Since the implementation of the Hong Kong listing regime for special purpose acquisition companies (SPACs) on 1 January 2022, 11 SPACs have lodged listing applications (see a summary of these cases at the end of this article) with The Stock Exchange of Hong Kong Limited (Exchange) as of 23 March 2022, with the first one having made its debut on 18 March 2022. We are currently advising the sponsor in relation to one of these SPAC listing applications which was lodged in mid-February 2022. We expect a strong pipeline of SPAC listings in Hong Kong this year.
Our previous client alert “Overview of Hong Kong’s listing regime for special purpose acquisition companies (SPACs)” issued in early January 2022 summarises the key features of the SPAC listing regime. Please note that capitalised terms such as “SPAC Shares” used in this article are explained in that alert. On 4 March 2022, the Exchange published a new guidance letter (HKEX-GL114-22) providing guidance on the qualifications and obligations of the trustee or custodian regarding the operation of the escrow account of a SPAC for ring-fencing the IPO proceeds. This guidance letter has addressed many of the questions we have received at the time when the SPAC listing regime first became effective from our trustee and custodian clients surrounding their qualifications and obligations in the context of a SPAC listing.
In this article, we will provide some insights on a few issues that potential SPAC Promoters (i.e. persons who establish a SPAC and/or beneficially own “Promoter Shares” issued by a SPAC exclusively to such persons at nominal consideration, commonly known as “sponsors” in the United States) may be interested to know.
Would (a) a SPAC Promoter controlled by a licensed firm / individual or (b) a SPAC Promoter structured as a fund managed by a licensed general partner fulfil the licensing requirement?
At the listing of the SPAC and on an ongoing basis for the lifetime of the SPAC, the Exchange must be satisfied as to the character, experience and integrity of a SPAC Promoter and that it is capable of meeting a standard of competence commensurate with its position. Section A of the Exchange’s guidance letter (HKEX-GL113-22) sets out the information that a potential SPAC Promoter must provide to the Exchange and the factors that the Exchange will take into account when considering the suitability of the SPAC Promoter.
To help ensure high quality SPAC Promoters and better alignment of interest with other SPAC investors, the Hong Kong listing regime specifically requires that at least one SPAC Promoter must be a firm that holds a type 6 (advising on corporate finance) and/or a type 9 (asset management) licence issued by the Securities and Futures Commission (SFC).
The Exchange will consider a SPAC Promoter that does not hold the requisite SFC licence to have met the requirement, if its controlling shareholder (which is a licensed corporation) satisfies the requirement, provided that: (a) the SPAC demonstrates to the Exchange that sufficient safeguards and/or undertakings are put in place to ensure the controlling shareholder’s oversight of the SPAC Promoter’s responsibilities; and (b) the controlling shareholder gives an undertaking to the Exchange that they will ensure the SPAC Promoter’s compliance with applicable Listing Rules. For the avoidance of doubt, the licensing requirement cannot be satisfied by an individual who holds a type 6 or type 9 licence.
If the SPAC Promoter is structured as a fund in the form of a limited partnership, the licensing requirement would apply to the general partner of the fund as it assumes ultimate responsibility for its management and control. This follows the same approach as the principles in Part A of the SFC’s circular to private equity firms seeking to be licensed issued on 7 January 2020.
SPAC Promoters are also reminded that if they conduct activities that fall within the scope of regulated activities, they should consider whether there are any possible licensing or other implications under the Securities and Futures Ordinance (SFO).
Potential conflict of interests / competition
The Hong Kong listing regime imposes the following requirements for directors of a SPAC:
- any director nominated by a SPAC Promoter for appointment to the board of a SPAC must be an officer (as defined under the SFO) of the SPAC Promoter representing the SPAC Promoter who nominated him or her;
- where a SPAC Promoter is an individual, that person must be a director of the SPAC; and
- to help ensure the good conduct of a SPAC board and the SFC’s regulatory reach over that conduct, the rules require a SPAC board to include at least two type 6 or type 9 SFC-licensed individuals (one of whom must be a licensed person of the SFC-licensed SPAC Promoter).
Directors and officers of a SPAC who are also officers or other employees of the SPAC Promoters may be involved in the investment activities of the SPAC Promoters. They may also be involved in the management of other SPACs that the SPAC Promoters will promote in the future. Potential conflicts of interest may arise when the SPAC Promoters are seeking suitable investment opportunities similar to those of the SPAC for a De-SPAC Transaction. To assist investors to make an informed assessment of the potential conflicts of interest, the offering circular of the SPAC should disclose:
- specific information on any business interests of the SPAC Promoters and their respective affiliates that compete or are likely to compete either directly or indirectly with the SPAC (including identification of targets similar to prospective De-SPAC Targets), including a discussion on the nature and extent of such competition; and
- the basis upon which the directors believe that the corporate governance measures in place will be effective in managing existing and potential conflicts of interest, and will enable them to make decisions independently of the SPAC Promoters and in the best interests of the SPAC and its shareholders.
Can a SPAC Promoter or its close associate participate in the SPAC’s IPO?
Paragraph 5(1) of Appendix 6 to the Listing Rules provides that no allocation of securities will be permitted, without the prior consent of the Exchange, to existing shareholders of the listing applicant or their close associates. According to the Exchange’s Guidance Letter HKEX-GL113-22, the Exchange may allow a SPAC Promoter to participate in the offering of SPAC Shares at the time of the initial listing of a SPAC subject to the following conditions being satisfied:
- the SPAC Promoter meets the definition of a “Professional Investor” (defined in section 1 of Part 1 of Schedule 1 to the SFO) (as the subscription and trading of a SPAC’s securities to “Professional Investors” only);
- the SPAC complies with all applicable open market requirements;
- the price and terms of subscription of shares by the SPAC Promoter must be substantially the same as, or are not more favourable to the SPAC Promoter, than those available to other investors, and any such participation increases the SPAC Promoter’s “capital at risk” (on top of their subscription price for the Promoter Shares and the Promoter Warrants) to align its interests more closely with the interest of other shareholders;
- the SPAC and the relevant sponsor must confirm to the Exchange that no preferential treatment has been, nor will be, given to the SPAC Promoter; and
- the participation is disclosed prominently in the listing document produced for the purpose of the SPAC’s listing.
However, as indicated in the offering circular of the first listed SPAC, which disclosed that a close associate of one of the SPAC Promoters proposed to participate in the SPAC’s IPO by subscribing for the SPAC Shares offered, the close associate will be subject to certain restrictions imposed on SPAC Promoters in respect of its SPAC Shares and SPAC Warrants, including:
- it will be prohibited from dealing in its SPAC Shares and SPAC Warrants prior to the completion of a De-SPAC Transaction;
- it must not, during the period ending 12 months from the date of the completion of a De-SPAC Transaction, dispose of any share of the Successor Company; and
- while it would be permitted to exercise the redemption rights in respect of its SPAC Shares like other SPAC investors:
- it will be required to notify the SPAC whether or not it will exercise its redemption rights and such information should be disclosed in the SPAC’s circular to shareholders for the relevant general meeting; and
- if it elects not to exercise its redemption rights, it is required to provide an irrevocable undertaking to the SPAC that it will not exercise such redemption right, details of which should be disclosed in the SPAC’s circular to its shareholders.
It remains to be seen whether these will become standard conditions whenever a SPAC Promoter and/or its close associate(s) seeks to participate in a SPAC’s IPO.