The legal framework surrounding SPACs in Pakistan
Akhund Forbes, Karachi
The primary purpose of a special purpose acquisition company (SPAC) is that of an investment vehicle with the intention of raising funds from the general public, which are utilised for the purpose of a merger or acquisition within a certain time period. This allows the private company to access the public markets and raise additional capital without going through the traditional initial public offering (IPO) process. This article discusses the legal requirements to establish a SPAC and the criteria to be fulfilled with respect to the merger or acquisition transaction undertaken by the SPAC following its establishment.
The Securities and Exchange Commission of Pakistan (SECP) has introduced amendments via the Public Offering Regulations 2017 (the ‘Regulations’), which set out the requirements, procedures and purpose for incorporating a SPAC in Pakistan.
The Regulations stipulate that a SPAC will be a public limited company with paid-up capital of no less than PKR 10m and it will not carry out any other commercial business other than the business of the SPAC. Furthermore, its promoters, sponsors, directors and chief executive officer will comply with the requirements prescribed by the ‘Fit and Proper Criteria’ under the Regulations.
The M&A transaction
Once the SPAC has raised funds, it must use those funds for the solitary purpose of a transaction pertaining to a merger or acquisition. The SPAC will ensure that the merger transactions are constructed in a manner that does not attract any conflict and that is in the best interests of the investors.
The SPAC will also ensure that at least 15 per cent of the shareholding of the merged entity (post-merger) is held by the sponsors for a period of at least one year from the date of the merger, provided that the SPAC sponsors are able to increase their shareholding percentage in the merged entity, if the merged entity (subsequent to the merger) starts generating operating profits within the time specified in the prospectus.
The SPAC will further ensure that the sponsor’s shareholding in the target company pre-merger/acquisition is less than 30 per cent of the total shareholding of the target company.
The Regulations stipulate that a SPAC must raise at least INR 200m to complete an acquisition or merger deal; the rationale being that the funds raised are adequate for the SPAC's a core business with a suitable size and scale in relation to the industry in which the business operates and this should be made apparent in the offering document/prospectus.
The Regulations obligate the approval of each M&A transaction by the shareholders of a SPAC through a special resolution.
The merger or acquisition transaction must be completed within a time period of 36 months from the date of the listing on the exchange. This time period may be extended by six months subject to a written request with a valid justification for the extension submitted to the SECP.
In the case of failure to complete a merger or acquisition transaction within the prescribed time period, the SPAC is required to inform the SECP, exchange within the stipulated time and refund the amount to the shareholders. The Regulations also provide for the rights of the shareholders to receive a refund in case of disapproval of the transaction.
The fair market value of the target company must equal to at least 80 per cent of the aggregate amount in the escrow account.
The merger or acquisition by the SPAC should result in majority ownership or management control by the SPAC of the merged/target entity.
The Regulations further highlight the procedure for the management of an escrow account. The SPAC will deposit at least 90 per cent of all proceeds immediately into the escrow account, whereas ten per cent may be utilised to cover the expenses in connection with the IPO or private placements, including operating costs, funding the hunt for a target business and concluding the qualifying acquisition, but the overall amount shall be utilised solely for the merger or acquisition transaction.
The monies in the escrow account can be released by the custodian for such purposes as permitted under the Regulations and upon termination of the escrow account. The escrow account can be terminated upon completion of the transaction within the prescribed time period or the failure to conclude the transaction by the SPAC.
The income generated by the funds held in the escrow account, including profit or dividend income from the permitted investments, must accrue to the escrow account, and the SPAC must ensure that the initial capital is preserved in such investments. The proceeds in the escrow account can be invested in permitted investments. Members of the management team are not eligible for any other payments from the escrow account other than in relation to securities purchased by them during and after the public offering.
The inception of SPACs is forecasted to play a fruitful role in the development of capital markets in Pakistan. It will provide an opportunity for corporations to extract capital to fuel M&A transactions on a large scale and, in addition, will stimulate new listings, providing a favourable environment for investments in Pakistan.