In January 2022, the Securities and Commodities Authority of the United Arab Emirates ("SCA") passed decision No. (1/TM) of 2022 on the Regulations on Special Purpose Acquisition Companies ("SPACs") ("Decision"). The Decision aims to regulate various aspects of SPACs and matters throughout the life of a SPAC transaction, including: (i) requirements for setting up a SPAC vehicle, (ii) rules around the IPO proceeds and escrow/trust accounts; and (iii) rules around business combinations ("De-SPAC"); and (iv) regulations relating to failure and winding up SPACs.
The Decision presents both opportunities and challenges to those looking to launch, invest in and participate in SPACs and De-SPAC transactions in the UAE.
What is a SPAC?
SPACs are shell companies, whose shares are publicly listed, formed by sponsors in order to raise capital for the purpose of effecting a business combination with one or more target businesses via merger, share exchange, asset acquisition, share purchase or reorganisation. SPACs raise capital predominantly through an initial public offering ("IPO") of the shares and/or warrants of the SPAC, often concurrent with a private placement, with the majority of the IPO proceeds being held in an escrow or a trust account. SPACs typically seek to consummate a De-SPAC within 18 to 24 months of their IPO.
In contrast to traditional IPOs, whereby an operating company lists its shares, a SPAC, at the time of its IPO, does not have an underlying operating business and holds only nominal assets. SPAC investors do not know, at the point of IPO, where, when or how their money will ultimately be deployed. However, SPAC investors are provided with a degree of protection in relation to the De-SPAC transaction. As part of the De-SPAC transaction investors have a right to redeem their shares for a pro rata portion of the IPO proceeds. Additionally, a SPAC may provide for an investor vote on a proposed De-SPAC transaction. Further, a SPAC has a limited timeframe within which to complete a De-SPAC transaction, typically 18 to 24 months, after which an investor's pro rata portion of the IPO proceeds is returned.
Finding a suitable target and successfully completing a De-SPAC transaction depends largely on the skill and experience of the SPAC's sponsors and management team. Investor conﬁdence in the SPAC's sponsors and management team is therefore vital. SPAC sponsors and management teams are typically firms and/or individuals with a successful record of identifying, acquiring and operating growth businesses, often with experience in operating public companies.
Requirements to set-up a SPAC
In order for a company to be classified as a SPAC by the SCA, it must be established as a public joint stock company ("PJSC") and meet the following criteria:
- The issued share capital of the SPAC, immediately following the IPO, cannot be less than AED 100 million. A SPAC may issue different classes of shares (including different classes of sponsor shares and investor shares);
- The SPAC's sponsors cannot have announced or disclosed an actual or potential De-SPAC target;
- The sponsors are required to submit an application, together with draft articles of association, to the SCA for approval.
In deciding whether to approve the establishment of the SPAC, the SCA will look at the experience and financial position of the proposed sponsors. The SCA will look in particular whether the sponsors have clear business objectives; have sufficient experience to ensure that they are able to achieve those business objectives; have an awareness of the potential risks and returns to investors and have prepared proposals to mitigate those risks.
A SPAC is prohibited from carrying out any economic activity other than the offering, issuing and listing of its shares and/or warrants and seeking an acquisition target for the purposes of consummating a business combination.
SPAC exemptions from the CCL
SPACs benefit from certain exemptions from the UAE's main companies law legislation, the Federal Decree-Law No. (32) of 2021 on Commercial Companies ("CCL"). SPACs are exempted from, amongst other things:
- The normal incorporation procedures for PJSCs under the CCL;
- Rules around subscription periods, allocation and distribution of shares, and nominal value and classes of shares;
- Requirements to offer priority rights on issuance of new shares;
- Restrictions on founders' trading of shares and the SPAC acquiring its own shares; and
- CCL rules around transformations, mergers and acquisitions of companies.
The intention of the Decision appears to be to offer a more streamlined and less onerous incorporation process for SPACs in order to encourage their use in the market. The Decision does note, however, that the provisions of the CCL and SCA will continue to apply and the description of the various exemptions is quite vague, so it is unclear at the moment to what extent sponsors will be able to deviate from, or disapply, provisions of the CCL.
There also appears to be a less onerous disclosure standard in the Decision, as compared to the usual requirements of the CCL and the SCA. Disclosure relating to a SPAC IPO is focused on: (i) a description of the shares and warrants being issued and shareholder rights attaching to them (including redemption rights); (ii) risk factors relating to investing in a SPAC, including what happens on failure; (iii) a description of the sector/industry focus of the SPAC's potential acquisition targets; (iv) time limits and extension rights, and (v) the sponsors/managers, including their experience, rights, conflicts of interest and financial incentives. This is not an exhaustive list and the SCA may require additional disclosure as part of their review process.
Escrow and trust accounts: what happens to the IPO proceeds?
Within two business days of the receipt of the IPO proceeds, the SPAC must ensure at least 90% (or such higher percentage as is determined by the SCA) of the IPO proceeds are credited to an escrow account, a trust account or such other account that allows for the segregation of IPO proceeds from the SPAC's own funds.
Proceeds held within the escrow or trust account may only be used for one or more of the following purposes:
- to fund a business combination;
- to meet investors' redemption requests;
- to return IPO proceeds to investors following a failure to effect a business combination;
- to pay any costs arising from the maintenance of the account itself; or
- any other purposes related to the foregoing
There is no guidance in the Decision on which form of account should be used, nor whether the account itself must be located in the UAE. Although trusts are now, in theory, recognized in the UAE under Federal Decree Law no. 19 of 2020 Concerning Trusts, there are few examples of UAE onshore trusts being used and we expect any accounts used for the purposes of holding SPAC IPO proceeds will either need to be a traditional escrow account in the UAE, or an offshore trust account.
The potential benefit of using of a trust account, as opposed to an escrow account, lies in the ability to invest the IPO proceeds. The Decision states that if the IPO proceeds are held in a trust account, they may be invested in easily sold assets, at the discretion of the trustee and in accordance with the law applicable to the trust. This is a useful tool that has long been utilized in US SPAC transactions and provides an opportunity for the IPO proceeds to circumvent, to some extent, the effects of low returns or negative carry. However, given certain regulatory constraints, European SPACs in some jurisdictions have not been able to invest proceeds as readily and must instead hold the proceeds as cash, and thereby account for any low returns or negative carry by additional sponsor contributions.
The IPO proceeds may also, however, be held in an account that does not accrue interest or any other form of financial return.
Rules around business combinations?
Prior to undertaking a business combination, the SPAC is required to provide both the SCA and its shareholders with information relating to the proposed business combination. Including, but not limited to, information relating to the target, its valuation, consideration for, or the price of, the business combination, details of any amendments to the SPAC's articles of association or the structure of its share capital that will be necessary after completion of the business combination. Following which, the SPAC is required to obtain the approval of shareholders representing at least 75% of the shares represented at the general meeting of the SPAC, in order for the business combination to be approved.
A SPAC may not complete a business combination unless the fair market value of the target or targets, as determined by an independent advisor approved by the SCA, is equal to, or greater than, 80% of the value of the funds deposited in the escrow or trust account as at the De-SPAC closing date. Further, in order to complete the business combination, the SPAC must have sufficient cleared funds to complete that business combination on the closing date, taking into account any redemptions by investors that have occurred, or are scheduled to occur, before the closing date.
At any time after completion of the listing, subject to the approval of the SCA and a majority vote of the investor shares, the SPAC may raise additional funds via private placement in order to complete the business combination. The shares and/or warrants issued as part of the private placement may be issued at an issue price less than the purchase price paid by the IPO investors and such funds are not considered a part of the IPO proceeds.
Investors may only require the SPAC redeem their shares if: (i) the general assembly of the SPAC decides to extend the time period within which the SPAC may complete a business combination and the particular investor voted against the decision; or (ii) the general assembly approves a business combination, regardless as to whether or not the particular investor voted in favor or against the business combination. However, the business combination contemplated by the vote must actually consummated for the shares to be redeemed. An investor redeeming their shares and/or warrants shall be returned their pro rata share of the IPO proceeds held in the escrow or trust account.
Time limits on business combinations
A SPAC is required to complete a Business Combination within the earlier of the time limit included in the prospectus published by the SPAC in connection with its IPO or within 24 months of the listing date.
Subject to the approval of the SCA and a majority of its investors, a SPAC may extend the time limit it has to complete a business combination. In any event, the total time limit may not be extended to longer than 36 months from the date of listing.
What happens on failure?
Should a SPAC fail to conclude a business combination within the time limit, the board of directors of the SPAC are required to notify both the SCA and the market on which the shares and/or warrants are listed.
Following the failure notification, the SPAC must undertake all necessary steps to refund the amounts held in the escrow or trust account to investors, in amounts that are pro rata to their shareholdings, within 10 business days from of the failure date. In addition, the SPAC is required to appoint one or more liquidators to effect a voluntary liquidation of the SPAC in accordance with the provisions of the CCL, within 30 business days from the date of failure. The SPAC's sponsors are prohibited from participating in any distributions made during the liquidation process with respect to any of the sponsors' shares that were issued or acquired before the listing date, including in respect of shares underlying any warrants.
Immediately upon the issuance of the failure notification, trading in the SPAC's shares and/or warrants will be suspended as of the date of failure and the listing of the SPAC's shares and/or warrants will be cancelled, as set out in the listing rules. As of the failure date, the SPAC will cease to benefit from any rights, privileges or exceptions it conferred by the Decision.
The Decision is an important move by the SCA to facilitate and attract SPAC and De-SPAC transactions to the UAE market. The Decision sets out a progressive framework for the launch of SPAC IPOs to be listed on UAE exchanges, however we have identified several areas of uncertainty in the wording of the Decision. It is likely that, in the near term, investors will need to adopt a collaborative approach with the SCA when attempting to launch a SPAC or when seeking consummate a De-SPAC, drawing from international best practices. Regulatory certainty around these areas of uncertainty will be key in establishing the UAE as a leading market for SPACs for the UAE to compete with other traditionally attractive SPAC markets.
Bird's eye comparison with other SPAC regimes
Shareholder redemption rights
Mandatory redemption rights at time of acquisition
Mandatory redemption rights exercisable at the discretion of shareholders prior to completion of an acquisition and regardless of whether shareholders voted for or against the acquisition.
Mandatory redemption rights at: (i) time of vote to extend time limit to complete business combination; and (ii) at time of acquisition
Shareholder vote on acquisition
Shareholder vote to approve acquisition is standard
If provided in the SPAC's constitutional documents.
Mandatory vote to approve acquisition
20% 'promote' equity at nominal value is standard for founders
Preference shares paying annual scrip dividend based on share performance more common
Minimum sponsor share capital contribution of AED 100,000, representing no less than 3% and no more than 20% of the SPAC’s issued share capital, with such rights as are provided for in the articles of association
Suspension of trading
No suspension on announcement of acquisition
No suspension, provided the SPAC raises at least £100 million from public investors, includes certain investor protection features in its structure and discloses sufficient information to the market.
No information provided
Disclosure of target projections
Standard disclosure for US SPAC acquisitions
Any targets could constitute a profit forecast which would need to be compiled and disclosed in line with applicable regulatory requirements
No information provided
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