Now, what about listing a SPAC in Belgium? The Belgian supervisor (the Financial Service Market Authority (FSMA)) recently published a consultation and opinion about minimum standards for the structuring, information disclosure and trading in SPACs on Euronext Brussels. In this article, we envisage the main features of SPACs in the light of the existing Belgian legal framework.
Although the underlying philosophy of SPACs is generally the same everywhere, the standard features may vary from one SPAC to another and the law of the place of incorporation and/or of the place of the Initial Public Offerings (IPO) may provide for specific requirements. One should keep in mind that, at present, there is no legal framework for SPACs as such and that the structure and process commonly applied results from market practice originated in the US which now finds its way to Europe. Regulators in France, Italy, Luxembourg, the Netherlands and the United Kingdom have recently approved prospectuses for SPACs.
To date, no SPAC has been listed on Euronext Brussels. Although it would be feasible from a legal point of view, the Belgian legal framework is not as attractive to foreign investors as the Dutch and the Luxembourg ones. In a recent consultation and opinion, the FSMA shares its concerns about some issues and takes position with respect to SPACs in issuing a list of minimum standards. As of the release of the opinion on 21 June 2021, the FSMA expects sponsors who do not follow these minimum standards to state this explicitly on the cover page of the IPO prospectus or information note.
Below we shed some light on the regulatory considerations relevant for setting up a SPAC in Belgium and engaging in the so-called “de-SPACing” transactions that are envisaged to follow and we list the four main take-aways of the FSMA’s consultation and opinion.
A SPAC you said?
SPACs are newly listed companies without commercial operations nor material assets. The rationale behind a SPAC is that once incorporated and listed, the proceeds received through the listing can be used almost like a blank check with the management of the SPAC taking on the task of identifying, negotiating and acquiring or absorbing an existing businesses target in the market (the business combination) within a time frame of most commonly 24 months after a successful IPO. This explains the fact that SPACs are usually formed by private equity managers advised by teams of managers and directors recognised for their extensive expertise in certain target markets (the sponsors). A SPAC may be industry or geographically focused and the acquisition strategy is expected to be based on the sponsors’ past experiences and established track records. On the other hand, target companies will see their listing greatly facilitated when being acquired by a SPAC, given this process allows them to side-step certain administrative burdens related to traditional IPOs while being taken under the wings of an experienced partner.
After the SPAC company has been incorporated by the founders, institutional investors may be offered the chance to subscribe to SPAC “units” via a private placement. These units are packages composed of both shares and warrants. Warrants provide the right to purchase a number of shares by exercising the warrants at an agreed strike price following the business combination. This provides investors with additional compensation for investing in the SPAC.
Once the company has been set up and, if relevant, the private placement of the units is complete, the SPAC will be listed via an Initial Public Offering (‘IPO’). This is in fact the start of the (secondary) market in the securities (shares and warrants) of the SPAC, and other external investors can now participate. Once the IPO is approved by the regulator, the new SPAC will be able to raise capital generally by offering "units", comprising both shares and (partial) warrants, which can also be traded separately.
Pending the implementation of the business combination, the SPAC puts the net proceeds of the IPO (and private placement) in an escrow account. The proceeds in that account serve to fund the redemptions of dissenting investors who may wish to exit the SPAC at the time of the business combination and/or to finance the acquisition of the target. In addition, the escrow account will also serve to release the money to be returned to the shareholders if the SPAC fails to acquire a target on time.
The SPAC going public
The SPAC’s corporate form
The Belgian Code of Companies and Associations allows both private limited liability companies (société à responsabilité limitée / besloten vennootschap) and public limited liability companies (société anonyme / naamloze vennootschap) to have their shares admitted to trading. Yet, based on market practice and the fact that a private company would still need to take on many obligations of a public company, the public limited liability company will probably remain the preferred vehicle (contrary to what is seen in the Netherlands notably because of a lighter regime applicable to listed private limited liability companies). From a shareholder perspective, the percentage of tradable shares has to be discussed with sponsors and shareholders, bearing in mind that Euronext imposes a minimum of 25% of listed shares. In terms of governance, a listed company must have a board of directors comprising a minimum of 3 directors, among which 3 independent directors and at least one third of these directors must be of the opposite sex. In respect of voting rights, shareholders may vote on targets’ acquisitions (generally sponsors shall abstain from voting or they will undertake to cast a similar vote as the majority of the shareholders) and management needs majority shareholder approval to close an acquisition.
The Prospectus/ Information note
One advantage of SPACs in respect of their IPO is that since they do not carry out any commercial activity as such and are solely formed to raise funds through an IPO, the disclosure obligations imposed by the Prospectus Regulation is significantly lighter compared to a traditional IPO. However, one should note that upon the business combination, information shall be delivered to the investors in a prospectus, information note or in another format depending on the combination contemplated.
In the event where target has been identified beforehand, disclosures with respect to such target would be required and therefore part of this advantage would be undermined. The description of the sponsors and founders and the risks of conflict of interests and of investing in a blank check company will, however, need to be detailed carefully in the prospectus or information note. If the target has been previously identified without the sponsors providing any information in this regard, such behavior could be considered as market abuse.
The FSMA highlights in its minimum standards that it will pay particular attention to information on dilution. It recommends that the prospectus or information note should provide a quantitative analysis based on the conditions of the offer, which should include the following information:
- the dilution of the share value as a result of the difference in the conditions of the offer to the public, to qualified investors and to founders/sponsors;
- the additional dilution of the remaining investors’ shares after reimbursement of the dissenting shareholders;
- a calculation of the annual return that the company needs to generate for the remaining investors in order, at a minimum, to break even in terms of the expected redemption value when the business combination is formed, taking into account the costs linked to the structure and to the acquisition process.
Several scenarios should be presented, in the form of a sensitivity analysis that looks at various rates of redemption at the time of the formation of the business combination.
As these additional disclosures however only provide investors with a theoretical valuation, the FSMA’s minimum standards additionally require a specific warning to be included on the cover page of the SPAC’s prospectus or in the information note.
Whilst the draft prospectus or draft information note is to be approved by the FSMA, the application for admission to trading is to be filed with Euronext Brussels or any other stock exchange which will conduct an in-depth analysis of the business, business model, finances and features of the proposed offer as well as the identification of key managers, board members and UBOs.
In its recommendations the FSMA considers that, in light of their complexity, investment in SPACs should be reserved for professionals. Intermediaries should take into consideration what this means for the application of conduct of business rules to transactions carried out on the market if they provide investment services in respect of financial instruments issued by SPACs. By the same token, the FSMA takes the view that the offer of units at the IPO should be reserved for qualified investors within the meaning of Article 2 of the Prospectus Regulation.
The fact that the SPAC shares on Euronext Brussels carry a notice that they are reserved for professional investors does however not prevent retail investors from acquiring them. The ‘execution only’ regime still allows retail clients to acquire SPAC shares via their financial institution after waiving the financial institution’s notice that it does not consider the proposed transaction suitable for him/her.
De-SPACing and beyond
De-SPACing is the operation whereby, after going public, the SPAC acquires a target by means of an acquisition, merger, a transfer or a reverse merger. As a result, the target also becomes public and thus tradable. The combination of the SPAC and the target will form a ‘business combination’. A SPAC typically acquires one or more target(s) using a significant portion of the proceeds from the offering, with the understanding that if these proceeds are not sufficient to complete the acquisition, they can be expanded by issuing additional equity or debt.
With respect to timing, sponsors are generally required to complete the business combination within 24 to 36 months of the IPO. However, standard terms often provide that if a letter of intent or definitive agreement has been executed with a target, there is, or subject to shareholders approval may be, a 6-month extension to complete the business combination. These timelines are not legally prescribed but market practice.
If the company does not complete a business combination within the specified timeframe, the net proceeds from the IPO will be returned from the escrow account to the public shareholders. Also, in case the SPAC is liquidated, sponsors typically have no right to distributions on shares obtained in the private placement, i.e. they are subordinated to the other shareholders.
Depending on the transaction via which the new business combination is formed the de-SPACing will require the shareholder’s majority consent (eg. via a merger). If not, the consent of the (qualified) majority of the board members may be sufficient. Investors have therefore no guarantee to participate in the decision about the target(s).
The sponsor’s strict timing to find a suitable target might give rise to a conflict of interest between the sponsor and the investors, potentially inducing the sponsor, amongst others, to select a target not (or not well) suited. As the shareholder’s involvement in the investment decision on the new ‘business combination’ can mitigate this conflict of interest, the FSMA’s standards provide that the investment decision must be taken by the general meeting of shareholders, and not by the SPAC’s board of directors. In addition, taking into account the various classes of shares, the general meeting should be asked to take a decision by organizing votes in each class of shares in which at least, a quorum of 50% and a majority of 50% plus one vote must be obtained. The FSMA also considers it is important to avoid that the founders who have acquired shares on the market are able to participate in the vote in the other category of shareholders and to influence their vote.
Before the closing of the business combination, investors can choose to exit by exercising their redemption option. If they do, they will in principle be paid out the pro rata nominal value of their holdings in the escrow account. Such a redemption option is a unique feature of SPACs. In most cases, the pay-out is possible only for the dissenting shareholders who voted against the acquisition of the target. The exercise of such redemption right may be limited to minority shareholders only (e.g. holding individually or in concert less than 10% of the shares) as well as be subject to other conditions. To mitigate the dilution of shares of the remaining shareholder’s rights and in line with market practice, the FSMA’s standards considers it useful to reserve the redemption of shares during the business combination for dissenting shareholders.
Completion of the envisaged acquisition may be cancelled in case the number of shares offered for redemption exceeds a certain threshold (set at the discretion of management). The redemption of shares against receipt of pro rata portion of IPO proceeds shall therefore only be possible if the acquisition is approved and completed. In such case the shareholders will retain the right to exercise any warrants they still hold.
However, several structural issues under Belgian company law regarding redemption rights need to be addressed in the context of de-SPACing. Belgian company law provides for a system of limitation of the redemption price, which implies that this price cannot be fixed in advance in the prospectus or information note. Furthermore, attention must be paid to the fact that when acquiring its own shares, the funds used for this acquisition must be available for distribution but the Belgian company must also retain a non-distributable reserve which must be maintained as long as these shares are recorded in its balance sheet. In addition, if the acquisition of its own shares results in the company holding more than 30% of it, a public takeover bid may be mandatory. These legal considerations must be taken into account when processing a SPAC, as they can have detrimental consequences.
Are SPACs AIF?
The most sensitive issue regarding the future of SPACs remains the uncertain attitude of the FSMA regarding the possible qualification of the SPAC as an Alternative Investment Fund (AIF). In Belgium, AIFs are broadly defined as any collective investment undertaking which (i) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and (ii) is not a UCITS. In addition, it is explicitly mentioned in the considerations of the Alternative Investment Fund Managers Directive (‘AIFMD’) that listed companies are not as such excluded from the application of the AIFMD. Hence, the challenge for SPACs in all EU member States is to argue that they are to be considered a ‘holding’ and benefit from the holding exemption provided for in AIFMD.