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Corporate finance: markets and lawyers eye surge in SPAC activity

Chris CroweFriday 23 April 2021

In the field of corporate finance, ‘SPAC’ was arguably the acronym of 2020. A surge of Special Purpose Acquisition Company (SPAC) or blank-cheque company initial public offerings (IPOs) brought welcome effervescence to New York in particular. Other financial centres looked on with envy.

Having observed this frenetic activity, the recommendations made by the UK Listings Review – an examination of the country’s listings regime, published in March – hint at a potentially more benign and attractive regulatory regime that will draw more SPACs to list on the London Stock Exchange. In turn, this should enable more entrepreneurs and growth businesses to go public.

A total of 248 SPAC vehicles were listed in the United States during 2020, with Nasdaq reporting that these vehicles raised some $79.87bn in gross proceeds.

'De-SPAC’ transactions (de-SPACs), which usually occur within two years of the SPAC going public, are another attractive source of business for legal advisers. De-SPACs revolve around a merger between the publicly-traded SPAC and a private company, the latter then becoming the listed entity.

There is talk coming out of the US that the SPAC market might be a bit overblown. There’s a lot of froth in that market and a lot of people are desperate to do deals

Alasdair Steele
Head of Equity Capital Markets, CMS

The proceeds from the IPO are usually placed in a trust account and the SPAC has 18 to 24 months to acquire a target business. If it fails to do so, the SPAC liquidates and the proceeds are returned to the shareholders.

SPACs are not a new phenomenon, but regulations have largely restricted uptake in the United Kingdom. The UK Listings Review’s recommendations may drive up market activity, however.

Until now, trading in a SPAC’s shares must be suspended when it announces an acquisition. Trading will be potentially allowed to continue, but voting and redemption rights will be afforded to SPAC shareholders in relation to acquisitions.

Thomas Vita, a corporate finance partner at Norton Rose Fulbright in London, says that the suspension of shares on deal announcements has been ‘a key deterrent for potential investors in a London SPAC IPO’.

Other UK proposals are expected to afford greater voting power to company founders through dual-class ownership structures and to allow outside investors to hold a minimum 15 per cent of the issued share capital rather than the current mandatory 25 per cent free float.

Alasdair Steele, Head of Equity Capital Markets at CMS in London, believes that changes to current regulations will be vital if the UK is to have any hope of creating a US-style SPAC-friendly environment. ‘The main difference between the UK and the US is that US SPAC acquisitions are all subject to shareholder approval. If you don’t like the deal, you can vote against the acquisition. And even if you’re in the minority, you can take most of your money back out.’

Steele is not especially hopeful that the UK is going to see a SPAC-driven upswing in capital markets activity. ‘I’m not betting that my entire practice for the next two years will be made up of SPACs. I also think there is talk coming out of the US that the SPAC market might be a bit overblown. There’s a lot of froth in that market and a lot of people are desperate to do deals.’

He points to the fact that many SPACs are struggling to deploy capital given the scarcity of suitable acquisitions. ‘You’ve got to be a certain size to go to the States and SPACs are raising $200-300m plus. Assuming that you do a leverage deal, then you’ve got to look for an asset that’s $500m minimum and there’s not a lot of those around.’

London also faces the challenge of preserving its status as a primary global financial centre after Brexit. Based on the number of shares traded in January, Amsterdam has ousted London as Europe’s top trading hub.

In the SPAC segment, Amsterdam has also steamed ahead. ESG Core Investments, a SPAC focused on the environmental, social and governance (ESG) segment, floated on Euronext Amsterdam through a €250m IPO in February, becoming the first European SPAC to list in 2021.

Jan Willem Hoevers, Vice-Chair of the IBA Securities Law Committee and a partner at Dutch firm De Brauw Blackstone Westbroek, says that the Dutch legal market is braced for ‘dozens’ of SPACs looking to list in Amsterdam. ‘It is absolute mayhem. There is a huge deal flow,’ he adds.

SPACs that are looking at continental European assets, particularly businesses that report their financial results in Euros, are understandably looking to list in Amsterdam or other European Union Member States.

Hoevers is not convinced, however, that London is going to continually cede ground to other European cities. ‘London is a major financial centre and will always be so. If you look at the data, there may be some business leaking to New York and to the continent, but London is still an impressive town and has a lot going for it, with or without the changes.’

While an uptick in SPAC listings and de-SPACs might be a welcome fillip to deal-hungry lawyers in London and Europe, the potential trend presents some complications from a strategic perspective.

IPO engagements are ultra-competitive, resulting in low fees. Usually, law firms will take a hit on fees in the hope of a longer-term relationship with the issuer, but as a SPAC is simply a temporary vehicle that evaporates as part of the de-SPAC acquisition, it isn’t necessarily an attractive prospect as a client. Many firms, then, might be better off representing the target in the belief that they will reap the rewards as the business grows as a public company.

Despite the SPAC hype, it might not be the windfall that the legal community is hoping for. But providing growth businesses with an easier route to going public can only be positive for the economy, and for advisers too.