The Canadian capital markets are abuzz with optimism around the development and proliferation of the SPAC program in 2015. On June 22, 2015, the TSX hosted an information session on the SPAC program with panels on the Canadian experience to date contrasted with the US SPAC experience. The programme included a discussion with representatives of each of Dundee Acquisition Ltd. (“Dundee”) and Infor Acquisition Corp. (“Infor”), the first two successfully listed SPACs on the TSX. In addition to technical interpretation and perspective as further detailed below, the participants made strong indications that the SPAC market in Canada is healthy and growing with the expectation that larger SPACs will be well received by the market in the coming months.
On December 19, 2008, the TSX adopted Part X – Special Purpose Acquisition Corporations (“SPACs”) of the TSX Company Manual. With the recent success of the Dundee and Infor transactions the SPAC framework poses a viable alternative for private companies to access the Canadian Public Markets.
A SPAC is a shell holding company or shell with no current operations or business that completes an Initial Public Offering (“IPO”) to raise a minimum of C$30 million with a view to using that capital to acquire one or more operating businesses through a qualifying acquisition within 3 years from the date of the IPO. Until such qualifying acquisition is completed, the SPAC is largely precluded from spending the capital raised through the IPO. SPACs are an alternative to both the restrictive rules and low maximum capital limits of the TSX Venture Exchange’s Capital Pool Company regime and the more formal, high minimum capital threshold of the traditional public offering route for entities looking to raise capital in the Canadian capital markets.
A SPAC is founded by a sponsor, which, along with the SPAC’s management, is responsible for identifying an acquisition target, negotiating and executing the qualifying acquisition, and ultimately supporting the operations of the resulting issuer.
The SPAC regime is controlled by the TSX itself rather than a provincial securities regulator and is subject to many stringent restrictions. It may be necessary for a SPAC to obtain exemptive relief from the TSX and applicable Canadian securities regulatory rules in order to achieve the SPAC’s objectives. Specific requirements and potential forms of relief are discussed in greater detail below.
An IPO Prospectus
SPAC securities must be qualified by an IPO Prospectus receipted by the issuer’s principle regulator in order to be listed on the TSX.
Prior to listing on the TSX, founding securityholders (the “founders”) must subscribe for units, shares, or warrants of the SPAC. In both Infor and Dundee, the founders’ equity ownership in the SPAC was between 10% and 20% immediately following the closing of the IPO.
The IPO Prospectus must disclose the terms of the initial investment by the founders. The founders must agree not to transfer any of their founding securities before the completion of a qualifying acquisition and, in the event of liquidation and delisting, must agree that their founding securities shall not participate in any liquidation distribution.
In order to be listed on the TSX, a SPAC must raise a minimum of C$30 million through an IPO of shares or units listed on the TSX and issued at a minimum price of C$2.00 per share or unit. In addition, at least one million freely tradable securities must be held by public holders, the aggregate value of the securities held by public holders must be at least C$30 million, and there must be at least 300 public securityholders holding at least one board lot each.
No Binding Acquisition Agreement Prior to IPO
A SPAC must not carry on any active business. At the time of its IPO, a SPAC must not have entered into either a written or orally binding acquisition agreement with respect to a potential qualifying acquisition and it must disclose such fact in its IPO Prospectus. However, a SPAC may identify a target business sector or geographic area in which to make its qualifying acquisition, provided such information is disclosed in the IPO Prospectus. Further, the TSX rules do not prohibit a SPAC from entering into confidentiality agreements and non-binding letters of intent regarding potential acquisitions prior to its IPO. Thus, a SPAC can be formed with a view to purchasing an identified target as long as no binding acquisition agreement has been formed.
IPO Proceeds must be placed into Escrow
Upon Completion of an IPO, a SPAC must place a minimum of 90% of the gross proceeds and 50% of the commission earned on the IPO by the underwriters into escrow. The escrow agent must invest the funds in certain permitted investments. The deferred commissions will be released upon completion of a qualifying acquisition and, if no qualifying acquisition is executed within 36 months, the deferred commissions will be distributed to securityholders other than the founders.
The 10% of the proceeds that is not placed in escrow and any income earned by the escrowed IPO funds may be used to fund administrative expenses incurred in connection with the IPO, for general working capital expenses, and for the identification and completion of the qualifying acquisition.
Capital Structure Requirements
Securities issued by the SPAC in the IPO must include both a conversion feature and a liquidation feature. A conversion feature allows securityholders who voted against a proposed qualifying acquisition to convert their securities into a pro rata portion of the proceeds held in escrow (including deferred commissions) if a qualifying acquisition is completed. Securityholders who exercise their conversion rights shall be paid within 30 calendar days of the completed qualifying acquisition. A liquidation distribution feature entitles non-founding securityholders to a pro-rata portion of proceeds held in escrow if a qualifying acquisition is not completed within 36 months of the IPO.
If the SPAC issues units, each unit may consist of one share and a maximum of two share purchase warrants, which shall not be exercised before the completion of a qualifying acquisition. Warrants must expire on the earlier of i) the date specified in the IPO Prospectus or ii) the date on which the SPAC fails to execute a qualifying acquisition within the required time period. Warrants are not entitled to escrowed funds upon the liquidation of the SPAC. Notably, both Dundee and Infor obtained exemptive relief from the requirement to have a fixed expiry date for warrants (as further detailed below).
Further, before the completion of its qualifying acquisition, a SPAC may not adopt a security based compensation agreement or transfer the founders’ securities out of escrow. Under the rules, the SPAC must also not obtain any form of debt financing (excluding ordinary course short term trade or accounts payable) prior to the completion of its qualifying acquisition. However, it may be worth noting that both Dundee and Infor obtained exemptive relief from the prohibition on debt financing (as further detailed below).
Additional Financing before a Qualifying Acquisition
After an IPO, a SPAC may raise additional capital through a rights offering with the qualification that 90% of the additional funds raised must be deposited into escrow. Again, the remaining 10% may be used for administrative expenses or to fund a qualifying acquisition.
Completion of a Qualifying Acquisition
A SPAC must complete a qualifying acquisition within 36 months of closing its IPO. A qualifying acquisition may be comprised of more than one acquisition. The business assets of the qualifying acquisition must have an aggregate fair market value equal to at least 80% of the aggregate amount in the SPAC escrow account (effectively, 72% of the gross proceeds of the IPO), excluding deferred underwriting commissions and taxes payable on interest earned on the escrowed funds. Where the minimum IPO is completed, the minimum target size requirement means that the SPAC would only be able to consider target acquisitions with aggregate values equal to at least C$21.6 million.
Meeting to Approve the SPAC’s Qualifying Acquisition
Under the rules, a qualifying acquisition must be approved by a majority of the directors unrelated to the qualifying acquisition and by a majority of the securityholders (other than the founders) at a meeting duly called for that purpose. This requirement bars founding securityholders from voting their founding securities with respect to the approval of the qualifying acquisition. However, both Dundee and Infor obtained exemptive relief from the prohibition against voting by the founders on their founding securities on the qualifying acquisition approval.
If there are multiple acquisitions in the qualifying acquisition, each must be approved.
Information Circular for the Meeting to Approve the SPAC’s Qualifying Acquisition
The information circular prepared for the qualifying acquisition approval meeting must contain prospectus-level disclosure of the resulting issuer, assuming the completion of the qualifying acquisition, and must be submitted to the TSX for pre-clearance prior to distribution to securityholders.
A SPAC must file a prospectus with disclosure regarding the SPAC and proposed qualifying acquisition with the provincial securities commission in each jurisdiction in which the SPAC and the resulting issuer is and will be a reporting issuer. It must also file the prospectus in the jurisdiction where the head office of the resulting issuer, assuming completion of the qualifying acquisition, is located in Canada.
It is imperative that the SPAC obtain a receipt for the qualifying acquisition prospectus prior to distributing the information circular. If a receipt is not obtained, completion of the qualifying acquisition will result in delisting of the SPAC by the TSX.
Liquidation of the SPAC
If a SPAC does not complete a qualified acquisition within 36 months of the IPO closing, it must complete a liquidation distribution within 30 calendar days. The funds in escrow will be distributed to securityholders on a pro rata basis. Founders cannot participate in a liquidation distribution with respect to their pre-IPO securities. The liquidation distribution includes 90% of the gross proceeds from the IPO, the proceeds from the founding shares of the founders, and 50% of the underwriters’ commissions. A SPAC will be delisted from the TSX on or about the liquidation distribution date.
The Escrow Policy Statement
Where escrow is applicable to an issuer listing on the TSX by completing a SPAC, 10% of the founding securities will be released at the date of closing of the qualifying acquisition rather than 25% as required for other issuers by the TSX Escrow Policy Statement. The balance of the founding securities will be released in equal amounts over the next 18 months with one quarter (1/4) upon closing of the qualifying acquisition and one quarter (1/4) at six month intervals thereafter. Promoters of the SPAC, post qualification acquisition directors and officers, as well as certain principle shareholders will be subject to escrow. The TSX will administer the escrow agreement under the TSX escrow policy.
Key Documents Required in the SPAC Regime
- Pre-IPO Subscription Agreement for founders
- IPO Prospectus
- Agency Agreement for IPO
- Transfer Agency Agreement & Registrar Agreement
- Trust Indenture (90% of IPO proceeds and 50% of underwriting commissions)
- TSX Listing Agreement
- Definitive Agreement for Qualifying Acquisition
- Information Circular (for shareholders meeting)
- Prospectus for Qualifying Acquisition
- Escrow Agreement
- Charter Documents (including articles of incorporation and equivalent documents)
- Personal Information from each officer, director, or 10% holder of the SPAC
Key Considerations from Dundee and Infor
The SPAC regime has only been implemented twice on the TSX, once by each of Dundee and Infor. Analysis of the Dundee and Infor SPAC’s has revealed that, in addition to the Rules, it is important to be mindful of the following considerations:
The TSX is the Key Gatekeeper
The TSX, more than the provincial securities regulators, is the gatekeeper for SPACs. The TSX may consider any factor that it deems relevant to evaluate a listing and may ultimately grant or deny any application. However, in respect of varying the redemption and/or liquidation rights of the SPAC by way of exemptive relief, the TSX has indicated that the support of the applicable provincial securities regulators will be required.
The TSX will Scrutinize the SPAC Board of Directors
The Rules stipulate that the TSX will consider “the experience and track record of the officers and directors of the SPAC” in assessing the merits of the application. Generally, the Directors must have substantial merger and acquisitions experience, as SPACs must compete with private equity firms and strategic buyers. The TSX has stated that in evaluating a proposed board of directors, in addition to a preference for entrepreneurial candidates and “builders”, they will look favourably on the following qualifications: public company experience, deep M&A experience, strong institutional relationships, and governance pedigree.
The TSX will Consider Ownership
The Rules also indicate that the TSX will typically consider the degree of founders’ equity ownership in a SPAC. It may also consider the ownership structure of the SPAC as a whole.
The Sponsor Bank is a Key Consideration
Experience indicates that the TSX will assess the experience of the sponsor bank. The TSX is more likely to view banks with experience more favourably than those without.
Key Ancillary Agreements
The SPAC and the sponsor must enter into a Make Whole Agreement pursuant to which the sponsor shall agree that if a specified event causes the value of the voting shares held in escrow to drop, the sponsor shall contribute the amount to the SPAC necessary to enable the SPAC to pay the amount initially invested back to the redeeming securityholders. The Sponsor shall also agree to indemnify and hold harmless the SPAC against any loss, liability, claim, damage, or expenses to which the SPAC may become a subject as a result of a claim by a third party for services rendered or products sold to the SPAC or a claim by a prospective target business with which the SPAC has entered into an acquisition agreement.
The Sponsor shall only be required to indemnify the SPAC to the extent necessary to ensure that the value of funds in escrow does not drop below the amount invested or below a lower amount due to a reduction in the value of the assets held in the escrow account, in certain circumstances.
A Forfeiture and Transfer Restrictions Agreement and Undertaking shall be executed by the sponsor and founder(s) in a SPAC regime. The founder(s) shall agree not to transfer certain securities purchased in the IPO prior to the completion of a qualifying acquisition or a specified later date. The document will also specify that a certain proportion of each founder’s securities (on a pro rata basis), shall be subject to forfeiture in certain events such as an Over-Allotment Option, or the failure of the securities to reach a specified value by a set date.
Exemptions from TSX Rules are In Play
A SPAC may be required to obtain certain forms of exemptive relief from the TSX. Review of the Dundee and Infor prospectuses reveals that these two SPACs obtained almost identical exemptive relief from the following requirements in the Rules:
- the requirement to allow a 15% redemption limitation by any holder of Class A Restricted Voting Shares (being the pre-qualifying acquisition shares which, unless previously redeemed, automatically covert post-qualifying acquisition to Class B Shares), together with any affiliate of each such holder or any other person with whom such holder or affiliate is acting jointly or in concert, contained in section 1008 of the Rules;
- the prohibition on debt financing contained in section 1009 of the Rules;
- the prohibition on voting by the Founders of the Founders’ Shares and by the Founder/Sponsor of its shares forming part of the Class B Units (being the Class B Shares and the related warrants) on the qualifying acquisition contained in section 1024 of the Rules. The TSX has indicated that the ability for public investors to get their investment back coupled with a desire to align with the standards of US SPACs has factored into the granting of this relief to date;
- the requirement to have a fixed expiry date for the warrants contained in section 1008 of the Rules;
- the requirement to hold an annual meeting within six months of the end of a listed company’s fiscal year contained in Section 464 of the Rules;
- the requirement to provide at least 21 days’ notice of shareholders’ meetings to holders of Class A Restricted Voting Shares contained in Section 624(h) of the Rules;
- the requirement of certain take-over protective provisions, also referred to as coattail provisions, contained in Section 624(l) of the Rules; and
- the prohibition on the issuance of shares with greater voting rights than any listed shares contained in Section 624(m) of the Rules to enable the issue of the Class B Shares forming part of the Class B Units.