UK SPACs: Time to Adopt the US Model?

This article was originally published in Legal Week. Any opinions in this article are not those of Winston & Strawn or its clients. The opinions in this article are the authors’ opinions only. 

The U.S. special-purpose acquisition market may be booming, but the SPAC market in London is currently minimal and across Europe, relative to the United States, it has been lackluster at best. But signs of life are starting to emerge across European exchanges with Amsterdam, in particular, emerging as an early leader of European listing venues.

An increasing number of market participants think there is an opportunity for the European SPAC market to grab some of the U.S.’s market share, as demand in the U.S. is outstripping the supply of suitable U.S.-based targets. Despite the early signs of life being shown on other European exchanges, we believe this opportunity could be taken by London.

Most of the European SPACs include investor-friendly shareholder vote and redemption mechanics in some form or other and we believe that London should adopt the same. London also requires some regulatory reform of its rules around reverse takeovers that govern a SPAC’s process for acquisition, which put it at a competitive disadvantage to other European exchanges. There is hope that this will come about as a result of the U.K. Listings Review, chaired by Lord Hill, which was launched by the Chancellor in November 2020 as part of a plan to strengthen the U.K.’s position as a leading global financial center.

The lack of a SPAC market in London is also partly due to low investor confidence in the model, driven in part by some high-profile failures in previous years. The traditional model in London is often seen as a sponsor-friendly model and notably lacks some key investor protections that are now part of the fabric of the U.S. model. For example, in the U.S., any acquisition is subject to shareholder approval and shareholders also have the ability to redeem their shares and get their money back plus interest.

If such a U.S.-type SPAC structure can be created in the U.K. through to a successful transaction for investors and sponsors alike, this should lead to a sustainable SPAC market in the U.K. Critically, U.K. SPACs should be able to access capital from traditional SPAC investors who are looking to deploy their capital internationally as a result of the recent saturation of the U.S. SPAC market.

By way of recap, SPACs are shell companies that use the proceeds from going public to buy another company, not yet identified at the time of listing. The resulting merger with a target company, often a company operating in a high growth sector, offers the target a faster, more certain and relatively lower-cost way to market than a traditional initial public offering. SPACs generally have a finite amount of time to make their acquisition (normally 24 months) before they are obliged to return IPO proceeds to shareholders and wind themselves up.

In very high-level terms, we see the main differences between the U.S. and U.K. models as follows: in the U.S., the sponsor pays the IPO expenses up front as part of its risk capital investment; in the U.S., IPO proceeds being placed into a ring-fenced trust account for the benefit of its public shareholders; in the U.S., the acquisition is subject to a shareholder vote; in the U.S. there is a redemption mechanic—in the U.K. this could amount to an unlawful reduction of capital for a U.K. company; in the U.K. the reverse takeover rules provide that there is a rebuttable presumption of suspension of trading upon announcement of the transaction and that the listing is canceled pending production of a prospectus for the enlarged group.

The above differences in our view help to undermine investor confidence in the U.K. SPAC model. We believe that with appropriate structuring, it is possible to substantially replicate the U.S. model. In addition, it would be helpful for the Financial Conduct Authority (FCA) to adjust its rules around suspensions and reverse takeovers to create a sustainable U.K. SPAC market over the long term. In particular, we would note that as SPACs tend to list on the Standard Segment of the London Stock Exchange, there is a high degree of flexibility as to structuring.

This article first appeared in the February 22, 2021 issue of Legal Week.