TSX introduces new listing rules

The Toronto Stock Exchange (TSX) recently proposed new rules to allow the listing of special purpose acquisition corporations (SPAC) —publicly traded shell companies that raise funds to be used to acquire an undetermined business. At the time of its formation and initial public offering, the SPAC has no business. SPACs have been used in the United States (listing on the NYSE, NASDAQ and AMEX) and in Europe (listing on the Euronext and the London Stock Exchange's AIM market).

Fundamentals

Formation and Initial Public Offering

A SPAC is formed by founders, generally executives and sophisticated investors, who form the management of the SPAC. The founders provide the initial funding for the SPAC by taking up at least a 10% equity interest in the SPAC. Although there is no maximum on the founders' initial investment, the TSX has stated that more than 20% may be excessive. Shares held by founders are subject to restrictions on transfer prior to the acquisition of a business (Required Acquisition) by the SPAC. The TSX may impose escrow on founders' shares after the Required Acquisition. 

The SPAC must complete an initial public offering (IPO) that raises a minimum of $30 million at a price of at least $5 per security. The IPO securities can be common shares or units consisting of common shares and warrants. Any warrants issued will not be exercisable before the Required Acquisition and will expire if no business is acquired.

IPO Proceeds and Conversion Feature

At least 90% of the IPO gross proceeds must be held in trust pending completion of the Required Acquisition. The trust funds may be invested only in certain permitted investments. This ensures sufficient capital is available to make the Required Acquisition. In addition, 50% of the underwriters' commission must be held in the trust, to be released after the Required Acquisition. If no business is acquired or the conversion feature (discussed below) is exercised, the portion of the underwriters' commission held in trust will be released to the security holders.

Shares issued to non-founders will have a conversion feature that allows a holder who votes against a proposed Required Acquisition to convert his or her shares into a pro rata portion of the IPO proceeds that are held in trust.

Operation of SPAC between IPO and Required Acquisition

A SPAC may pay expenses incurred in operations and in seeking out businesses from the funds raised from the founders, the non-trust portion of IPO proceeds and any interest earned on the IPO proceeds in trust.

A SPAC may raise additional capital by way of a rights offering (90% of the additional funds must be held in trust). A SPAC is not permitted to undertake any debt financing prior to the completion of a Required Acquisition.

SPACs will be reporting issuers and thus are subject to continuous and timely disclosure requirements and corporate governance standards.

A SPAC may not have a stock compensation plan prior to the Required Acquisition. Any plan instituted will be subject to shareholder approval.

Required Acquisition

A SPAC has up to three years to complete a Required Acquisition. The value of the business acquired must be equivalent to at least 80% of the funds held in trust. A SPAC may acquire multiple businesses in order to meet this 80% requirement and to meet additional TSX requirements. Multiple acquisitions must close concurrently.

Shareholders, other than founders, will have the right to vote on each proposed Required Acquisition. The SPAC must provide shareholders with an information circular containing prospectus level disclosure about the business or businesses being acquired. The information circular is vetted by the TSX and the securities regulatory authorities prior to mailing. A SPAC must also file a "non-offering" prospectus with the securities regulatory authorities describing the resulting issuer. This prospectus must be cleared by the regulatory authorities prior to mailing the information circular to ensure consistent disclosure.

The Required Acquisition must be approved by a majority of votes cast at the shareholder meeting. If the Required Acquisition is approved, any shareholder who voted against the resolution may elect to exercise the conversion rights. Since shareholders who exercise conversion rights will be paid out of the trust funds (which would otherwise be applied to the purchase price of a Required Acquisition) a SPAC may need to raise additional funds by way of debt or equity financing in order to close a Required Acquisition which meets the TSX original listing requirements. Such a financing must be completed contemporaneously with or immediately following the closing of a Required Acquisition. A SPAC may provide that a Required Acquisition can be abandoned if more than a specified number of shares are converted, provided that this limitation is disclosed in the information circular and prospectus.

The company resulting from the Required Acquisition must meet the minimum TSX original listing requirements and obtain TSX approval of the listing of the resulting company prior to the completion of the Required Acquisition.

Liquidation and Delisting 

If a SPAC does not complete a Required Acquisition within the three year time period, the SPAC must liquidate the funds held in trust. This liquidation must occur within 30 days after the three-year deadline. The funds are distributed to the shareholders, other than the founders, on a pro rata basis. The portion of the underwriters' commission held in trust is forfeited and distributed to the shareholders. Warrants do not entitle the holder thereof to any proceeds from the liquidation. Upon liquidation of the trust, the SPAC is delisted.

Difference from Capital Pool Companies

Canadian investors are already familiar with capital pool companies (CPCs) that trade on the TSX Venture Exchange. CPCs are permitted to raise a relatively small amount of capital (less than $2 million) and do not have shareholder protection mechanisms, such as the conversion and liquidation features. In addition CPC shareholders are entitled to vote on only certain types of acquisitions.

The Future of SPACs

The amendments to the TSX rules to permit SPACs are not yet in effect. The TSX solicited comments on the proposal (the deadline for comments has expired). It is likely that the SPAC rules will be finalized by November 2008.