As we predicted in an article in our June 17, 2008 Osler Corporate Review entitled, “SPACs May be Coming to an Exchange Near You,” on August 15, 2008 the Toronto Stock Exchange (TSX) published proposed amendments to its listing requirements that, if adopted by the TSX and approved by the Ontario Securities Commission, would allow Special Purpose Acquisition Companies (SPACs) to list their securities on the TSX. The proposed rules would be set forth in “Part X—Special Purpose Acquisition Corporations,” a new section of the TSX Company Manual. The proposed rules were subject to a 30-day comment period which ended on September 15, 2008.
The TSX SPAC proposal follows quickly on the heels of recent actions by the NYSE and NASDAQ whose rules to permit the listing of SPACs were approved by the United States Securities and Exchange Commission (SEC) on May 8, 2008 and July 25, 2008, respectively. Previously, SPACs could be traded in the United States only on the AMEX and the Over the Counter Bulletin Board. SPACs also trade on the Euronext. As noted by the TSX in its release, the proposed rules take into account the SPAC listing requirements of the NYSE and NASDAQ while incorporating best commercial practices observed in the U.S. SPAC market.
Overview of SPACs and the U.S. SPAC Market
SPACs are companies that do not have any business operations. They are shell companies that raise equity for the purpose of undertaking a yet-to-be-determined significant acquisition no later than 18 to 36 months after their initial public offering (IPO). A substantial portion of the proceeds of the IPO are placed in an escrow account and may not be used until an acquisition satisfying specified minimum criteria and shareholder approval requirements is consummated. Typically, the sponsor of the SPAC subscribes for additional securities of the SPAC in advance of the IPO at a price which represents a significant discount to the IPO price and which may sometimes be nominal. The proceeds of the sponsor purchase are also placed in the escrow account and, accordingly, are available to the holders of the IPO shares in case of liquidation of the SPAC as described below.
If (i) the qualifying acquisition is not consummated within the required time frame, (ii) the shareholders do not approve the acquisition, or (iii) the shareholders approve the acquisition but a specified percentage of the shareholders (generally ranging from 20% to 40%) vote against the acquisition and request to have their shares redeemed for a pro rata portion of the proceeds in the escrow account (referred to as the “conversion right”), the SPAC will be liquidated and the funds in the escrow account, less any expenses, returned to the holders of the IPO shares. SPACs may have a particular geographic or industry focus, although many are not so restricted. They are marketed primarily on the basis of the reputation of the sponsor and management team.
As noted in the TSX release, at April 30, 2008, in the United States, 94 SPACs had completed their IPOs, having raised an aggregate of US$18.6 billion, but had not yet completed their qualifying acquisition. Another 87 SPACs were in the process of registration. The growing acceptance of SPACs in the United States was evidenced by the fact that global financial institutions such as Goldman Sachs, Citigroup, UBS, Deutsche Bank, Merrill Lynch, JP Morgan Chase and Morgan Stanley had acted as investment bankers for SPACs.
While SPACs are similar to reverse takeovers, the TSX release observed that, unlike reverse takeovers, SPACs generally offer a number of advantages: (i) a clean public company shell; (ii) more experienced management teams; (iii) greater certainty of financing; and (iv) a readily available retail and institutional shareholder base.
Summary of the Proposed SPAC Listing Requirements
The proposed Part X rules are summarized below and grouped into three categories:
(i) the original listing requirements which must be met by the SPAC (Sections 1003-1018);
(ii) the continued listing requirements that a SPAC must meet prior to completion of a qualifying acquisition (Sections 1019-1021); and
(iii) the process relating to the completion of a qualifying acquisition or, failing that, the liquidation of the SPAC (Sections 1022-1030).
Where material, we have also noted differences with the U.S. listing requirements or practice.
Original Listing Requirements
- IPO Size. The SPAC must raise a minimum of $30 million through an IPO of shares or units, with a minimum price per security of $5; if units are issued, each unit may consist of one share and no more than two share purchase warrants. There must be at least one million freely tradable securities held by public holders and at least 300 public holders of securities, holding at least one board lot each. Any warrants issued in the IPO may not be exercisable prior to the completion of the qualifying acquisition and are not entitled to any of the trust funds upon liquidation of the SPAC. These minimum listing requirements are lower than those required by the NYSE and NASDAQ and, according to the TSX, take into account the relative size of the Canadian marketplace and the average IPO size in Canada.
- Sponsor Interest. The sponsors of the SPAC must subscribe for units, shares or warrants representing an aggregate equity interest of at least 10% of the SPAC, and the terms of their investment must be disclosed in the IPO prospectus. In addition, the sponsors must agree (i) not to transfer any of their founding securities prior to the completion of a qualifying acquisition and (ii) in the event of liquidation, that their founding securities shall not participate in a liquidation distribution. If the qualifying acquisition is consummated, these founding securities may be subject to the TSX Escrow Policy. The founding securities will also be prohibited from voting on the qualifying acquisition. While no maximum equity interest of the sponsors is set forth in the proposed rules, the TSX indicated that it may refuse to list a SPAC if the sponsor interest appears excessive and that a sponsor interest above 20% would generally be considered excessive. Neither the NYSE nor the NASDAQ rules contain a specific minimum or maximum sponsor equity investment percentage requirement, nor do either of those rules or the proposed TSX rules contain any specific dollar threshold for the sponsor investment.
- No Operating Business or Acquisition Agreement. A SPAC seeking listing must not carry on an operating business. While the SPAC may be in the process of reviewing potential acquisition targets, it may not have entered into a written or oral, binding or non-binding agreement with respect to a potential qualifying acquisition. The foregoing requirement differs from U.S. SPAC offerings which due to SEC requirements prohibit management of a SPAC from being in discussions with potential acquisition targets prior to completion of the IPO.
- IPO Proceeds Deposited in Trust. At least 90% of the gross proceeds raised in the IPO must be placed in trust with a trustee unrelated to the transaction and acceptable to the TSX. The proceeds in the trust account may be invested in specified investments permitted by the proposed rules and the IPO prospectus must disclose the proposed nature of this investment as well as any intended use of the interest earned on the trust funds from the permitted investments. The trust deed must satisfy certain requirements and be submitted to the TSX for pre-clearance. The proceeds from the IPO that are not placed in trust, and interest earned on the trust funds from permitted investments, may be used to pay administrative expenses of the SPAC.
- 50% of Underwriting Commissions to be Held in Trust. In addition, the underwriters of the IPO must agree to defer and deposit into the trust account a minimum of 50% of their commissions from the IPO. The deferred commissions will only be released to the underwriters upon completion of a qualifying acquisition within the permitted timeframe. If the SPAC fails to complete a qualifying acquisition within the permitted timeframe, the deferred commissions placed in trust will be distributed to the holders of the securities as part of the liquidation distribution. Securityholders voting against a qualifying acquisition and exercising their conversion rights will be entitled to their pro rata portion of the trust funds, including any deferred commissions.
- Conversion Right and Liquidation Requirement. The SPAC arrangements must provide for the conversion right and the liquidation distribution requirement described above. The conversion right will allow securityholders who vote against a proposed qualifying acquisition to convert their securities into a pro rata portion of the proceeds held in trust if the qualifying acquisition is completed. The liquidation distribution feature will return a pro rata portion of the proceeds held in trust to securityholders if a qualifying acquisition is not completed within the prescribed time frame. However, the sponsors of the SPAC will not be permitted to participate in any liquidation distribution or conversion right.
- Prohibition on Debt Financing. The SPAC will not be permitted to obtain any form of debt financing other than concurrently with (or after) consummation of its qualifying acquisition. While a credit facility may be entered into prior to completion of a qualifying acquisition, it may be drawn down only as discussed above.
- Other Requirements. No security-based compensation arrangement may be adopted by the SPAC prior to the completion of a qualifying acquisition. The TSX may, in its discretion, take into account any other factors it considers relevant in assessing the merits of the SPAC listing application and may refuse to grant an application notwithstanding that the prescribed original listing requirements are met. Such other factors will include (among other things) the experience and track record of the officers and directors of the SPAC, and the nature and extent of the officers' and directors' compensation. The TSX also may refuse to grant an application notwithstanding that the prescribed original listing requirements are met. There is no restriction on non-equity compensation arrangements; but, the TSX may consider such arrangements under its discretionary authority when considering the SPAC’s listing application. In addition, while the TSX recommends that SPACs be incorporated under Canadian federal or provincial corporate laws, non-Canadian SPACs should be able to list on the TSX by obtaining a preliminary opinion that the jurisdiction of incorporation is acceptable.
Continued Listing Requirements
No Further Dilution Prior to Qualifying Acquisition. In addition to the prohibitions on equity compensation-based arrangements, debt financing and the exercisability of warrants discussed above, the TSX will prohibit the SPAC from raising additional capital prior to the completion of the qualifying acquisition, other than pursuant to a rights offering to existing securityholders. A minimum of 90% of the additional funds raised in the rights offering must also be placed in trust pending a qualifying acquisition or liquidation. The additional funds to be raised by the rights offering may only be used to fund a qualifying acquisition and/or administrative expenses of the SPAC.
Completion of a Qualifying Acquisition or Liquidation
- Time Limitation. A SPAC must complete its qualifying acquisition within 36 months of the closing date of the IPO. If more than one acquisition is to be made, each of the acquisitions comprising the qualifying acquisition must close simultaneously and within the 36-month period.
- Fair Market Value of a Qualifying Acquisition. The businesses or assets comprising the qualifying acquisition must have an aggregate fair market value equal to at least 80% of the aggregate amount then on deposit in the trust account, excluding the deferred underwriting commissions held in trust and any taxes payable on the income earned on the trust funds. Where more than one acquisition is contemplated, the multiple acquisitions together must satisfy the 80% requirement.
- Shareholder Approval Requirement; Conversion Right and Other Conditions of a Qualifying Acquisition. The qualifying acquisition must be approved by a majority of the votes cast by the shareholders of the SPAC, excluding the founding securityholders. If multiple acquisitions are contemplated, each transaction must be approved by the shareholders and must close simultaneously and within the required timeframe. In addition, as noted above, the holders of public shares who vote against the qualifying acquisition must have a conversion right in the event the acquisition is approved and consummated. However, unlike the NYSE rules which do not permit a qualifying acquisition to be consummated where shareholders owning in excess of a specified percentage (to be set no higher than 40%) exercise their conversion rights, the proposed TSX rules do not set forth a maximum threshold amount for the conversion right. Instead, the proposed rules allow a SPAC to voluntarily establish such a limit and/or other conditions for the qualifying acquisition, such as a requirement contained in the recently adopted NASDAQ rules that a majority of the SPAC’s independent directors approve the acquisition, which limit or other conditions must be disclosed in its IPO prospectus and in the acquisition information circular discussed below.
- Shareholder Disclosure and Filing Requirements. An information circular in connection with the shareholder meeting called to consider a proposed qualifying acquisition with prospectus level disclosure must be pre-cleared by the TSX and distributed to shareholders prior to the meeting. In addition, the SPAC must file a prospectus containing disclosure about the SPAC and its proposed qualifying acquisition with the applicable Canadian securities regulatory authorities, and must receive a final receipt from such authorities prior to mailing the information circular to shareholders. This prospectus will be a non-offering prospectus if additional securities are not being distributed to the public at the time of the qualifying acquisition. While the prospectus and information circular will be separate documents, they will contain substantially similar disclosure. However, the preparation of two documents and the dual filing process will entail additional costs and a timing element for regulatory review not normally encountered in an acquisition in Canada. Nonetheless, this process is parallel to the SEC review process of acquisition proxy statements in the United States.
- Original Listing Review. The entity resulting from the consummation of the qualifying acquisition must meet the original listing requirements set out in Part III of the TSX Company Manual. Failure to obtain TSX approval of the listing of the resulting issuer prior to the completion of the qualifying acquisition will result in the delisting of the resulting issuer.
- Liquidation. If the SPAC fails to complete a qualifying acquisition within the permitted timeframe, it must complete a liquidation distribution within 30 calendar days thereafter, pursuant to which the trust funds – which will include the IPO proceeds held in the trust; the proceeds from the founding sponsor interest; the deferred underwriting commissions placed in the trust; and interest earned on permitted trust investments that remains in trust but net of any applicable taxes and direct expenses related to the liquidation distribution – must be distributed to the public shareholders on a pro rata basis.
We anticipate that the proposed SPAC rules will obtain broad support and, upon adoption, will provide Canadian and foreign entrepreneurs, investment banks, hedge funds and other investors with a significant new avenue for capital creation and acquisition activity.