The second Special study of SPAC: an interpretation of the listing Mechanism of SPAC in Hong Kong

Introduction

The Stock Exchange of Hong Kong Limited ("SEHK") announced on December 17, 2021 the introduction of new rules to establish a new special purpose acquisition company (Special Purpose Acquisition Company, referred to as "SPAC" listing mechanism in Hong Kong, and published the "consultation Summary on Special purpose acquisitions" ("consultation Summary") to respond to the feedback from the previous consultation document. The new rules will come into effect on January 1, 2022. For the related concepts, models, advantages and disadvantages of SPAC, as well as the development of the global market, please see our previous article: "one of the special studies on SPAC: the past and present life of SPAC".

Background

The SEHK issued a consultation document on 17 September 2021 to consult the market on the proposal to establish a listing system for (SPAC), a special purpose acquisition company in Hong Kong. The consultation period ended on 31 October 2021.

During this period, the SEHK received a total of 96 views from various sectors of the community, including SPAC sponsors, investment management companies, corporate finance companies, accounting firms, law firms and professional bodies. After taking into account the views of various parties, the HKEx has decided to implement the recommendations of the consultation document and make a number of amendments to ensure that consideration is given to the quality of listed companies and the market.

Compared with the consultation document, the consultation summary of HKEx has been relaxed in many aspects, including the number of professional investors in SPAC institutions, the requirements of SPAC directors, the bundling of voting rights and share redemption rights, mandatory independent PIPE investment and the upper limit of dilution of warrants.

The Chief Executive Officer of the HKEx Group, Mr ou Guansheng, said: "the HKEx is committed to enhancing the attractiveness, competitiveness and diversity of the Hong Kong market in the international arena. The addition of the SPAC listing mechanism reflects our unremitting efforts to enhance Hong Kong's reputation as the premier financing market in Asia and consolidate our position as the world's leading international financial centre. Through the introduction of the SPAC listing mechanism, we hope to allow experienced and reputable SPAC to initiate emerging and innovative industrial companies as M & A targets, so as to foster the growth and success of some potential new corporate stars. "

The establishment of SPAC listing mechanism in Hong Kong provides the market with another listing channel in addition to the traditional (IPO), which plays an important role in consolidating Hong Kong's position as an Asian financial center.

Photo: KPMG China

Interpretation of Hong Kong SPAC rules

According to the listing rules and consultation summary of the Stock Exchange, below we will briefly sort out the listing mechanism of Hong Kong SPAC in the context of the life cycle of SPAC for reference.

(1) SPAC is established

1.SPAC initiator

The promoters of SPAC shall meet the suitability and qualification requirements of the Stock Exchange at the time of SPAC listing and during its existence, and shall ensure that:

(1) at least one SPAC sponsor holds a category 6 (advising on corporate financing) and or 9 (providing asset management) licences issued by the Hong Kong Securities and Futures Commission ("licensed promoters") at the time of listing and during its lifetime; and

(2) to provide the required information to the Stock Exchange in accordance with the requirements of the Stock Exchange (in accordance with the guidelines on its website and revised from time to time); and

(3) at least one licensed promoter must hold more than 10 per cent of all initiator shares issued by SPAC.

Director of 2.SPAC

The director nominated by the SPAC sponsor must be an officer of the SPAC sponsor (whether or not he holds a SFC licence) (as defined in the Securities and Futures Ordinance) and must represent the initiator; if the sponsor is a natural person, that person must be a director of SPAC.

At the time of the listing of SPAC and during its lifetime, at least 2 members of the board of directors of SPAC must be category 6 or 9 SFC licensees (including a director representing the licensed SPAC promoters) (the "licensed director"), but the majority of board members are not required to be promoters' representatives, which is also an important amendment to the proposal for SPAC directors in the previous consultation document.

(2) SPAC listing stage

1.SPAC listing conditions

For SPAC to apply for listing, the following requirements must be met:

(1) No operating performance requirements

As SPAC is a shell company with no actual business, the requirements of rules 8.05, 8.05A, 8.05B and 8.05C of the listing rules relating to operating performance indicators (such as profit test, market capitalization / earnings / cash flow test, market capitalization / earnings test) do not apply to SPAC.

(2) Marketing to the public is prohibited and trading is allowed.

SPAC's securities (including shares and warrants) are only available to professional investors and shall not be marketed or allowed to be bought or sold to the public until the completion of the SPAC merger and acquisition transaction. The trading unit and subscription amount of SPAC shares are not less than HK $1 million.

(3) other listing conditions should be met.

Except that rules 8.07, 8.13 and 8.23 of the listing rules and the 18th Application guidelines do not apply to SPAC, SPAC shall meet other requirements of the listing rules for IPO (IPO).

(4) Open market requirements

SPAC securities must in all cases be held by at least 75 professional investors, at least 20 of whom must be institutional investors, and institutional investors must hold at least 75 per cent of the securities. The rules are relaxed compared to the fact that SPAC securities recommended in the consultation document should be allocated to at least 30 institutional professional investors.

(5) issue price and amount of funds raised

The issue price of each SPAC share is not less than HK $10; when SPAC is listed, the total amount raised in the IPO is not less than HK $1 billion.

(6) transaction arrangements

SPAC must apply for the listing of SPAC shares and SPAC warrants, which are bought and sold separately from the date of initial listing.

(7) duration

SPAC must publish a SPAC M & An announcement within 24 months from the date of listing and complete the SPAC M & A transaction within 36 months (under special circumstances, it can apply to the shareholders' meeting and HKEx for an extension of up to 6 months), otherwise SPAC will be delisted.

Regulatory requirements for the duration of 2.SPAC

Before completing the M & A transaction after listing, SPAC shall meet the following requirements:

(1) restrictions on the sale and sale of securities

Prior to the completion of the SPAC merger and acquisition, the following persons and their close contacts are prohibited from buying or selling any SPAC listed securities,: (a) SPAC promoters and their respective directors and employees,; (c) SPAC, a director of; (c) SPAC.

(2) holding and raising funds in the form of trusteeship

The total amount of money raised by SPAC in the IPO (excluding funds raised by the issue of promoters' shares and initiators' warrants) must be deposited into a closed escrow account (escrow account) registered in Hong Kong and such escrow account must be operated by a trustee / custodian who meets the appropriate qualifications and conditions.

The funds in the escrow account can only be used for the following purposes:: (a) meets the redemption requirements of SPAC shareholders; (b) completes the SPAC merger and acquisition transaction; (c) returns the funds to the SPAC shareholders after SPAC has been ordered to suspend trading,; (d) returns the funds to the SPAC shareholders after the SPAC is wound up or closed down.

Any interest or other income earned from the money held in the escrow account may be used by SPAC to cover its expenses. This provision has made significant changes to the original consultation document, which originally recommended that all such interest or income should form part of the escrow funds and should not be used for other purposes.

(3) significant changes have taken place in the sponsors and directors of SPAC during the period of existence.

Prior to the completion of the SPAC M & A transaction, the following material changes of the SPAC promoters and SPAC directors shall be subject to the approval of the shareholders' meeting and the Stock Exchange.: (a) alone or together with its close associates controls or is entitled to control 50% or more of the issued initiator shares (if there is no control or right to control 50% or more of the issued shares of the SPAC promoters, the single largest SPAC promoters will have significant changes; Major changes in (b) licensed promoters; (c) significant changes in the qualifications or qualifications of SPAC promoters as mentioned in the above (a) and (b); (d) licensed directors have undergone significant changes.

Shareholders (other than the holders of the promoters' shares) shall have the right to redeem their shares prior to a vote on the survival of SPAC after the above-mentioned significant change in SPAC promoters. If not approved, SPAC must delist and return the funds raised to shareholders.

3. Issue of warrants, promoters' shares and promoters' warrants

(1) issuance of warrants

Before and after listing, SPAC may issue, issue or grant warrants (warrants for short). The issuance of warrants is subject to the approval of the Stock Exchange and, if the warrants are issued after listing, the approval of the general meeting of SPAC shareholders. In addition, the issuance of warrants must meet the following requirements:

In terms of price of (a), the exercise price (exercise price) of SPAC warrants must be at least 15% higher than the IPO price of SPAC.

In terms of the exercise period of (b), SPAC warrants can only be exercised after the completion of the M & A transaction;

In terms of the expiration date of (c), the maturity date of SPAC warrants is the time range of not less than 1 year and not more than 5 years from the completion date of the M & A transaction;

In terms of the result of exercising the right of (d), the exercise of the right only leads to the acquisition of the shares of the inheriting company;

(e) should satisfy the number of exercising rights. For example, if SPAC warrants exercise all the rights, they will be issued due to exercising rights.

The number of SPAC shares shall not exceed 50% of the number of shares issued at the time of exercise (including shares of SPAC sponsors), which allows for a higher dilution limit for warrants than recommended in the consultation document, provided that the dilution impact of all warrants is more clearly disclosed.

(2) promoters' shares and promoters' warrants

The promoters' shares and promoters' warrants shall meet the following requirements:

The shares and warrants of the sponsors of (a) shall not be traded on the stock market, nor shall they make any other arrangements for the change of ownership. The promoters shall have beneficial ownership of the promoters' shares or warrants at the time of the listing of SPAC and during the duration of the promoters' shares or warrants, and under special circumstances, with the approval of the Stock Exchange and the shareholders' meeting, the promoters' shares or warrants may be transferred between the promoters;

(b) SPAC can only allocate, issue or grant promoters' shares or promoters' warrants to SPAC promoters; except for the original allotment, issuance or grant of SPAC promoters' shares or sponsors' warrants, SPAC shall not register, certify or otherwise facilitate the transfer of ownership of any promoters' shares or sponsors' warrants to any person other than SPAC promoters.

In terms of quantity, the number of shares allotted, issued and granted by (c) to the sponsors shall not be more than 20% of the total number of issued shares of SPAC on the date of listing;

In the share conversion of (d), the shares of the sponsors can only be converted into the common shares of the inheriting company, and can be converted on an one-to-one basis. The conversion can only be carried out at or after the completion of the M & A transaction;

In terms of the price of (e), the issue price of the sponsor's warrants shall not be less than 10% of the issue price of the shares at the time of SPAC listing;

Each sponsor of (f) shall not grant to its holder more than one share of the successor company after exercise. The terms of the initiating warrants shall not be superior to those of other warrants;

The warrants initiated by (g) shall be exercised within 12 months from the date of completion of the M & A transaction.

(3) searching for the target stage of M & A

SPAC must find a suitable M & A target and complete the M & A transaction within 36 months. Under special circumstances, it may apply to the shareholders' meeting and the Stock Exchange for an extension of up to 6 months.

In the initial public offering prospectus, it is necessary to specify the industry, asset type, region and other information of the M & A target.

(4) the stage of SPAC merger and acquisition

1. Target requirements of M & A

The successor company that survives after the initial merger of SPAC is required to comply with all the new listing requirements of the listing rules of the Stock Exchange (including the minimum market capitalization requirement and the financial qualification test), that is, companies that may be listed through SPAC can also choose traditional IPO listing. In addition, the successor company must appoint at least one sponsor to assist it in its application for listing and conduct the sponsor due diligence review.

The fair market value of the M & A target must be up to 80 per cent of the money raised by the SPAC initial public offering.

two。 Introduction of independent third-party investment

The terms of M & A transactions must include investment from third-party investors (PIPE), that is, the introduction of independent PIPE investment in SPAC M & A transactions is a mandatory requirement. All PIPE investors must be professional investors, and the minimum amount to be raised is as follows:

SPAC M & A target

Agreed valuation

Independent third party investment

Minimum percentage of agreed valuation

Less than HK $2 billion

25%

HK $2 billion or above but less than HK $5 billion

15%

HK $5 billion or above but less than HK $7 billion

10%

HK $7 billion or above

7.5%

Source: Hong Kong Stock Exchange "Consulting Summary-Special purpose acquisition companies"

Compared with the recommendations on the investment scale of PIPE in the consultation document, the SEHK adopts more stringent and detailed rules and introduces a minimum share mechanism of SPAC according to the agreed valuation of PIPE M & A targets, which plays an important role in determining the valuation of M & A targets and protecting investors.

In addition, at least 50 per cent of the independent PIPE investment must come from at least three institutional investors, each with a total asset management value of at least HK $8 billion. Here, compared with the consultation document, it has also been revised to stipulate that PIPE must make significant investments from experienced investors also help to ensure a fair and reasonable valuation of M & A targets.

3. Shareholder approval

The SPAC M & A transaction, PIPE investment and the royalty rights granted (or to be granted) to the SPAC promoters shall be confirmed with the approval of the SPAC shareholders at the general meeting convened to approve the SPAC M & A transaction, and the convening of the general meeting shall not be replaced by the written approval of the shareholders. The sponsors of SPAC and their close contacts are required to waive their voting rights, and the proposal in the consultation document to impose voting restrictions on the original controlling shareholders has not been adopted.

4. Lock-up period

Within 12 months from the date of completion of the special purpose M & A transaction, the promoters of SPAC shall not sell any inherited company securities beneficially owned by them as shown in the listing documents, enter into any agreement to sell such securities, or create any options, rights, benefits or encumbrances in respect of such securities.

5. Inherit the company's open market

When a successor company goes public, it must ensure that there are at least 100 professional investors.

6. Share redemption

Shareholders shall have the right to redeem their shares when voting on the following matters (redemption at an amount not lower than the issue price of SPAC shares at the time of the SPAC initial offering, excluding interest):

(1) the survival of SPAC after a major change in the sponsor

(II) SPAC M & A transactions; or

(3) the suggestion of extending the term of SPAC M & A transaction.

Compared with the proposal in the consultation document that there can be share redemption only if the SPAC M & A transaction is rejected, HKEx believes that if the investment requirements of PIPE can be raised to support the valuation of SPAC M & An objectives, share redemption and SPAC M & A voting do not need to be linked, so a major revision has been made.

7. Delisting and winding-up

If SPAC fails to announce, complete the M & A transaction within the prescribed time limit, or obtain the necessary approval within one month after a material change in the promoters of SPAC and the directors of SPAC, the Stock Exchange will suspend trading in SPAC's securities.

After the suspension, SPAC shall, within one month after the suspension, refund the money in the escrow account to the shareholders on a pro rata basis at an amount not lower than the issue price of each SPAC share at the time of the initial offering.

After SPAC returns the funds, SPAC must be wound up. Upon completion of the liquidation, the SEHK will cancel the listing status of SPAC.

Source: HKEx, China International Capital Corporation Research Department

Conclusion

Through the introduction of the SPAC listing mechanism, the SEHK provides the market with an alternative to the traditional listing. At a time when the future of listing in the United States is uncertain, we believe that this move of the Stock Exchange will undoubtedly attract more companies from Greater China, Southeast Asia and other parts of the world to come to Hong Kong for financing.