 million euros, the founders of DEE Tech for 40 million euros, or Groupe Artémis for 15 million euros in I2PO units5
The investment of certain founders pari passu with investors reinforces the alignment of interests between the founders' team and the investors as from the IPO. Unlike the initial investment of the founders, their investment in units in the offering is not at risk; it benefits from the same protection than that of the investors, i.e., the funds are held in escrow. However, founders holding units and thus market shares under-take in the prospectus not to request the redemption of their market shares at the time of the initial business combination.
Until the DE-SPAC, the risk is borne only by the founders, whose initial investment (excluding the investment in units) will finance the IPO, operating, target search and initial business combination costs. The compensation for that risk-taking is the benefit of a promote for the founders. By investing about 2.5% to 3% of the funds held by the SPAC, they will hold 20% of the share capital and voting rights of the company.
That promote, which was initially immediate, either on the listing date or on the completion date of the initial business combination, is now staggered and depends on the stock market performance of the SPAC after its DE-SPAC. Out of the 20% of the share capital and voting rights of the SPAC to be held by the founders, a first third is received in case of completion of the initial busi-ness combination, a second if the share price exceeds 12 euros, and the last one if the share price exceeds 14 euros.
This new promote structure was introduced in Europe in February 2021 by the German SPAC Lakestar SPAC I SE, then in France in June 2021 by DEE Tech, and now figures among investors' expectations. It realigns the interests of the founders with those of the investors when the SPAC becomes an operating company and associates the founders to the risk of a share price reduc-tion occurring following the completion of the initial business combination.
Adaptation of forward purchase agreements
The U.S. SPAC practice developed the implementation of forward purchase agreements at the time of the SPAC IPO, i.e., forward contracts or options whereby a significant investor (sometimes one of the founders) either undertakes irrevocably to subscribe for units or is granted the option, at its sole discretion, to subscribe for units, at the IPO price at the time of completion of the initial business combination. The entering into those agreements at the stage of the SPAC IPO enables the SPAC to secure part of the financing of its initial business combination, in addition to the capital raised during its IPO and, as the case may be, any other cus-tomary M&A financing sources (bank financing, pri-vate investment in public equity (PIPE), etc.).
In France, Accor Acquisition Company is the first SPAC having adopted that practice, by adapting it to French corporate law provisions. Thus, instead of using an option or an agreement, the SPAC issues at the time of the IPO, in the context of an issue reserved to the inves-tor or founder concerned, warrants giving access to units (or founders' units, as the case may be) which may be ex-ercised by their holder during an exercise period starting shortly before the approval of the initial business combi-nation and at an exercise price equal to the IPO price.
Development of corporate SPACs
In addition to individuals being leading figures in their sector, more and more investment companies (private equity funds, family offices, etc.) create or co-create SPACs in Europe: Tikehau Capital, Financière Agache, Groupe Artémis, 468 Capital, Obotitria Capital, etc. That trend, very strong in the United States with many SPACs being launched by private equity funds, also ex-ists in Europe.
However, that trend shall not be mistaken for the new trend of "corporate SPACs", which are SPACs spon-sored by an industrial player, as opposed to financial players such as investment companies. The purpose of that kind of SPACs may differ from the purpose of traditional SPACs as the search for synergies between the founder and the target to be acquired by the SPAC underlies the project since the beginning.
The Accor Acquisition Company (AAC) SPAC launched by the Accor group in May 2021 is the first corporate SPAC in Europe, it being specified that these SPACs are still little developed, even in the United States. Accor indicated that it launched AAC to invest in incidental activities while remaining a pure player in the hostel trade industry, which is its core business.
As part of a corporate SPAC, the founder contributes its know-how to the SPAC in relation to the sourcing of targets and the development of targets, like any founder, but also intends to create synergies with the SPAC when it becomes an operating company, in par-ticular through the implementation of partnerships and the co-creation of value, while holding a minority interest in the SPAC's share capital. Accordingly, the logic of a corporate SPAC may seem even more indus-trial. However, depending on the profile of their founders, "traditional" SPACs may have the same indus-trial inclination.
Renouncing founders' shares
A new trend may appear in Europe when DE-SPACs of European SPACs will occur, consisting for the founders in renouncing part of their founders' shares and/or founders' warrants at the time of the initial business combination to make the DE-SPAC terms and condi-tions more attractive to the target's shareholders, in particular when shares earn-out provisions are being negotiated with the sellers. This has indeed become a very common practice in the United States, which has not yet developed in Europe.
For now, the European market practice still consists in providing for a 24-month-period for the SPAC to carry out its initial business combination, sometimes with a six-month extension option in case a binding agree-ment is entered into with a target during the initial period (AAC, Transition) or in case the shareholders vote accordingly (Hedosophia European Growth, Odyssey Acquisition S.A.).
On the contrary, the current U.S. market practice consists in reducing the initial period of the SPAC by undertaking to carry out the DE-SPAC within 18 months, or 12 months for the most recent SPACs sponsored by "serial SPACers" (such as CF Acquisition Corp. VIII). Where needed, an extension is negotiated with the investors in due course, in exchange for the modification of the SPAC conditions, if a binding agreement is entered into during the initial period. A short period to carry out the initial business combination enables the SPAC to stand out from its competitors and to offer the investors a shorter locked-in period of their funds.
Moreover, while until now European founders chose to launch SPACs on the U.S. market while aiming at European targets, there are more and more U.S. SPACs seeking European profiles to join their management team and board of directors.
The cool-off of the U.S. SPAC market should also lead U.S. founders to incorporate and list their SPACs in Europe in order to aim at targets located in Europe, thus enabling their SPACs to stand out from their U.S. competitors while possibly benefiting from a competi-tive advantage in terms of foreign direct investments screening6
Regardless of the new trends that the end of 2021 and the year 2022 have in store, the European SPAC market still has a bright future and should continue creating its own market practices as new SPACs keep being launched in Europe.
1. "A SPAC is a vehicle without its own operating activities, listed on the stock exchange to raise funds to finance (at least) one M&A transaction with a private company that has not yet been identified when the SPAC is being listed", SPACS: Opportunities and Risks of a New Way of Going Public, Study from the Autorité des Marchés Financiers, July 2021. ?
2. Sources: SPAC Insider and SPAC Research (September 30, 2021). ?
3. In this respect, 49 law firms, including Winston & Strawn LLP, have coalesced to release a response to Investment Company Act allegations, declaring that these suits are "without factual or legal basis" (see https://spacinsider.com/2021/08/27/49-law-firms-unite-push-back-on-spac-litigation/). ?
4. As a reminder, units or market units comprised of market shares and market warrants are offered to the investors as part of the offering in connection with the listing of the SPAC (or its initial public offering), whereas the founders hold, from that date, founders' units comprised of founders' shares and founders' warrants. ?
5. Winston & Strawn LLP acted as co-legal counsel of 2MX Organic and I2PO in connection with their IPOs. ?
6. Since the SPAC is in principle not controlled by its founders, it may be considered as a European player depending on its governance and shareholding structure. ?
This article was originally published in M&A Review.
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