Special purpose acquisition companies (Spacs) came into being in Korea by the Amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FISCMA) in December 2009. Spacs are paper companies that raise funds through initial public offerings (IPOs) in order to merge or acquire well-performing unlisted companies.
In Korea, Spacs are welcomed as a breakthrough in M&A as they lower the entry barrier for private investors, an area traditionally limited to private equity and other professional investors. Spac IPOs have been active in the US, accounting for over 20% of all IPOs last year. In Korea, however, there is some scepticism over whether Spacs will be used much, as only mergers between a Spac and a target company are allowed.
Major issues raised in connection with Spacs are: conflict of interest on the part of financial investment service providers, tax issues, matters related to listing and merger, remuneration for sponsors, disclosure and management issues.
|Soonghee Lee, YOON & YANG LLC|
First, conflict of interest on the part of financial investment service providers. Each stage of Spac deals, including their establishment, management and merger, involves participation of financial investment service providers, and each stage may give rise to conflicts of interest between the financial investment service provider and its client, or between different clients. Furthermore, the fact that the financial investment service provider, which is the sponsor at the time of a Spac's establishment, has come to manage proprietary investment, IPO and M&A processes for the Spac, also raises conflict of interest issues.
For instance, a financial investment service provider, which is required as sponsor to contribute at least 5% of the total share capital of the Spac, may attempt to raise the IPO share price or merge with a poor-performing company at the M&A stage only to maximise its profit, compromising the interests of the general investors. So financial investment service providers should separate proprietary investment, IPO and M&A departments from each other and establish an information barrier among these departments.
Second, tax issues. In the case of a qualified merger, the Corporate Tax Act requires that the shares issued at the time of a merger be valued at their par value if market value is higher than par value. The issue here is that, even if a Spac, which is a shell company, has been established for more than one year, whether it would qualify for a qualified merger may depend on whether the IPO and M&A preparation is recognised as actual business activities in the one-year measurement. Since there has been no regulatory guidance regarding this issue, it requires caution in practice. Also, starting from 2011, companies listed on the Korea Stock Exchange must comply with International Financial Reporting Standards (IFRS) for their accounting practices, making IFRS compliance a requirement for Spacs, as they are listed on the Korea Stock Exchange with the intent of acquiring and merging with unlisted companies. Accordingly, possible effects of the IFRS compliance on merger-related tax issues need to be reviewed.
Third, matters to consider at the time of listing and merger. The Korea Exchange overhauled the requirements for IPOs of Spacs and back-door listings in case of a merger between a Spac and an unlisted company in order to protect Spac investors. Accordingly, the sponsor that establishes a Spac must comply with the listing regulations, such as the following: (i) it should be a securities company with an equity capital of at least W100 billion ($86.4 million); (ii) its officers should not fall under any disqualification grounds for an officer of a financial investment service provider; and (iii) 90% or more of the entire IPO proceeds should be deposited or held in trust. In case of a merger with an unlisted company, basically the same requirements for IPOs are applicable to the unlisted company. Meanwhile, some point out the necessity to clarify regulations regarding Spacs, since imposing the same requirements on Spacs, which are shell companies, as those for regular listed companies under applicable laws including the FISCMA is unreasonable.
Last, matters concerning remunerations for sponsors, disclosure and management. As a way of providing remunerations to sponsors, issuing convertible bonds or bonds with warrants prior to IPO could be considered, and granting stock options could only be considered for officers. Also, it is necessary to examine mandatory provisions that must be set forth in the articles of incorporation and contracts that must be prepared beforehand in order to fulfill the requirements under laws and regulations relating to the FISCMA and the listing regulations. With respect to contributions to a Spac by a securities company as a sponsor, appropriate consideration should be given to take into account of the following: (i) contributions by a financial institution to another company at over a certain ratio could be subject to approval from the Financial Services Commission under the Act on the Structural Improvement of the Financial Industry; and (ii) direct or indirect subsidiaries of a financial holding company are barred from controlling another company under the Financial Holding Companies Act.