A SPAC is a shell company which is specifically incorporated by its initial sponsors for the purpose of raising capital through an IPO for use in the acquisition of a target company. The SPAC does not have any operating assets or operations and is commonly a BVI or a Cayman Islands company.

The acquisition by a SPAC of a target company is usually referred to as a de-SPAC. Most SPACs typically have between 18 and 24 months in which to identify a target company and complete an acquisition. If an acquisition is not completed within that timeframe, the proceeds of the IPO need to be returned to the investors. Investors can also redeem their shares prior to the de-SPAC if they do not want to participate in the acquisition. 

The SPAC sponsor typically receives shares for nominal consideration at the time the SPAC is incorporated. These shares normally represent around 20% of the SPAC equity following the SPAC IPO, which predominantly serves as a “finder’s fee” for identifying a target company, conducting due diligence and closing the de-SPAC transaction. Coupled with the current extended low-interest rate environment, these highly favorable economic returns have continued to attract sponsors to invest in SPACs.

SPACs have various distinctive features as follows:

i. SPAC trust account: The proceeds of a SPAC IPO cannot be used for any purpose other than to fund the relevant de-SPAC transaction or to redeem the shares sold to the investors in the IPO. The funds that are raised from the IPO are held in an interest-bearing trust account.

ii. IPO units and classes of shares: Each unit that is sold to a public investor in a SPAC IPO typically comprises a class A share and a fraction of a warrant to purchase a class A share in the future. The units typically become separable 52 days after the IPO, at which point the component securities can trade separately. In contrast, class B shares are purchased by the sponsor at the formation of the SPAC which typically convert into class A shares at the time of the de-SPAC transaction on a 1:1 basis. Unlike the class A shares, the class B shares are usually subject to transfer restrictions and are not subject to redemption. The class B shareholders also typically have the right to appoint and remove directors prior to the closing of the de-SPAC transaction.

iii. No acquisition target at the time of the IPO. A SPAC may (and commonly does) identify certain geographic areas and/or specific industries in which it will pursue a target company in order to de-SPAC in its IPO prospectus. That being said, a SPAC cannot identify its acquisition target prior to the closing of the IPO and there are typically disclosures regarding this in the relevant prospectus.

iv. Structuring of a de-SPAC: A typical de-SPAC is usually structured as a merger transaction, but the specific method that is used to acquire a target company will depend on where it is incorporated, tax considerations, whether the target company is also a listed entity and the methods of merger that are available in the applicable jurisdictions to complete the de-SPAC transaction. Typically, the target company will merge with a wholly-owned subsidiary of the SPAC and the shareholders of the target company will receive new shares in the SPAC in consideration for their shares in the target company. Both the BVI and the Cayman Islands have straightforward and well-tested statutory merger regimes which are conductive to de-SPAC transactions and familiar to corporate lawyers.

SPACs have arguably unlocked various advantages over more traditional structures used by private equity firms for investment. For example, SPAC investors benefit from the liquidity of publicly traded securities and have limited risk exposure as they are entitled to a return of their funds held in the trust account if the SPAC fails to complete an acquisition or the investor does not want to participate in one. In addition, there is typically no cash compensation paid to the management team of the SPAC pending completion of the de-SPAC transaction and their reward will depend on the success of the acquisition.

Yes, a SPAC IPO will be speedier to bring to market because it will not be necessary to complete due diligence on an existing operating company. As a direct consequence of this, some SPACs can complete an IPO within 8-12 weeks versus 12 months (or more) for a traditional IPO.

Asia-based sponsors and investors have demonstrated a keen interest in SPAC IPOs on US stock exchanges, particularly in the technology sector. In response to this, the Singapore Exchange announced new rules on 2 September 2021 to enable SPACs to list on the Main Board of the Singapore Exchange. This is a welcome development that may also revive Singapore’s lagging IPO market which saw only 3 IPOs in the first half of 2021 . Other stock exchanges in Asia, such as in Hong Kong, are also considering lifting their long-standing prohibitions on raising funds for unspecified purposes. Whilst Asia’s more conservative approach to SPACs is unlikely to match the level of deal-flow or capital raising seen in the US in the short or medium term, Asia’s financial markets are reliant on a steady-stream of IPOs to remain competitive so we foresee that key financial centers in Asia will develop a suitable regulatory framework for SPACs. It should also be noted that a number of SPACs are currently exploring de-SPAC opportunities in China and South Asia where an abundance of private equity backed companies with promising growth prospects are located.

Many SPACs issue new shares to institutional investors in a PIPE – which stands for private investment in public equity – that closes concurrently with the de-SPAC transaction in order to raise additional funding. These PIPEs are important in ensuring the completion of the de-SPAC transaction in the event there are significant redemptions and they also provide third-party validation of the terms and valuation of the acquisition.

The sponsor or institutional investors may also enter into forward purchase arrangements with the SPAC to commit to purchase new shares of the SPAC concurrently with closing of the de-SPAC transaction.

Most SPACs pursuing US targets continue to be incorporated in Delaware, although the BVI and the Cayman Islands also remain popular. We expect the popularity of BVI and Cayman Islands incorporated SPACs to increase as SPAC activity picks up in Asia because BVI and Cayman Islands companies are widely used across the region and familiar to stock exchanges, regulators and other relevant market participants.

Cayman Islands SPACs are currently more popular than BVI SPACs, probably because the Cayman Islands continues to be the jurisdiction of choice for listed companies and private equity funds. That being said, BVI companies may confer certain advantages in the context of SPAC transactions. For example, the shareholder approval thresholds in a de-SPAC transaction for a statutory merger are typically lower in the BVI than the Cayman Islands.

There are various features of BVI and Cayman Islands law which make these jurisdictions attractive for SPACs, including:

i. Unlimited objects. BVI and Cayman Islands companies may have unlimited objects and purposes which is important because SPACs will, in our experience, describe their target in terms that are as broad as possible in their IPO prospectus.

ii. Flexibility. There is significant flexibility in tailoring the articles of association of the relevant SPAC to accommodate the issuance of warrants and different classes of shares, as well as the incorporation of defensive takeover tactics.

iii. Capital maintenance. The rules on capital maintenance (where applicable) are flexible, permitting distributions and share redemptions from a wide range of sources subject only to the usual solvency tests.

iv. No takeover code. There is no takeover code or legislation that is specifically applicable to listed companies (with the exception of the Cayman Islands Code on Takeovers and Mergers that is only applicable to companies whose securities are listed on the Cayman Islands Stock Exchange).

v. Foreign private issuer. BVI and Cayman Islands companies that are listed on a US stock exchange may be able to qualify as a “foreign private issuer”, thereby taking advantage of reduced disclosure and reporting requirements.

vi. Statutory merger regime. Both the BVI and the Cayman Islands have well-established and straightforward statutory merger regimes which are conductive to de-SPAC transactions.

vii. Secured creditor friendly. The BVI and the Cayman Islands are widely recognized as creditor friendly jurisdictions, which is helpful in the context of facilitating a financing that a SPAC may require to consummate a de-SPAC transaction. The BVI also has a straightforward system of registering security interests which is attractive to secured creditors.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas

Partner

Loeb Smith Attorneys

Hong Kong

T: +852 5225 4920

E: peter.vas@loebsmith.com

www.loebsmith.com

The Private Funds Law, 2020 (the “Law“) which came into force on 7th February 2020 requires all private funds (e.g. Private Equity funds, Real Estate funds, Venture Capital funds, and certain Private Credit funds) which fall within its scope which were either (i) launched prior to 7th February 2020 or (ii) launched since 7th February 2020, to register with the Cayman Islands Monetary Authority (“CIMA“) before 7th August 2020. The Law refers to these closed-ended funds as “Private Funds”. A copy of our previous legal update is attached for your information.

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Bearing in mind that the Law has introduced a number of new legal requirements for existing Private Funds, we recommend that you seek advice from Cayman legal counsel (1) as to whether or not your investment fund falls within the scope of the Law and therefore needs to register with CIMA before the deadline (not all closed-ended investment funds fall within the scope of the Law), and (2) as to how to satisfy these requirements in order to register your Private Fund before the 7th August deadline.

i. Audit – Your Private Fund will be required to undertake an audit for its 2020 financial year. Do you require any recommendations as to audit firms? When will the first audit be required?

ii. Valuation of assets – The Law has introduced new requirements regarding the valuation of your Private Fund’s assets. Does your Private Fund have a valuation policy? Do you require any recommendations as to valuation service providers?

iii. Safekeeping of fund assets – The Law has introduced new requirements regarding the safekeeping of your Private Fund’s assets. Does your Fund have a custodian? How and on what basis can your Private Fund apply to CIMA for an exemption from this requirement?

iv. Cash monitoring – The Law has introduced new requirements regarding cash monitoring for your Private Fund. How can you introduce a mechanism to deal with this new requirement? Will cash monitoring need to be done internally?

v. Identification of securities – The Law has introduced new requirements regarding maintaining identification procedures and records for listed securities that your Private Fund may hold. Does your Private Fund hold any listed securities?

1. Director Appointments – Does the general partner or corporate director of your Private Fund have only one natural person as Director. If yes, then it will need to make one or more appointments as CIMA will apply the two (2) directors test to the general partner or corporate director of a Private Fund.

2. AML Regime – Does your Private Fund have an Anti-Money Laundering (AML) framework focused on ensuring that it adheres to the Cayman Islands AML regime when onboarding and monitoring investors? Has your Private Fund undertaken a risk assessment of its AML policies and procedures?

3. AML Officers – Has your Private Fund appointed AML Officers?

4. FATCA/CRS Registration – Has your Private Fund put into place a mechanism for
dealing with FATCA/CRS registration and annual reporting?

Timing: It will take some time to make changes (including amending Fund documents, appointing Directors, etc.) and to appoint service providers who can assist with helping your Private Fund to satisfy the requirements set out above. Therefore we recommend taking steps now to commence the process. Please contact us for legal advice and recommendations on effectively satisfying the new legal requirements and registering your Private Fund successfully with CIMA before the deadline of 7 August 2020.

This publication is not intended to be a substitute for specific legal advice or a legal opinion.
For specific advice on registering your Private Fund with CIMA, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: benjamin.wrench@loebsmith.com

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Prior to applying for deregistration and in order to avoid delays in the processing of the application, a Registered Person is required to ensure that all fees are paid, the annual declarations have been submitted and there are no outstanding queries from, or regulatory filings with, CIMA. The following documents are required for de-registration:

(i) a written notice of the intention to deregister;
(ii) the deregistration fee of or approx. US$610;
(iii) a certified copy of the Board resolution which indicates the date on which the Registered Person has ceased to carry on as a SIBL Manager and/or Adviser ; and
(iv) an affidavit by a senior officer of the SIBL Manager and/or Adviser that attests to the following:

a. the reason for the cessation of business;
b. that, as far as the senior officer is aware, the applicant has operated in accordance with its Articles of Association;
c. that all client relationships have been properly terminated or transferred¹ to another service provider;
d. that the applicant has not conducted its securities investment business and has not wound up such business in a manner that is prejudicial to its clients and creditors; and
e. that the applicant intends (i) to continue as a legal entity in the Cayman Islands, or (ii) to apply to be struck-off (e.g. through voluntary liquidation and dissolution) from the register of companies maintained by the Companies Registry, or (iii) to merge with another Registered Person.

In addition, the Regulations specifically address the following cases of deregistration, where additional requirements and documentation are or may be requested by CIMA.

1. The Registered Person is being wound up.
2. The Registered Person is being merged with another Registered Person.
3. The Registered Person seeks to cancel its registration with CIMA by reason of its transfer to another jurisdiction.
4. The Registered Person has never carried on business.

Voluntary Liquidation

The Registered Person applying to CIMA for deregistration in connection with a voluntary liquidation² is required to provide, in addition to the documentation referred to above, the following:

(a) the notice of voluntary winding up (Form No. 19 of the Companies Winding Up Rules, 2018);
(b) the voluntary liquidator’s consent to act (Form No. 20 of the Companies Winding Up Rules, 2018); and
(c) the declaration of solvency (Form No. 21 of the Companies Winding Up Rules, 2018).

Merger

The Registered Person applying to CIMA for deregistration in connection with a merger with another Registered Person is required to provide, in addition to the documentation referred to above, an application to CIMA for prior approval of the merger which shall be accompanied by resolutions of the merging and surviving parties, the plan of merger and appendices, and such other documents as CIMA may specify. Where CIMA approves the merger, the surviving Registered Person is required, upon the merger becoming effective, to provide a certified copy of the certificate of merger within seven (7) days of its issuance.

Transfer to another Jurisdiction

The Registered Person applying to CIMA for deregistration in connection with a transfer to another jurisdiction is required to provide, in addition to the documentation referred to above, an affidavit from a senior officer that attests to the following:

(a) the reason for the transfer and name of the jurisdiction to which the Registered Person is being transferred;
(b) that the Registered Person has operated in accordance with its Articles of Association; and
(c) that the transfer is not prejudicial to the Registered Person’s clients or creditors.

In such specific cases (voluntary liquidation, merger or transfer to another jurisdiction), the Registered Person will be assigned “registration under termination” status, until all the documents listed above are submitted to and received by CIMA, and CIMA is satisfied that the Registered Person has complied with the Regulations.

Registered Person that Never Carried on Business

A Registered Person that has never carried on business means a Registered Person that has not commenced any client relationships contractually or otherwise for the purpose of carrying on securities investment business. In this case, the Registered person will be required, for purposes of deregistration, to provide to CIMA an affidavit by a senior officer that attests to the fact that the Registered Person has never carried on such business.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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The Privy Council judgment in Bermuda Bar Council v Walkers (Bermuda) Ltd delivered on 10 June 2019 recently clarified the longstanding “60:40 rule” in respect of local companies in Bermuda, which could also have a wider economic impact on local companies in the Cayman Islands and their ability to access foreign capital. The principal question in the Privy Council appeal was the nature of foreign control over a local company, Walkers (Bermuda) Ltd (“WBL”), which would prevent it from being “controlled by Bermudians” and would therefore require it to be licensed by the Minister of Finance in Bermuda.

The local company 60:40 rule is enshrined in Part I of the Third Schedule of The Companies Act 1981 in Bermuda (“Companies Act”), which provides that a local company must be (i) controlled by Bermudians (ii) at least 60% of the total voting rights to be exercisable by Bermudians and (iii) the board of directors to comprise at least 60% Bermudians. This mirrors the local company requirements in the Cayman Islands set out in section 5(1) of the Local Companies (Control) Law (2019 Revision), which requires a local company or an exempted company that is carrying on business in the Cayman Islands to be (i) Caymanian controlled (ii) at least 60% of its shares are beneficially owned by Caymanians and (iii) at least 60% of its directors are Caymanians. The principal purpose of the 60:40 rule in both Bermuda and the Cayman Islands is to aim to ensure local control over local companies and the economy.

1. In May 2015, Walkers Global, a partnership established in the Cayman Islands determined to set up a local presence in Bermuda and in October 2015 incorporated WBL as a local company in Bermuda under the Companies Act.
2. All of the issued share capital of WBL is held by Bermudian barristers with valid practicing certificates, with no legal control over or beneficial interest in the shares being exercised by Walkers Global. Kevin Taylor is the sole director.
3. Two draft agreements were prepared between Walkers Global and WBL, being (i) a licensing and services agreement to allow professional services to be provided in Bermuda under the “Walkers” brand, including access to human resources, marketing and IT support and (ii) a loan agreement for a loan of up to US$5 million to be lent by Walkers Global. If executed, these two agreements would govern the relationship between Walkers Global and WBL.
4. Kevin Taylor applied to the Bar Council in Bermuda for a certificate of recognition of WBL as a professional company under section 16C of the Bermuda Bar Act 1974. The application was refused on the grounds that the terms on which WBL proposed to operate in Bermuda with respect to Walkers Global, would contravene section 114 of the Companies Act, that requires a local company cannot carry on business in Bermuda unless it complies with Part I of the Third Schedule (as set out above).
5. WBL’s appeal against the Bar Council’s decision was granted by the Chief Justice, on the basis that the proposed arrangements regulating the operation of WBL as a professional company were not contrary to section 114 of the Companies Act or contrary to public policy.
6. On appeal to the Court of Appeal of Bermuda, the Court of Appeal disagreed with the decision of the Chief Justice and interpreted the local company provisions of The Companies Act as extending beyond control over the voting power of shareholders, to include the substance and reality of commercial control.
7. Adopting a practical interpretation of the concept of “control” over a company, the Privy Council held that non-Bermudians may exercise de facto control over a local company by way of commercial arrangements without having to first obtain a licence from the Minister of Finance, provided that the directors and shareholders of such company are free to vote of their own volition. The decision determined that “control” of a company to be exercised over a local company is at board and shareholder level and that influence over a local company’s operations does not constitute “control”. In restoring the decision of the Chief Justice, the key arguments of the Board of the Privy Council were:

• • Lord Hodge stated that “if it were sufficient to establish non-Bermudian control by commercial control alone, a local company might face intolerable uncertainty as to whether it was carrying on business legally or was committing an offence.” In support of this determination, he provided an example of a primary producer entering into an exclusive supply agreement with an overseas buyer which made it dependent on the commercial decisions of the buyer – in this case, the buyer would have considerable influence over the supplier’s commercial decisions and would have the potential to control the quality and quantity of the supplier’s products. In a similar context, if a local company had borrowed a large sum of money from an overseas lender and came into financial difficulty such that it was required to act in the interests of the overseas lender, this would cause uncertainty as to what would constitute “control” and breach of The Companies Act.
  • The Board of the Privy Council interpreted Part I of the Third Schedule as preventing agreements or arrangements which confer voting control or constrain the effectiveness of majority votes in director or shareholder meetings.
  • Lord Hodge further stated that there is no requirement in the Companies Act (either express or by implication) that a local company must pay or attribute a minimum percentage of its profits to Bermudians in order for it to be controlled by Bermudians.
  • Lady Arden determined that “controlled by Bermudians” is that of “board and of the company in the general meeting. Mere influence of any kind on a company’s operations does not constitute control in this sense.”

As the Privy Council is the highest court of appeal for the Commonwealth countries and its decisions are binding on all countries in the Commonwealth, the ruling in this case will be binding in the Cayman Islands. Furthermore, the similarity between the 60:40 rule in Bermuda and requirements under Section 3(2) and Section 5 of the Local Companies (Control) Law (2019 Revision) of the Cayman Islands means that the reasoning put forward in the Privy Council decision is equally applicable in determining whether a local company incorporated in the Cayman Islands is “Caymanian controlled”. On a practical level, this ruling means that an element of commercial influence may be exercised by non-Caymanians in respect of the day-to-day operations of a local company in the Cayman Islands, provided that the key constitutional documents and any shareholders’ agreement do not constrain the voting rights of the board and/or shareholders.

For specific advice on this matter, please contact your usual Loeb Smith attorney or:

E: elizabeth.kenny@loebsmith.com