Hong Kong consults on listing framework for special purpose acquisition companies (SPACs)

On 17 September 2021, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper seeking market feedback on proposals to create a listing regime for SPACs in Hong Kong.

A SPAC is a type of shell company, established and managed by professional managers who have private equity, corporate finance and/or relevant industry experience (SPAC Promoters, known as “SPAC Sponsors” in the United States (US)), for the purpose of raising funds through its listing for acquiring a business (De-SPAC Target) at a later stage within a pre-defined time period after listing (De-SPAC Transaction). The listed issuer resulting from the completion of a De-SPAC Transaction is a Successor Company.

The Hong Kong approach

Instead of replicating the US SPAC regime, the Exchange proposes to provide a high entry point for SPAC listing applicants and De-SPAC Targets, aiming at listing of SPACs that have experienced and reputable SPAC Promoters that seek good quality De-SPAC Targets.

A notable difference from the US regime is that the Exchange proposes to restrict the subscription for, and trading of, a SPAC’s securities to professional investors (as defined in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO)) only.

The key proposals for a Hong Kong SPAC listing regime are summarised below.

Consultation period will end on 31 October 2021.

At listing of a SPAC


1.  

At listing and for the lifetime of the SPAC:

  • the Exchange must be satisfied with the character, experience and integrity of a SPAC Promoter and its capability of meeting a standard of competence commensurate with its position. The Exchange will publish guidance setting out the information that must be provided to it to determine the suitability of each SPAC Promoter. It is proposed that the Exchange will view favourably persons who have experience in:

    • managing assets with an average collective value of at least HK$8 billion over a continuous period of at least three financial years; or

    • holding a senior executive position (e.g. Chief Executive or Chief Operating Officer) at an issuer that is or has been a constituent of the Hang Seng Index or an equivalent flagship index; and

  • at least one SPAC Promoter is a firm that holds a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license issued by the Securities and Futures Commission (SFC), which is the beneficial holder of at least 10% of the Promoter Shares issued by the SPAC.

2.

At the time of listing, a SPAC must distribute:

  • each of SPAC Shares and SPAC Warrants to a minimum of 75 professional investors, of which 30 must be institutional professional investors (i.e. persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO); and

  • at least 75% of the total number of SPAC Shares and SPAC Warrants to institutional professional investors.

3. 

Promoter Shares are shares issued by a SPAC exclusively to a SPAC Promoter at nominal consideration as a financial incentive to establish and manage the SPAC. A SPAC Promoter must, at the date of listing of the SPAC and thereafter, remain as the beneficial owner of such Promoter Shares issued to it.

A SPAC must not allot, issue or grant Promoter Shares to the SPAC Promoters that represent more than 20% of the total number of shares the SPAC has in issue as at the date of listing. The Exchange may allow a SPAC to issue additional Promoter Shares to the SPAC Promoters after completion of the De-SPAC Transaction subject to the Successor Company meeting certain performance targets (i.e. earn-outs), provided that the total number of Promoter Shares (including the earn-out portion) will represent not more than 30% of the total number of shares the SPAC has in issue at the date of its listing.

4. 

SPAC Shares for which a listing is sought must have:

  • an issue price of at least HK$10 each; and

  • a board lot size and subscription size of a value of at least HK$1,000,000.

If the Promoter Shares are convertible into SPAC Shares, such conversion shall be on a one-for-one basis only.

5. 

Issue or grant of all warrants by a SPAC must be subject to the prior approval of:

  • the Exchange; and

  • in the case of issue or grant of warrants after listing, the shareholders in general meeting (unless they are issued or granted pursuant to the authority of a general mandate granted by shareholders).

Each warrant issued or granted by a SPAC must entitle the holder to not more than a third of a share of the SPAC (or of the Successor Company).

The number of SPAC Shares that may be issued upon exercise of all outstanding warrants issued or granted by a SPAC must not exceed 30% of the number of shares in issue at the time such warrants are issued.

Warrants must not be exercisable before completion of a De-SPAC Transaction.

6. 

Promoter Warrants are warrants issued by a SPAC exclusively to a SPAC Promoter who must remain as the beneficial owner of such Promoter Warrants at the date of listing of the SPAC and thereafter.

The number of SPAC Shares that may be issued upon exercise of all outstanding Promoter Warrants issued or granted by a SPAC must not exceed 10% of the number shares in issue at the time such warrants are issued.

Promoter Warrants must not be exercisable during the period ending 12 months from the date of the completion of a De-SPAC Transaction.

7. 

The majority of directors of a SPAC must be officers (as defined under the SFO) of the SPAC Promoters representing the respective SPAC Promoters who nominate them.

SPAC IPO sponsor engagement

SPAC listing applicants should engage a sponsor in connection with its listing application. The sponsor should conduct due diligence to determine whether the SPAC Promoter and the SPAC’s internal controls meet Listing Rule requirements prior to the submission of a “substantially complete” listing application in accordance with Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC and Practice Note 21 of the Listing Rules.

A SPAC listing application should be submitted no earlier than one month (instead of two months for other types of new listing applications or a De-SPAC Transaction) after the date of the formal appointment of the sponsor.   

Trading arrangements and restrictions on dealing in SPAC securities

The Exchange proposes to allow the separate trading of SPAC Shares and SPAC Warrants from the date of initial listing onwards, subject to having measures in place to mitigate the risks of extreme volatility and a disorderly market.

SPAC Promoters (including their directors and employees), SPAC directors and SPAC employees, and their respective close associates are prohibited from dealing in any of the SPAC’s securities prior to the completion of a De-SPAC Transaction.

De-SPAC Transaction

1. 

A De-SPAC Target must have a fair market value of at least 80% of funds raised by the SPAC from its initial offering.

An investment company (as defined by Chapter 21 of the Listing Rules) would not be an eligible De-SPAC Target.

Can a De-SPAC Target be connected to the SPAC?

This is not prohibited. The current connected transactions rules would apply to the De-SPAC Transaction, and for this purpose, the SPAC Promoters, the SPAC’s trustee/custodian, the SPAC directors and associates of any of them would fall within the meaning of connected persons. In addition, the SPAC must also:

  • demonstrate that minimal conflicts of interest exist in relation to the proposed acquisition;

  • demonstrate that the transaction would be on an arm's length basis, for example:

    • the SPAC and its connected persons are not controlling shareholders of the De-SPAC Target

    • no cash consideration being paid to connected persons, and any consideration shares issued to the connected persons being subject to a lock-up period of 12 months; and

  • include an independent valuation of the transaction in the circular to shareholders.

2. 

The terms of a De-SPAC Transaction must include investment from independent third party investors:

  • whose investment must constitute at least 25% of the expected market capitalisation of the Successor Company (or at least 15%, if the Successor Company’s expected market capitalisation at listing is over HK$1.5 billion); and

  • which must include at least one asset management firm with assets under management of at least HK$1 billion or a fund with a fund size of at least HK$1 billion. The investment made by this firm or fund must result in it beneficially owning at least 5% of the issued shares of the Successor Company as at the date of the Successor Company’s listing.

3. 

A Successor Company must meet all new listing requirements (including minimum market capitalisation requirements and financial eligibility tests, as well as appointment of at least one sponsor at least two months prior to the date of the listing application).

Successor Company must ensure an adequate spread of holders of its shares of at least 100 shareholders (instead of the minimum 300 shareholder requirement normally required for a new listing).

Shareholders’ approval

A De-SPAC Transaction must be made conditional on approval by the SPAC’s shareholders at a general meeting.

A SPAC Promoter and their close associates must abstain from voting. If the De-SPAC Transaction results in a change of control, any outgoing controlling shareholder(s) of the SPAC and their close associates must not vote in favour of the relevant resolution(s) at the general meeting.

Deadlines

A SPAC must:

  • publish an announcement of the De-SPAC Transaction within 24 months of the date of its listing; and
  • complete a De-SPAC Transaction within 36 months of the date of its listing.

The Exchange may permit an extension of either deadline for a period of a maximum of six months if the extension is approved by an ordinary resolution of the SPAC’s shareholders at a general meeting (on which the SPAC Promoters and their respective close associates must abstain from voting).

Lock-up

SPAC Promoters must not dispose of any securities of the Successor Company during the period ending 12 months from the date on the completion of the De-SPAC Transaction.

The controlling shareholder of a Successor Company would be subject to the current requirements of the Listing Rules on the disposal of shares by controlling shareholders following a new listing. That means, the controlling shareholder could not dispose of its holdings in the first six months of the Successor Company’s listing and could not dispose of its holdings in the second six months following the listing if this would result in it ceasing to be a controlling shareholder.

Share redemptions

A SPAC must provide its shareholders with the opportunity to elect to redeem all or part of their shareholdings (at the price at which they were issued in the SPAC’s initial offering, plus accrued interest) in the circumstances of a shareholder vote on:

  • a material change in the SPAC Promoter or the eligibility and/or suitability of a SPAC Promoter;
  • a De-SPAC Transaction; and
  • a proposed extension of the deadline for the publication of announcement of the De-SPAC Transaction or the deadline for the completion of the De-SPAC Transaction.

Shareholders would only be able to redeem those SPAC Shares voted against the relevant resolution(s).

Liquidation and delisting

If a SPAC fails to:

  • announce / complete a De-SPAC Transaction within the respective deadlines (including any permitted extensions); or
  • obtain the requisite shareholders’ approval in respect of a material change in a SPAC Promoter within one month of the material change,

the Exchange will immediately suspend the trading of the SPAC, and the SPAC must, within one month of the suspension, return the funds it raised at its initial offering to all holders of SPAC Shares (plus any and all accrued interest) as held in the trust account on a pro rata basis.

As soon as practicable after such return of funds, the SPAC must voluntarily liquidate. The Exchange will automatically cancel the listing of a SPAC upon its liquidation.

Application of the Takeovers Code

 

Would the Takeovers Code apply?

Prior to completion of a De-SPAC Transaction:

Yes

De-SPAC Transaction:

The application of Rule 26.1 of the Takeovers Code in relation to a De-SPAC Transaction which would result in the owner of the De-SPAC Target obtaining 30% or more of the voting rights should normally be waived.

Successor Company:

Yes