This webinar covers an overview of the HKEX SPAC Consultation Paper and the conditions to listing SPACs in Hong Kong and the key proposals, potential benefits identified by the HKEX of listing SPACs in Hong Kong as well as look at some of the areas of concern that have been identified by the HKEX in relation to listing SPACs in Hong Kong.
Hello everybody, I’m delighted to be with you today for this webinar to discuss the HKEX’s SPAC Consultation Paper which was published on 17 September 2021.
Before we start, there are a few formalities I need to mention. Part of the Law Society’s requirements for granting CPD points is that we test your understanding of today’s webinar and so there will be 5 multiple choice questions at the end of the webinar. If you are claiming CPD points, the Law Society asks that I remind you to update your Mandatory CPD Training Records and to ensure that you comply with the Law Society’s attendance policy set out in the CPD information package on the Law Society’s website. Please also refer to the Law Society’s attendance policy if you arrive late or depart early from this webinar.
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Before I start discussing the SPAC Consultation Paper, there is terminology that I will use throughout the webinar, that is specific to SPACs that you will need to be familiar with.
Firstly, a De-SPAC Target is a private company with business operations that is the target company of the De-SPAC Transaction.
Secondly, a De-SPAC Transaction. This is a business combination between the SPAC and a De-SPAC Target that if successful, results in the listing of a Successor Company.
Third, a Successor Company. This is the listed company that results from the successful De-SPAC Transaction.
The key personnel in relation to a SPAC are the SPAC Promoters. A SPAC Promoter is normally a professional manager, usually with private equity, corporate finance and/or industry experience, who establishes and manages a SPAC. The SPAC Promoter is ultimately the ‘deal maker’ in that the SPAC Promoter is tasked with identifying a suitable De-SPAC Target, negotiating the terms of the De-SPAC Transaction and seeing to the successful completion of a De-SPAC Transaction.
The key proposals under the SPAC Consultation Paper relate to key stages of the lifecycle of the SPAC which are:
the period prior to the De-SPAC Transaction – that being the period prior to the business combination between the SPAC and the De-SPAC Target;
the De-SPAC Transaction; and
the liquidation and de-listing of the SPAC.
The HKEX highlighted that Hong Kong as a jurisdiction may provide SPACs with a competitive advantage. According to the SPAC Consultation paper, as at 13 July 2021, there were 25 SPACs with headquarters in Greater China which are listed in the U.S. Of these 25 SPACS, 20 of them are headquartered in Hong Kong while 5 are headquartered in Mainland China. These 25 SPACs collectively raised approximately US$4.2 billion.
The HKEX states in the Consultation Paper, that if SPACs which focus on finding a Greater China target, were able to list in Hong Kong, this may also assist to ensure that the SPAC Targets, choose Hong Kong as its preferred listing venue.
In addition, in the last 3 years, 12 companies with a combined market capitalisation (as at 13 July 2021) of approximately HK$26 billion have listed in the U.S. via a De-SPAC Transaction. Of these 12 companies, 2 were headquartered in Hong Kong, 8 headquartered in Mainland China and 2 were headquartered in Singapore.
Therefore, Hong Kong’s geographical location and its close proximity to Mainland China and South East Asia, may provide SPACs from these regions with an attractive alternate to the U.S.
To ensure the quality and reputation of the Hong Kong listing market, the HKEX Listing Rules prevent the creation and maintenance of shell companies and the circumvention of IPO requirements (including qualitative and quantitative criteria for listing) through the injection of sub-standard assets and/or businesses into listed shells. In particular:
under the current HKEX Listing Rules, listing applicants are not considered suitable for listing if their assets consist wholly or substantially of cash or short-term investments. This prevents listing applicants using cash or short-term investments to acquire and/or commence new businesses that are not suitable for listing and by doing so, circumventing the HKEX’s listing requirements;
listing applicants seeking to list on the HKEX must also demonstrate a trading record of at least 3 financial years for the Main Board. The HKEX will consider a listing applicant’s proven track record and use it to evaluate the substance, viability and sustainability of the listing applicant’s business; and
to warrant a listed company’s continued listing, it must carry out on a continuous basis business with a sufficient level of operations and assets of sufficient value to support those operations, failing which the trading of its securities may be suspended until the matter is remedied within a stipulated timeframe. A listed company’s listing status may also be cancelled if it fails do so within the stipulated timeframe.
The HKEX has raised concerns in respect of the management of SPACs. In this regard, the HKEX is concerned that SPAC Promotors may lack the knowledge and experience required to find an acquisition target that can provide SPAC Investors with a good return on their investment. The HKEX is also concerned that that SPAC Promoters may deliberately mislead investors as to the extent of their abilities, with fraudsters attempting to fabricate, exaggerate or hide facts about their backgrounds while presenting themselves as successful professionals to entice investors or falsely misrepresenting the success or accomplishment of certain SPAC Promoters.
The HKEX is concerned not only with the quality of management but also continuity of management. The HKEX states that SPAC Promoters will typically have the knowledge and experience of managing listed companies and the industry to which a De-SPAC Target belongs, and will hold Promoter Shares which will give them an economic interest in the Successor Company. Consequently, the Promoters may take on a management role in the Successor Company. Where this is not the case or where the composition of the board of a De-SPAC Target changes substantially after the De-SPAC Transaction, its historical financial track record becomes a less reliable indicator of its future performance. This is because its new management team was not responsible for any previous financial track records. Uncertainty therefore arises as to whether they would be able to improve upon or replicate that track record.
The HKEX states that in a traditional IPO, meeting the market capitalisation threshold under Chapter 8 of the HKEX Listing Rules (currently at least HK$500 million for Main Board applicants) by a listing applicant is demonstrated through price determination of offered shares over the book-building process. However, such book-building is not required for a De-SPAC Transaction and valuation of a De-SPAC Target is instead negotiated and agreed between De-SPAC Target and SPAC Promoter (and according to the HKEX, the valuation is validated by outside third party independent investors).
The HKEX explains that the lack of public book-building may mean that the transaction may be more susceptible to deliberate attempts for over-valuation for circumventing (or artificially meeting) market capitalisation requirements, and may therefore result in listing of sub-standard businesses or assets.
The HKEX has stated that the proposed SPAC listing regime is aimed striking a balance between providing the potential competition benefits of listing SPACs on the HKEX while mitigating against the potential risks associated with SPACs. The proposed SPAC listing regime, is said to be tailored specifically to the Hong Kong market. The aim is to ensure that the SPACs have experienced and reputable SPAC Promoters that seek good quality De-SPAC Targets. Therefore, a number of the proposals contained in the SPAC Consultation Paper “are designed to provide a high entry point for SPAC listing applicants and De-SPAC Targets.”
The HKEX proposes that prior to completion of the De-SPAC Transaction, that the subscription and trading of a SPAC’s securities be limited to Profession Investors only including both institutional and individual professional investors as defined under the Securities and Futures (Professional Investors) Rules. That is. an individual with a portfolio of not less than HK$8 million or a corporation or partnership with a portfolio of not less than HK$8 million or total assets of not less than HK$40 million.
However, the professional investor restrictions will not apply to the Success Company. The trading of the securities of the Successor Company will be open to everyone, on the same basis as in respect of a traditional IPO.
To ensure that the securities of a SPAC are marketed to or traded by professional investors only, the HKEX proposes that:
the board lot size and subscription size of SPAC shares should have a value of at least HK$1,000,000;
intermediaries selling securities for and on behalf of the SPAC must satisfy themselves that each placee is a professional investor through their established “know your client” procedures; and
the SPAC would need to demonstrate to the HKEX that all other aspects of the structure of any SPAC securities offering will prevent access to investors other an professional investors.
Furthermore, the HKEX also proposes to implement certain measures to limit participation in respect of secondary trading of the SPAC securities. These measures include an intermediary approval process; ongoing monitoring; enforcement actions by the HKEX where there is a breach by an intermediary; and assigning a special stock short name marker to the stock short names of the SPAC securities.
The HKEX have raised a concern that if SPAC Units (that being a unit of SPAC Shares and SPAC Warrants stapled together) are separated into SPAC Shares and SPAC Warrants immediately after the commencement of listing of the SPAC, this may result in a disorderly market due to sudden changes in the volatility of the shares prices owing to the unique nature of SPACs. With respect to the separate trading of SPAC Shares and SPAC Warrants, the HKEX has proposed two options and seeks feedback from the market on these two options.
The proposal under Option 1 is to only allow manual trades on SPAC Warrants. This would require that the professional investor who wishes to trade his SPAC Warrant, would be required to request quotes from the intermediary. If transacted, the intermediary acting as agent or counterparty would then report the transaction to the HKEX as per current manual trade reporting requirements. Post-trade transparency of the transaction would remain the same but there would be no automation of this process and no pre-trade transparency of the orders (in the central limit order book).
Option 2 provides more flexibility and is a combination of automatching and manual trading. Under this option, it is proposed to allow both auto-matching of orders with volatility control mechanism, and manual trades, on SPAC securities. Automatching of trading orders and manual trades for SPAC securities would be permitted. However, trading with automatching would be subject to the HKEX’s volatility control mechanism.
With the proposed professional investor restriction to be applied prior to completion of the De-SPAC Transaction, the number of investors who are eligible and willing to subscribe for the securities in the SPAC will be smaller than compared to a traditional IPO.
The HKEX is of the opinion that listing high quality SPACs that have experienced and reputable SPAC Promoters will attract large commitments from investors. To achieve these aims while also imposing the professional investor restrictions, the HKEX has proposed that SPACs raise at least HK$1 billion in funds from its initial offering.
The HKEX acknowledges that under these proposals, the number of investors is likely to be smaller than it would be for a SPAC regime that does not place such an emphasis on quality. In respect of the open requirements, the HKEX proposes that:
SPACs must distribute SPAC Shares and SPAC Warrants to a minimum of 75 professional investors, of which 30 must be institutional professional investors;
SPACs must distribute at least 75% of each of SPAC Shares and SPAC Warrants to institutional professional investors.
To ensure that there is an open market for the SPAC securities, the HKEX proposes that the current requirements under HKEX Listing Rules 8.08(1) and 8.08(3) be applied. This requires that:
not more than 50% of securities in public hands at the time of the SPAC’s listing can be beneficially owned by the 3 largest public shareholders; and
at least 25% of a SPAC’s total number of issued SPAC Shares and at least 25% of its SPAC Warrants must be held by the public (these requirements apply on an ongoing basis).
In addition to the proposed open market requirements, the HKEX proposes that there should be a minimum fund raising size of HK$1 billion and that shares in the SPAC should be issued at no less than HK$10.00. The HKEX states that a minimum fund raising size will validate the reputation of the SPAC Promoters as it will illustrate to the market that professional investors have faith in the ability of the SPAC Promoters to successfully negotiate and complete a De-SPAC Transaction on the best possible terms. The HKEX adds that this minimum fund raising size this will assist in ensuring that that the De-SPAC Transactions are sufficiently big enough to result in Successor Companies that will meet the minimum market capitalisation requirements for listing on the HKEX.
The HKEX considers that the share price of a SPAC is likely to be driven by speculation and rumour, particularly with regards to finding a suitable De-SPAC Target. As such, SPAC Warrant prices are likely to be more volatile than that of SPAC Shares and when exercised, Promotor Warrants and SPAC Warrants will dilute the number of SPAC Shares in issue. Therefore, it is proposed that the existing HKEX Listing Rules in respect of warrants (as set out in Chapter 15 and Practice Note 4 of the HKEX Listing Rules) be modified for SPAC Warrants and Promotor Warrants. These modifications include:
Promotor Warrants and SPAC Warrants must expire not less than 1 and not more than 5 years from the date of completion of a De-SPAC Transaction;
Promotor Warrants and SPAC Warrants must not be convertible into further rights to subscribe for securities which expire less than 1 year or more than 5 years after the date of the completion of a De-SPAC Transaction;
conditions to be imposed in respect of material terms of the warrants and which must be disclosed in the listing document of the SPAC include a limit on the number of securities to be issued upon exercise; exercise period and price; arrangements on transfer and the variation in the subscription or purchase price or the number securities; and the rights of the holder upon liquidation of the SPAC;
where a term(s) of the Promotor Warrants and SPAC Warrants are altered after issue or grant, this alteration must be approved by the HKEX except where such alterations take effect automatically under the terms of such warrants. Any alteration must also comply with Practice Note 4 of the HKEX Listing Rules, including the requirement for approval by shareholders; and
Promotor Warrants and SPAC Warrants will only be exercisable only after the completion of a De-SPAC Transaction.
In addition to the above modifications, the HKEX Proposes that in respect of Promoter Warrants, these may not be issued at less than fair value and must not contain terms more favourable than the terms of the SPAC Warrants. This is aimed at reducing the risk of a misalignment of interests between SPAC Promoters and SPAC shareholders.
Unlike traditional IPOs, SPACs do not have a track record and the HKEX states that SPACs differentiate themselves from traditional IPOS, based on the experience and the reputation of the SPAC Promoter, which the investor will rely on when deciding whether or not to invest in the SPAC.
In respect of SPAC Promoters, the HKEX proposes that it must be satisfied as to the character, experience and integrity of each SPAC Promoter and that each SPAC Promoter is capable of meeting a standard of competence commensurate with their position.
The HKEX will publish guidance in respect of the required information in relation to the experience of the SPAC Promoter. This required information must be provided to the HKEX for assessment of the suitability of the SPAC Promoter and must be disclosed in the listing document of the SPAC. The HKEX states that it will reserve the right to request that a SPAC provide such further information regarding any proposed SPAC Promoter’s character experience and integrity.
The guidance will state that the HKEX will view favourably a SPAC Promoter who can demonstrate that they have experience:
managing assets with an average collective value of at least HK$8 million over a continuous period of at least three financial years; or
holding a senior executive position (for example, chief executive) of a HKEX listed company that is or has been a constituent of the Hang Sang Index or an equivalent flag ship index.
The HKEX further proposes that at the time of listing and during the lifecycle of the SPAC, at least one SPAC Promoter must:
be a firm that holds a SFC license to carry out type 6 (advising on corporate finance) and/or type 9 (asset management) regulated activity; and
the SPAC Promoter must beneficially hold at least 10% of the Promoter Shares.
SPAC Directors will be required to meet the current requirements in respect of directors set out in the HKEX Listing Rules. These requirements include requirements in relation to the SPAC directors’ fiduciary duties, their character, experience and integrity.
In addition, a majority of the SPAC Directors must be “officers” (as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) of the SPAC Promoters (both licensed and unlicensed) representing the respective SPAC Promoters who nominate them.
The HKEX aims to ensure that SPAC Promoters are held accountable for the performance of the SPAC and that the SPAC Directors have fiduciary duties, of skill, care and diligence to the SPAC investors and the SPAC as a whole.
The HKEX proposes to require 100% of the gross proceeds from a SPAC IPO (excluding the funds raised from the issue of Promoter Shares and Promoter Warrants) be held in a ring-fenced trust account in Hong Kong.
The HKEX proposes that the trust account be operated by a trustee/custodian that meets the qualification criteria set out in Chapter 4 of the SFC’s Code on Unit Trusts and Mutual Funds (the “UT Code”) and must operate the account in a manner that is consistent with Chapter 4 of the UT Code. The requirements set out in Chapter 4 of the UT Code in respect of a trustee/custodian are very narrow. The effect is that only (a) a bank licensed under the Banking Ordinance (Cap. 155), (b) a registered trust company registered under the Trustee Ordinance (Cap. 29) that is a subsidiary of a bank licensed under the Banking Ordinance (c) or a trust company that is a trustee of a registered MPF scheme under the Mandatory Provident Fund Schemes Ordinance (Cap. 485).
The proceeds deposited with the trustee/custodian will need to held in cash or cash equivalents.
The funds (and any interest earned on such funds) that are held on trust will only be released in the following circumstances:
to meet any redemption requests;
to complete a De-SPAC Transaction; or
to return funds to SPAC Shareholders in accordance with SPAC provisions under the proposed HKEX Listing Rules.
The SPAC Promoter is allocated Promoter Shares which is used to incentivise the SPAC Promoter to successfully complete a De-SPAC Transaction. The SPAC Promoter will purchase these shares for a nominal amount which will convert into SPAC Shares at the time of the De-SPAC Transaction. Additionally, the SPAC Promoter will normally purchase SPAC Warrants to cover the underwriting fees of the SPAC’s initial offering, other expenses associated with the offering and the expenses required to search or a De-SPAC Target.
The HKEX proposes that restrictions be placed on the transfer of the Promoter Shares and Promoter Warrants and that only SPAC Promoters be permitted to beneficially hold Promoter Shares and Promoter Warrants at the time of listing of the SPAC and thereafter. To this end, the HKEX proposes that the Promoter Shares and Promoter Warrants will not be eligible for listing and the SPAC will be required not to certify the transfer of legal ownership of any Promoter Shares or Promoter Warrants.
To protect against what the HKEX believes is a heightened risk of insider dealing in respect of the securities of the SPAC, the HKEX proposes that a SPAC Promoter (including the directors and employees), SPAC directors and the SPAC employees (including their respective associates) will be prohibited from dealing in the SPAC securities prior to the completion of the De-SPAC Transaction.
The HKEX proposes to apply its current trading halt and suspension policy to SPACs. The HKEX is of the opinion that this approach will maximise the trading time of the SPAC’s securities while still providing the shareholders with the necessary protection from uneven distribution and inside information. The definition of Inside Information under Section 307A of the SFO will be applicable.
The HKEX will expect SPACs to adopt measures to preserve confidentiality of information and the SPAC will be required to meet the requirements of Part XIVA (disclosure of information) of the SFO.
Where the SPAC has a reasonable belief or that it is reasonably likely that confidential information may have been lost in respect of inside information regarding the De-SPAC Transaction negotiations, the SPAC will be required to apply to the HKEX as soon as reasonably practicable, for a trading halt where an announcement cannot be made promptly. The HKEX have stated that it will only agree to a trading halt where it appears that there is a reasonable concern the Inside Information has been leaked and/or practical difficulty in maintaining the confidentiality of such confidential information.
As mentioned earlier, the De-SPAC Transaction is a business combination between the SPAC and a De-SPAC Target that if successful, results in the listing of a Successor Company.
The HKEX proposes to consider the Successor Company in the same way as it does a reverse takeover (“RTO”), that being a deemed new listing on the HKEX. Therefore, sponsor due diligence requirements among others will apply.
The HKEX is of the view that this approach will ensure that the quantitative and qualitative requirements that are applicable to a new listing will not be circumvented by the Successor Company. The HKEX states that this will guard against the quality and reputation of the Hong Kong market being compromised.
The HKEX proposes that the new listing requirements which will apply to new listings from 1 January 2022, will be applicable to De-SPAC Transactions. Therefore, the Successor Company will be required to meet all of the listing requirements under the HKEX Listing Rules including the (i) minimum market capitalisation requirements; (ii) the financial eligibility tests; and (iii) the management and ownership continuity requirements.
The HKEX do not require the De-SPAC Target to separately meet financial eligibility tests (as is the case under current RTO rules), given that the SPACs themselves are in fact a cash shell without any financial track record (i.e. it would be sufficient for the Successor Company to meet all new listing requirements).
The HKEX proposes that the Successor Company appoint at least one IPO sponsor (independent of both SPAC and the Successor Company) to assist with its listing application in accordance with Chapter 3A of the HKEX Listing Rules. The IPO sponsor must be formally appointed by the Successor Company at least two (2) months prior to listing. I will refer to this as the Minimum Engagement Period. In circumstances where a listing applicant simultaneously considers an application for a traditional IPO and a listing via a SPAC, the HKEX will take into account the due-diligence performed by the IPO sponsor during the entire dual-track record period for the purposes of considering whether the Minimum Engagement Period has been met by the Successor Company.
The SPAC would be required to provide sufficient information to the HKEX to demonstrate that the Successor Company meets the listing track record requirements, including the financial information in respect of the De-SPAC Target based on an accountant’s report.
The IPO sponsor must carry out the due-diligence such that it is capable of making the declaration that, among other things:
the Successor Company is in compliance with all conditions of listing under Chapter 8 of the HKEX Listing Rules (qualifications for listing); and
the Successor Company’s listing document contains sufficient information to enable a reasonable person to form a valid and justifiable opinion in respect of the financial condition and the profitability of the Successor Company.
An announcement in respect of the De-SPAC Transaction will be required to be made as soon as practicable once the terms have been finalised. This announcement must:
contain all information required by the HKEX Listing Rules for transactions and RTOs;
be submitted to the HKEX prior to publication and must not be published until the HKEX has no further comments; and
state the expected date that the listing document will be issued.
In addition to the above requirements, the HKEX proposes that the De-SPAC Transaction must comply with all other applicable HKEX Listing Rule requirements applicable to notifiable transactions.
The HKEX proposes that the De-SPAC Transaction must comply with the procedures and requirements that are applicable to new listing applicants as set out in Chapter 9 of the HKEX Listing Rules (application procedures and requirements). These requirements include that the:
the SPAC submit an application for listing (Form A1) that is to be completed by the IPO Sponsor together with an advanced proof of a ‘substantially complete’ listing document; and
the listing document must not be issued until the HKEX has confirmed that it has no further comments.
In addition, the listing document must contain all the information it would be required to contain for a new listing on the HKEX and for a RTO and must be sent to shareholders either at the time notice of general meeting is given to approve the De-SPAC Transaction or prior to such notice.
The listing document must also satisfy the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong).
The HKEX proposes that the terms of the De-SPAC Transaction must include a condition that the De-SPAC Transaction must not be completed unless the Successor Company has been given approval for listing on the HKEX.
The HKEX proposes that an investment company under Chapter 21 of the HKEX would not be an eligible De-SPAC Target while biotech companies and mineral companies will be eligible provided that these companies comply with applicable requirements.
In addition, a SPAC may also become a Successor Company with a weighted voting rights (WVR) structure, provided the applicable requirements under the HKEX Listing Rules are met.
To help ensure that the De-SPAC Targets are businesses with sufficient substance to justify a listing on the HKEX, the HKEX proposes to require that the De-SPAC Target have a fair market value of at least 80% of the funds raised by the SPAC at its initial offering prior to any redemptions.
The HKEX is seeking views from the market as to whether the SPAC should be required to use a certain portion of its net proceeds raised as consideration for a De-SPAC Transaction. In particular, the HKEX is concerned that if the Successor Company is permitted to retain all or a substantive amount of these funds, it may become a “cash company” which is not considered suitable for listing on the HKEX under the existing listing regime. However, the HKEX understands that it is market practice for the consideration for a De-SPAC Transaction to be predominantly settled through payment in shares. The HKEX recognises that imposing such requirements may put the Successor Company at disadvantage vis-à-vis a company which lists via a traditional IPO.
The HKEX proposes to make it a requirement that a SPAC obtain funds from outside third investment for the purposes of completing a De-SPAC Transaction.
The HKEX believes that independent investment will mitigate against risk of artificial valuations of the De-SPAC Target. To this extent, it is proposed that funds raised by third party investors will have to constitute at least 25% of the expected market capitalisation of the Successor Company. However, the HKEX may accept a lower threshold of between 15% – 25% where the expected market capitalisation of the Successor Company is in excess of HK$1.5 billion at the time of listing.
In addition to the above requirements, the HKEX proposes to require that at least one independent investor be either an asset management firm of at least HK$1 billion or a fund with a fund size of at least HK$1 billion. The investments made by these firms must result in them beneficially owning at least 5% of the issued shares of the Successor Company as at the date of its listing. To determine the independence of an investor, the HKEX proposes to apply the same criteria it uses to determine the independence of an independent financial adviser under rule 13.84 of the HKEX Listing Rules.
Currently under the HKEX Listing Rule 15,02, securities issuable upon the exercise of warrants, must not exceed 20% of the number of the listed company’s shares in issue. In addition, under HKEX Listing Rule 7.27B, there is a cap on the value of shareholdings following a rights issue, open offer or specific mandate placing. A listed company on the HKEX may not undertake any of these corporate actions where such action would result in a theoretical dilution effect of 25% or more.
In respect of SPACs, the HKEX proposes that the SPAC will have to disclose the dilution in number and value to non-redeeming SPAC shareholders that may occur if the transaction is approved and completed. In addition, the listing document issued for the De-SPAC Transaction must contain the dilution effect of the De-SPAC Transaction to the number and value of the holdings of non-redeeming SPAC shareholders.
In respect of the dilution cap, the HKEX seeks feedback on whether a dilution cap on the maximum possible dilution from the conversion of Promoter Shares and the exercise of warrants issued by a SPAC, is appropriate. To the extent that the dilution is deemed appropriate, the HKEX proposes to prohibit a SPAC from issuing:
Promoter Shares to SPAC investors which represent more than 20% of the total number of shares the SPAC has in issue at the date of its listing and if the Promoter Shares are convertible into SPAC Shares, such conversion will be on a one-to-one basis only;
SPAC Warrants and Promoter Warrants which entitle the holder thereof to more than a third of a share upon their exercise;
warrants in aggregate, that if immediately exercised (whether or not if such exercise is permissible), result in the issue of shares, a number that is greater than 30% of the number of shares that are in issue at the time that such warrants are issued; and
Promoter Warrants that, if they were immediately exercised (whether or not if such exercise is permissible), result in the issue of shares of a number that is greater than 10% of the number of shares in issue at the time that the warrants are issued.
The HKEX have stated that they would be willing to accept requests to issue additional Promoter Shares to SPAC Promoters after completion of the De-SPAC Transaction (the “Earn Out Portion”) subject to conditions that:
the total number of Promoter Shares including the Earn Out Portion, should represent an amount of not more than 30% of the total number of shares that are in issue at the time of the SPAC’s listing;
the Earn Out Portion must be linked to an objective performance target(s) which target(s) should not be determined by changes in the price or trading volume of the Successor Company’s shares;
at the general meeting to approve the De-SPAC Transaction, the SPAC shareholders, the Earn Out Portion is approved; and
the Earn Out Portion must be included in the resolution approving the De-SPAC Transaction.
In addition, the HKEX proposes that a SPAC must not grant any anti-dilution rights to a SPAC Promoter that would result in the SPAC Promoter holding more than the number of Promoter Shares than they held as at the date of the listing of the SPAC.
The HKEX proposes that a De-SPAC Transaction should be made conditional on receiving approval from the independent shareholders at a duly convened general meeting.
Where a shareholder has a material interest in the relevant resolution, it is proposed that the shareholder (including the shareholder’s close associates) abstain from voting. As a result:
the SPAC Promoter(s) and their close associates will be unable to vote; and
where any De-SPAC Transaction will result in a change in control, any outgoing controlling shareholder(s) (and their close associates), must not vote in favour of the resolutions.
In addition, the terms of any outside investment (including the independent third party investment) which has been obtained for the purpose of completing a De-SPAC Transaction, must be included in the relevant resolution(s) that are the subject of the shareholder vote at the general meeting.
The HKEX perceives there to be a high risk that the valuation of a De-SPAC Target and the Successor Company may not be genuine and may be manufactured to meet new listing requirements where the De-SPAC Transactions involves connected targets. Having said that, the HKEX acknowledges that a complete prohibition on connected transactions is unnecessarily restrictive and proposes to allow such transactions where certain conditions are met. These conditions include applying Chapter 14A of the HKEX Listing Rules to SPACs with an expanded definition of connected person to include the following people and their associates:
a SPAC Promoter;
the SPAC’s trustee/custodian;
the SPAC directors.
A De-SPAC Transaction will be considered a “connected transaction” if it may confer benefits on any of these parties just mentioned, through their interests in the entities which are involved in the transaction.
In addition to receiving the independent shareholder approval, the SPAC will be required to comply with the provisions under HKEX Listing Rules 14A.32 – 14A.48 which are applicable to connected transactions. Under HKEX Listing Rules 14A.32 – 14A.48, the SPAC will among other things, have to establish an independent board committee to advise the SPAC’s shareholders on certain aspects of the connected transaction including:
whether the terms of the transaction are fair and reasonable;
whether the connected transaction is in the interests of the SPAC and its shareholders; and
how to vote on the connected transaction (the “Connected Transaction Requirements”).
In addition, the SPAC will be required to appoint an IFA, acceptable to the HKEX, to make recommendations to the independent board and the shareholders on the Connected Transaction Requirements.
The circular sent to shareholders in respect of the De-SPAC Transaction must include:
a letter from the independent board committee containing its opinion on the Connected Transaction Requirements and conforming with relevant HKEX Listing Rule requirements; and
a letter from the IFA containing its opinion and recommendation.
The IFA is required to meet all the applicable HKEX Listing Rules.
In addition to the requirements listed above, a SPAC must also:
demonstrate minimal conflicts of interest exist in relation to the proposed acquisition; and
demonstrate with support that the proposed connected transaction will be concluded at arm’s length. Evidence in support may include:
demonstrating that the SPAC and its connected persons are not controlling shareholders of the De-SPAC Target;
demonstrating that no cash consideration is being paid to connected persons, and that any consideration shares issued to connected persons would be made subject to a lock-up period of 12 months; and
in all cases, an independent valuation will be required which must be included in the circular to the shareholders.
A key aspect of SPACs is the ability of shareholders to redeem their shares in the SPAC on the happening of certain trigger events.
To align shareholder voting and shareholder redemptions, the HKEX proposes that only those shareholders who vote against one the following trigger events may redeem their shares in the SPAC:
a material change in the SPAC Promoter managing a SPAC or the eligibility and/or suitability of a SPAC Promoter;
a De-SPAC Transaction; and
a proposal to extend the De-SPAC Announcement deadline or the De-SPAC Transaction deadline.
The HKEX is the of the view that such mechanism will provide a meaningful check on the reasonableness of the terms of a proposed transaction and will assist to curb abusive market practices such as over-valuation. This is redemption right (as proposed) is only available to shareholders who vote against one of the trigger events. Therefore, a shareholder who votes in favour of the De-SPAC Transaction would not have a redemption right as the HKEX considers that this will help to ensure that interests of non-redeeming shareholders are not prejudiced by votes cast by persons whose interests are not aligned with their own.
SPAC shareholders who redeem their SPAC Shares will still be entitled to keep the associated SPAC Warrants they hold to compensate them for the lack of return on their investment held in trust prior to completion of the De-SPAC Transaction.
The HKEX proposes to make it mandatory for SPACs to provide a redemption option. It is proposed that redeeming shareholders be entitled to receive a pro-rata amount of 100% of the funds raised at the initial offering, to be redeemed at the price the shares were issued plus accrued interest (the “Redemption Price”).
Expenses incurred by the SPAC Promoter for its establishment and maintenance will not be recoverable if the De-SPAC Transaction is not completed. This the HKEX believes will better align the interests of the SPAC Promoters and the SPAC shareholders who do not redeem their shares.
Shareholders who purchased their SPAC Shares on the secondary market at a premium to the listing price, will not be able to recover their investment in full.
It is proposed that SPACs will be prevented from imposing a limit on the number of shares a SPAC shareholder can redeem. The HKEX states that this is aimed at ensuring that a SPAC shareholder can recover their initial investment where the shareholder votes against the resolutions in respect of a trigger event. This will ensure that voting is not influenced by redemption requests.
Where a general offer obligation is triggered under the SFC’s Codes on Takeovers and Mergers and Share Buy-backs (the “Takeovers Code”), the SPAC will be prevented from offering a premium to some shareholders, but not all.
With respect to redemptions in relation to a De-SPAC Transaction, the redemptions will be subject to the completion of the De-SPAC Transaction. These redemptions and the return of the relevant funds will have to be completed within five (5) business days of the completion of the De-SPAC Transaction.
Where the De-SPAC Transaction is not completed, the funds will remain in trust for the purposes of listing an alternative De-SPAC Target at a later date.
In the case of a vote in respect of either (i) a material change in the SPAC Promoter managing a SPAC or the eligibility and/or suitability of a SPAC Promoter; or (ii) a proposal to extend the De-SPAC Announcement deadline or the De-SPAC Transaction deadline, the redemption and the return of funds must happen within one month of the date of the relevant general meeting.
The HKEX proposes that the current requirements in respect of forward looking statements should not be lowered for disclosures concerning a SPACs’ IPO and De-SPAC Transactions. Therefore, these statements should be formulated on a reasonable basis and be verified by independent persons to the extent required for a traditional IPO. Therefore, in line with HKEX Listing Rule 11.16, a listing document in respect of a De-SPAC Transaction, may only refer to future profits or contain dividend forecasts based on an assumed future level of profits, where these are supported by a formal profit forecast.
Unlike restrictions on the marketing and trading of SPAC Shares, the trading of the Successor Company’s shares will not be limited to professional investors. However, because the offer of SPAC Shares will be limited to professional investors only, SPACs are likely to have a smaller shareholder base and therefore, the HKEX proposes that the minimum shareholder base threshold should be lowered to at least 100 (rather than the usual minimum of 300 under the HKEX Listing Rules).
The HKEX proposes that the Successor Company must raise at least HK$1 billion in its initial offering and attract independent investment of up to 25% of the Successor Company’s market capitalisation. The HKEX is of the view that these requirements will assist in ensuring that the Successor Company is a relatively large listed company whose size may mitigate against the risk of substantial market volatility in the trading of its shares upon listing.
To mitigate against the risks of price volatility and liquidity that is associated with a smaller shareholder base, it is proposed that the following HKEX Listing Rule requirements will also apply:
a 25% public float requirement must be met at all times; and
not more than 50% of the securities of a Successor Company in public hands can be beneficially owned by the three largest public shareholders, as at the date of the Successor Company’s listing.
The HKEX proposes that SPAC Promoters be subject to a lock-up period of 12 months in respect of their holdings in the Successor Company from the date of the completion of the De-SPAC Transaction. In addition, Promoter Warrants will not be exercisable during this period.
In addition to the proposed SPAC Promoter lock-up period, the HKEX proposes a lock-up period in respect of the controlling shareholders. To this extent, the HKEX proposes that the restrictions imposed on controlling shareholders under the existing HKEX Listing Rules be imposed on the controlling shareholders of a Successor Company. This means that a controlling shareholder of a Successor Company will not:
be allowed to dispose of its holdings in the Successor Company within the first 6 months of the listing of the Successor Company; and
be allowed be allowed to dispose of its holdings in the Successor Company within the second 6 months following the listing of the Successor Company if such disposal would result in the controlling shareholder ceasing to be a controlling shareholder.
The Takeovers Code applies to takeovers, mergers and share buy-backs affecting companies with a primary listing of their equity securities on the HKEX. The Takeovers Code applies irrespective of the country of incorporation or the location of the management or place of business and assets.
It is expected that all SPACs listed on the HKEX will be primary listed and therefore, prima facie the Takeovers Code will apply. The HKEX states that the application of the Takeovers Code will ensure that, during a change in control (as defined by the Takeovers Code), shareholders during this period will be afforded the same treatment and will be provided with an exit opportunity.
In respect of the application of the Takeovers Code to SPACs, there are three stages of the life of a SPAC to which the Takeovers Code may apply, those being (i) prior to the De-SPAC Transaction; (ii) the De-SPAC Transaction; and the (iii) Successor Company.
The HKEX proposes that the Takeovers Code should apply to a SPAC during the SPAC period, that is the period during which the SPAC remains listed until the completion of the De-SPAC Transaction. The HKEX cited the following key reasons:
despite that offers prior to the completion of the De-SPAC Transaction are unlikely, to have a period of up to 36 months without the application of the Takeovers Code would not be satisfactory and opportunistic behaviour may be prevalent if unregulated offers are permitted during this period;
as SPACs will have a primary listing on the HKEX, they should be subject to the Takeovers Code and a broad waiver from the application of the Takeovers Code during this period will not be appropriate; and
while the redemption of shares by SPAC shareholders under the HKEX proposals may fall under the definition of an “exempt share buy-back” under the Takeovers Code on Share Buy-backs, the Code on Share Buy-backs will provide protection to the SPAC shareholders if a SPAC wishes to conduct buy-back transactions outside the redemption regime.
The HKEX proposes that, where a De-SPAC Transaction results in the owner of the De-SPAC Target obtaining 30% or more of the voting rights, the application of Rule 26.1 of the Takeovers Code would normally be waived. In these circumstances, the owner of the De-SPAC Target would need to make a formal application to the SFC for the application of such waiver. In granting the waiver, factors that will be taken into account by the SFC include:
the holdings of the owner of the De-SPAC Target and parties acting in concert with it in the shares of the SPAC and any dealings by such persons during the SPAC Period prior to the announcement of the De-SPAC Transaction; and
any relationship(s) between the owner of the De-SPAC Target and the SPAC Promoters and parties acting in concert with any of them.
Following completion of the De-SPAC Transaction, where a third party obtains “control” over the Successor Company (i.e. 30% or more of the voting rights), or otherwise consolidates control by crossing the 2% creeper threshold of the Successor Company, the SFC would not normally grant a waiver from Rule 26.1 of Takeovers Code.
The HKEX has explained that the difference in approaches between granting a waiver to the owner of the De-SPAC Target and the refusal to grant a waiver to a third party, is because while it can be said that there this a general expectation that the owner of the De-SPAC Target will become the controlling shareholder of the Successor Company, the same cannot be said in respect of a third party gaining control of the Successor Company.
The SFC is of the view that the Takeovers Code should apply in full to the Successor Company as it is expected to be a typical publicly listed company on the HKEX.
The HKEX proposes the following deadlines for completing a De-SPAC Transaction, with the option of an extension:
the De-SPAC Announcement must made within 24 months of the date of its listing (the “Announcement Deadline”); and
the DE-SPAC Transaction must be completed within 36 of the date of its listing (the “De-SPAC Transaction Deadline”).
Failure to meet either these deadlines will result in an immediate suspension of the trading in the SPAC’s securities. During the trading suspension, the SPAC must return the funds raised from its listing to its shareholders, liquidate and de-list.
The HKEX proposes that the SPAC may apply for an extension of the Announcement Deadline or the Transaction Deadline. To be eligible to apply for such extension, the SPAC must in the opinion of the HKEX have a valid reason for such request and must include confirmation that the SPAC has received the approval for the extension by an ordinary resolution of the shareholders at a general meeting. The SPAC Promoters and their respective close associates may not vote. A six (6) month extension is proposed by the HKEX.
Prior to a vote on the extension of either the Announcement Deadline or the Transaction Deadline, shareholders of the SPAC must be given an opportunity to redeem their shares at the Redemption Price.
Where the SPAC fails to:
meet either the Announcement Deadline or the De-SPAC Transaction Deadline (including any extension); or
to get the requisite shareholder approval in respect of a material change in SPAC Promoters within one month from the said material change;
the HKEX will suspend the trading in the securities of the SPAC and the SPAC must within one (1) month of such suspension, return to its shareholders (excluding the holders of the Promoter Shares), on a pro rata basis, 100% of the funds it raised at its initial offering at the redemption price. The redemption prices is the price at which the securities were issued in the SPAC’s initial listing, plus any accrued interest. Thereafter, the SPAC must liquidate and upon liquidation publish an announcement regarding the liquidation and the cancellation of its listing. Upon completion of the liquidation, the HKEX will automatically cancel the SPAC’s listing.
