The listing of special purpose acquisition companies or Spacs on the Main Market of Bursa Malaysia Securities Berhad was introduced in May 2009 as part of a number of measures comprised in a new regulatory framework. In a joint launch of the new framework on August 3 2009, the Securities Commission and Bursa expressed the hope that the competitiveness of the Malaysian bourse as an equity-raising and listing destination will be enhanced and that the advent of Spacs, in particular, will not only promote private equity activity but also spur corporate transformation and encourage mergers and acquisitions.
A Spac is a shell company that has no operations but goes public with the intention of merging with or acquiring operating companies or businesses with its IPO proceeds.
The shell company is expected to be incorporated in Malaysia under the Companies Act 1965. However, the Securities Commission may allow a Spac that is incorporated outside the country to seek listing subject to compliance with provisions relating to the listing of foreign corporations.
A minimum of RM150 million ($42.6 million) must be raised in an IPO through the issue of new securities and at least 90% of the gross proceeds of the offering deposited in a trust account. While some may consider the threshold of RM150 million to be high and while it may in effect serve as an inhibiting factor to the development of Spacs, it is to be noted that the level of investor protection has been set equally high as well. Though short of 100% that some larger Spacs in other jurisdictions such as the US have to place in escrow, the 90% requirement is still on the higher end of what exchanges typically require Spacs to hold in a trust account.
A custodian must be appointed to safeguard the proceeds in the trust account while the management team, (whose expertise must be demonstrated to the regulators), seeks an acquisition. An acquisition will be considered as a qualifying acquisition if it is a business domiciled locally or abroad and is capable of providing a principal source of operating revenue or after-tax profits and which will comprise the principal activity of the Spac.
A qualifying acquisition must be completed within 36 months of the listing of the Spac and must account for at least 80% of the value held in the trust account. This is designed to prevent the management team from making small transactions to avoid having to liquidate the fund when the acquisition period is close to expiration.
If the qualifying acquisition comprises more than one business, the businesses must collectively satisfy the aggregate fair market value equal to at least 80% of the amount deposited in the trust account, net of any taxes. Furthermore, the sale and purchase agreements for each of the businesses must be inter-conditional and all acquisitions, each of which must be approved by the holders of voting securities, must complete contemporaneously within the timeframe.
The members of the management are required to hold in aggregate at least 10% of the Spac on the date of its listing and these shares are subject to lock up and restrictions on voting and participation in liquidation distribution.
At a general meeting convened specifically to approve the qualifying acquisition, the resolution must be approved by a majority in number of the holders of voting securities representing at least 75% of the total value of securities held excluding the management team and persons connected to it.
Where a Spac obtains debt financing, the credit facility may only be drawn down after approval of the qualifying acquisition and funds must be applied towards financing the qualifying acquisition. Details of the credit facility and the proposed utilisation must be disclosed in the circular to holders of voting securities issued in relation to the qualifying acquisition. Monies in the trust account cannot be used as collateral to secure the debt financing.
To an investor, the advantages of a Spac over private equity are its liquidity features and the ability to exercise discretion over the type of investment. Any downside can potentially be limited in that funds are liquidated if a qualifying acquisition is not completed within the stipulated timeframe. With the management team holding 10%, there is also better alignment of interests. Lastly, the regulatory requirements imposed on Spacs are designed to promote a higher level of transparency and accord the investing public with greater insight into the affairs of Spacs.
For target companies, Spacs are clean public shells that allow for immediate conversion into public listed companies without the risks, expense and time associated with an IPO. As an exit opportunity, Spacs also offer more advantages over private equity funds and strategic buyers. Spacs have substantial cash at their disposal and may not need additional borrowing to complete an acquisition. The Spac management team is also likely to be motivated to complete the acquisition in an expedient manner. In contrast to traditional IPOs where existing shareholders are typically subject to moratorium requirements, the owners of the target company are not under the same constraints. A Spac is also differentiated from a reverse take over in that it has no operating history and therefore the risk of hidden liabilities is limited.
Although Spacs are relatively new and untested, given their unique features and the docile IPO market they may just be what is required to provide impetus to private equity.