Regulatory challenges to allowing SPAC IPOs in Indonesia
Danar Sunartoputra, Gregorius Pradana, and Putu Putra of Melli Darsa & Co., Indonesian member law firm of PwC global network, analyse the hurdles to allowing special purpose acquisition companies (SPACs) in Indonesia as an alternative to traditional initial public offerings (IPOs), and highlight the need for a regulatory alignment
Special purpose acquisition companies (SPACs) have been receiving much attention in the market, largely from 2020 onwards, despite them having been around for many years. SPACs essentially provide an alternative way to take companies public, significantly faster and with fewer hurdles, as compared to a traditional initial public offering (IPO).
A SPAC, which is generally a new entity with very limited operating activity, undergoes an IPO following its incorporation, with the intention to acquire one or more operating target companies. After the IPO, the target company can merge with (or be acquired by) the publicly-listed SPAC within a certain time frame, effectively making it a publicly-listed company (or a subsidiary of a publicly-listed company). This is commonly referred to as a de-SPAC transaction.
If the SPAC fails to complete a de-SPAC transaction within the time frame, the SPAC will be liquidated, and the remaining funds from the IPO proceeds will be returned to the shareholders.
Following positive attractions from the US market on Asian companies for SPAC IPOs in the past few years, a few Asian regulators have allowed SPAC IPOs in their jurisdictions, while others are contemplating whether to allow it. At the time of writing, the Indonesian Financial Services Authority (OJK) and the Indonesia Stock Exchange (IDX) are considering allowing SPAC IPOs in Indonesia. For Indonesia, not only would that help to keep its start-ups and technology companies raising capital and being listed at home, but it would also help to boost the number of equity issuers in general.
However, regardless of the benefits that a SPAC provides, the current regulatory framework in Indonesia presents several regulatory challenges that will need to be addressed before SPAC IPOs (and de-SPAC) can be implemented in Indonesia. This article will discuss these regulatory challenges and how the Indonesian regulatory framework can stay ahead of them.
The Company Law
An important provision under the Indonesian Company Law that needs to be observed concerns merger requirements. The law requires a joint merger plan document to include, among other things, the financial report of each merging company for the past three years. This is quite different from an acquisition transaction, where the law only requires the latest financial report of each of the acquiring and target companies.
A merger, therefore, can only be conducted by companies that have operated for at least three years. It would be nearly impossible or impractical for a newly formed SPAC to satisfy this three-year financial report requirement before carrying out a de-SPAC, in particular if a de-SPAC transaction must be completed within three years or less from the SPAC IPO. This requirement will likely become a regulatory barrier for a de-SPAC merger in Indonesia.
Other important provisions of the Company Law that need to be observed are:
The absolute right of shareholders to receive the remaining assets after the company is liquidated, which contradicts with the best practice of SPACs, whereby the founding shareholders (sponsors) would have no right to obtain the proceeds of a SPAC liquidation;
The fact that failing to complete a de-SPAC transaction is not seen as a reason for the dissolution of a company; and
The requirement for a company to have clear objectives, purposes, and business activities under specific business codes (KBLI) that must be stipulated in its articles of association, which will not be easily satisfied by a SPAC unless a more specific KBLI is issued.
In a practical sense, these challenges might be mitigated by a tailored contractual arrangement between the SPAC, the founding shareholders (sponsors), and the public shareholders (investors), to stipulate:
A requirement for the founding shareholders (sponsors) to release their right to receive any remaining assets after the liquidation of the SPAC;
A requirement for the SPAC to convene a general meeting of shareholders to approve the SPAC liquidation when it fails to carry out the de-SPAC transaction, and for the shareholders to provide their approval; and
A covenant that the SPAC will not operate and carry out business activities until the completion of the de-SPAC transaction, and that it will amend its Articles of Association in accordance with the business activities of the target company.
Capital market regulations
OJK Regulation No. 8/POJK.04/2017 on Form and Content of a Prospectus stipulates that the prospectus for an IPO must contain, among other information, explanations of:
The use of proceeds, whereby if the IPO proceeds will be used to acquire shares or assets of another company, the prospectus must disclose the seller party; and
The industry type and business activities of the company.
The SPAC is intentionally incorporated to look for a target company, and to consider the best practice in other jurisdictions, it is worth noting that in making such a disclosure a SPAC should not have had any commitment with any potential target companies during the IPO process.
As regards listing requirements, the Decision Letter of the Board of Directors of IDX Decree Letter No. Kep-00101/BEI/12-2021 on Amendment of Rule No. I-A on Listing of Shares and Equity Securities Other than Shares Issued by Listed Companies provides that the key listing requirements for the main board include, among other things, the company:
Having been commercially operating for at least three years;
Having at least 1,000 shareholders post-IPO;
Having audited financial statements of the most recent three years, with an unmodified opinion for financial statements of the most recent two years and for the interim audited financial report (if any); and
Having fulfilled one or more financial requirements specified thereunder.
Given that the SPAC is generally a newly incorporated entity with no prior operating history, operations, or revenue-generating business or assets at the time of listing, it is worth noting that it would not be possible for a SPAC to be listed on the IDX main board.
Some other provisions under the Indonesian capital market regulations that should be taken into account include the right of warrant holders, under OJK Regulation No. 32/POJK.04/2015 on Rights Issue as amended by OJK Regulation 14/POJK.04/2019, to execute the warrant after six months of the issuance of the warrant. This contradicts the best practice in other jurisdictions, where a warrant cannot be executed until the completion of the de-SPAC transaction which could take more than six months after the warrant’s issuance.
In a practical sense, this challenge might be mitigated by a tailored contractual arrangement between the SPAC, the founding shareholders (sponsors), and the public shareholders (investors), which stipulates the requirements that the public shareholders (investors) will not execute their warrant before the completion of the de-SPAC transaction, or to structure it differently.
Public shareholders protection
The SPAC and de-SPAC transactions create high-level execution risks for public investors when the SPAC is unable either to find a suitable target company or to successfully complete the de-SPAC transaction within the specified period. This may result in the liquidation of the SPAC. Although the liquidation proceeds will be distributed to the investors, investors would have lost the opportunity to invest in other potentially higher-return investments in the intervening time, particularly retail investors who may not have carefully considered the unique characteristics and risks of a SPAC.
In this regard, in addition to the key rights and protections for the public / minority shareholders of publicly listed companies in Indonesia, which have been stipulated under the Company Law and the capital market regulations, it is important to consider additional rights and/or protections for the public shareholders of SPACs.
Best practices from other countries provide public investors with rights and/or protection in the form of, among other things:
Shares redemption rights (without the buyback threshold limitation stipulated under the Company Law.) These can also be executed by public shareholders who approve the de-SPAC transaction;
Warrant rights which can only be executed after the completion of the de-SPAC transaction;
Shareholders’ contractual rights to approve the de-SPAC transaction, the extension of time for the SPAC to complete the de-SPAC transaction, and a draw-down of interest earned and the income derived from the amount placed in the escrow account under exceptional circumstances (such as payment for administrative expenses incurred by the SPAC in connection with the IPO, general working capital expenses and related expenses for the purposes of identifying and completing the de-SPAC transaction).
Accordingly, it is important to have specific rules governing shareholders’ protection for SPAC and de-SPAC transactions in the effort to maintain good checks and balances between the interests of the SPAC and the interests of the public shareholders.
It may be tempting for Indonesia to allow and regulate SPACs in Indonesia as it would help to increase the number of Indonesian IPOs in general and to provide an alternative scheme for fundraising or conducting traditional IPOs based on the current worldwide market practice. However, it is worth carefully considering the regulatory challenges present, which will likely be a legal barrier for allowing SPAC and de-SPAC transactions, unless all the relevant regulations are aligned.
It is crucial for Indonesia to have a clear regulatory framework as a legal basis and guideline for regulators and stakeholders for allowing SPAC and de-SPAC transactions in Indonesia. In addition to issuing new regulations specifically regulating SPAC and de-SPAC, certain existing regulations should also be made aligned in favour of SPAC and de-SPAC transactions.
This will allow Indonesia to avoid restricting or limiting the implementation of the key procedures and requirements of SPAC and de-SPAC transactions, while also maintaining the highest standards of protection for minority shareholders.