Introduction Following the recovery from the recent financial crisis, there has once again been a growing interest in special purpose acquisition vehicles (SPACs) and offshore jurisdictions such as Jersey, Guernsey, Cayman and the British Virgin Islands are increasingly being used for both the creation and ongoing business structure of such vehicles. These jurisdictions have proven to be ideal for this type of funding structure due to their flexibility and tax efficiency.
This client briefing gives a brief overview of the structure and benefits of using SPACs.
What is a SPAC?
A SPAC is a company incorporated with the sole purpose of raising money by way of an initial public offering (“IPO”). Following the IPO, the SPAC will then use the proceeds to fund the acquisition of a target business or businesses. Whilst many SPACs will have identified the industry and/or geographical area in which the acquisition will be made, one of the defining characteristics of a SPAC is that the target itself will not have been determined at the point of investment.
A time limit is usually placed on the SPAC identifying and acquiring its target (usually 18 to 24 months), during which time the IPO proceeds are held in escrow within a trust account at a third party custodian bank. The time limit is a result of shareholders not wishing to have their investment tied up indefinitely, but factors such as the relevant listing rules must also be considered (e.g. the AIM Rules require investor consent for this period to be extended beyond 18 months). If a suitable target is discovered during that time, it is possible, depending on the SPAC’s constitutional documents, for the acquisition to still be conditional on the directors of the SPAC securing the approval of shareholders. However, this is not always required and recent SPACs have been structured so as to enable the target acquisition to be consummated without the requirement to secure shareholder approval - instead the shareholders have a right to redeem subsequent to the target acquisition.
If shareholder approval is required but not achieved, the acquisition will not proceed and the SPAC will then usually be liquidated and dissolved with the proceeds of the trust account returned to investors pro rata. Similarly, if no acquisition has been made by the end of the set time limit, the SPAC can be wound up at the request of the investors and an agreed amount of the monies initially raised will be returned to the investors.
Benefits of a SPAC
A SPAC will usually be initially formed by a management team with a proven track record in private equity investments, who will comprise the executive directors and management team. The management will often be incentivised through holding a significant minority in the SPAC’s share capital post-IPO (this is typically 15% to 20%). The management team of the SPAC will clearly benefit from such an incentive structure where they directly hold the equity in the SPAC in addition to receiving a share in its profits.
From the perspective of the incoming investors, there will be the potential for substantial capital gains on any investment actually made, but equally there is the opportunity to have most of their investment returned should a suitable target not be identified during the lifetime of the SPAC.
Ogier has a wealth of experience from acting on numerous high profile SPACs across the globe, including the following:
Q Resources PLC - listed on AIM in 2010 with the intention to invest in a mineral resources asset with an initial focus on Africa and/or South America.
Vallar Plc - acted for Credit Suisse, Singapore Branch in relation to a US$1.3 billion debt refinancing of two Indonesian entities to be acquired by Vallar plc;
Sherborne Investors Guernsey A Limited - listed on AIM in 2010 with the intention to invest in an undervalued UK listed company.
India Hospitality Corp - listed on AIM in 2007 with the intention of investing in two Indian catering and restaurant businesses.
Justice Holdings Limited - listed on the main market of the London Stock Exchange in 2011 with the intention of acquiring a business with a value between £1bn and £7bn.
Global Cornerstone Holdings Limited - listed on OTC Bulletin Board in 2011 with the intention of acquiring a business operating primarily in Europe, Asia or the United States of America.
Choice of Location
Our global network of offices covering the leading offshore jurisdictions means that Ogier is uniquely placed to assist arrangers of SPAC transactions establish corporate vehicles in their domicile of choice. A range of factors will need to be considered before selecting the appropriate jurisdiction (including the proposed location of assets, location of investors, suitable time zone and other external requirements, such as the impact of the UK Takeover Code).
Each of our jurisdictions - BVI, Cayman, Guernsey and Jersey offers:
- Economic and political stability
- Flexible, independently endorsed regulatory framework
- Tax neutral location
- Mature, well respected legal system
- Track record of product and service innovation
- Skilled and responsive workforce
In addition, Jersey, Guernsey, Cayman and BVI legal advice offered from our Hong Kong office to the Asia Pacific region