TSX Seeks Input on Proposed Changes to Rules Governing Special Purpose Acquisition Corporations
June 14, 2018
The Toronto Stock Exchange (TSX) recently released proposed amendments (Proposed Amendments) to Part X — Special Purpose Acquisition Corporations (SPACs) of the TSX Company Manual (Manual). Notable changes include codifying exemptions previously provided to SPACs and removing the requirement for shareholder approval of a qualifying acquisition subject to certain requirements.
The TSX is seeking public comments and responses to certain questions concerning the Proposed Amendments. The deadline for comments is July 3, 2018.
WHAT IS A SPAC?
A SPAC is a publicly traded corporation with no operating business, which acts as an investment vehicle for the public to invest in companies and industry sectors. Pursuant to a long-form prospectus, a SPAC issues “units” to be listed on the TSX. Each unit is typically comprised of a share and a full (or half) of a share purchase warrant. The gross proceeds raised from the public through the initial public offering (IPO) are placed into an escrow account to be used toward the SPAC’s qualifying acquisition or to satisfy redemptions of shares by shareholders in specified circumstances. If a qualifying acquisition is not completed within the SPAC’s permitted timeline (typically 21 months, but may be up to 36 months under the TSX rules), the escrowed funds, plus interest earned thereon, will be returned to the SPAC’s shareholders. For an overview of the Canadian SPAC market, please see our December 2015 Blakes Bulletin: The ABCs of SPACs: Canadian Experience.
The Proposed Amendments codify certain market practices and exemptions previously granted by the TSX and remove the requirement for shareholder approval of a qualifying acquisition subject to certain requirements. The Proposed Amendments also include certain non-material amendments to clarify various provisions as well as ancillary changes.
Approvals and Prospectus Requirements
Currently, a SPAC’s qualifying acquisition must be approved by a majority of the votes cast by securityholders of the SPAC (including the SPAC’s founding securityholders). The Proposed Amendments would remove the requirement for shareholder approval on the condition that an amount equal to at least 100 per cent of the gross proceeds raised by the SPAC on its IPO is placed in escrow (100% Escrow Condition). The SPAC must also mail a notice of redemption to shareholders and make the prospectus for the resulting issuer publicly available on its website at least 21 days prior to the redemption deadline, and deliver such prospectus to shareholders at least two business days prior to the redemption deadline. The Proposed Amendments also clarify that shareholder approval will not be required for matters related to the qualifying acquisition, such as dilutive transactions or the adoption of a security-based compensation arrangement, provided that such matters are disclosed in the prospectus filed in connection with the qualifying acquisition and the foregoing conditions are satisfied.
This change is helpful as it eliminates the requirement for a shareholder vote, which may be seen as a rubber stamp in the Canadian SPAC market. Due to the structure and use of warrants, shareholders who were not in favour of the transaction would still vote for the transaction to preserve the value of their warrants, but at the same time, redeem their common shares. In connection with the five TSX SPACs that held a vote to approve a qualifying transaction, the transactions received between 88 per cent and 99 per cent of the votes in favour of the qualifying acquisition, but a number of them still suffered significant redemptions.
The Proposed Amendments will also require disclosure in the SPAC’s IPO prospectus if shareholder approval would be a condition of the SPAC’s qualifying acquisition. If approval is required, the qualifying acquisition would require approval by a majority of the votes cast by shareholders of the SPAC entitled to vote at a duly called meeting. Comprehensive disclosure would be required for all material aspects of the transaction including valuation requirements for non-arm’s-length transactions. The Proposed Amendments also codify the exemption permitting founding shareholders, subject to the related party rules, to vote with respect to the approval of a qualifying acquisition.
The TSX seeks specific feedback on whether the 100% Escrow Condition is the appropriate threshold (versus 90 per cent). It also seeks feedback on the appropriate length for the notice period for the redemption deadline and for posting and delivery of the prospectus.
Public Distribution Requirements
Following both the closing of its IPO and completion of a qualifying acquisition, a SPAC currently must meet the TSX minimum public distribution requirements, which are similar to the requirements for regular corporate issuers, including a minimum of 300 public board lot holders. The Proposed Amendments would: (i) reduce the minimum number of public board lot holders required following the IPO to 150; and (ii) provide the resulting issuer with up to 90 days from the completion of a qualifying acquisition to provide evidence that it meets the 300 public board lot holders public distribution requirement.
The TSX seeks specific feedback on the public distribution requirement, including the appropriate public distribution requirement for SPACs upon their original listing and following the closing of the qualifying acquisition.
In our view, we would recommend applying the continued listing requirements under Part VII (i.e., 150 public board lot holders) to the resulting issuer following the SPAC’s qualifying acquisition due to the fact that the shareholder base of SPACs is typically highly concentrated and the SPAC has no ability to control redemptions related to its qualifying acquisition. We expect that a broader shareholder base would typically develop after the closing of the qualifying acquisition as the market learns more about the resulting issuer’s operating business.
The Proposed Amendments seek to codify an exemption that permits a SPAC to limit the maximum exercise of redemption by any shareholder, provided that the limit is not lower than 15 per cent of the shares sold on the IPO and such limit is disclosed in the SPAC’s IPO prospectus.
Currently, a SPAC is prohibited from obtaining any form of debt financing prior to its qualifying acquisition, but the TSX has granted an exemption to allow founders to provide a loan to the SPAC subject to certain requirements. The Proposed Amendments would allow a SPAC to obtain unsecured loans on reasonable terms from its founders or others, up to a maximum aggregate principal amount equal to the lesser of: (i) 10 per cent of the funds held in escrow; and (ii) C$5-million, with the limit of such loans to be disclosed in the IPO prospectus. Such loans cannot have any recourse against the SPAC’s escrowed funds and must be repayable in cash no earlier than the completion of the SPAC’s qualifying acquisition. The TSX seeks specific feedback regarding the proposed limit on loans and asks whether a different limit is more appropriate.
Warrant Expiry Date and Annual Meetings
The Proposed Amendments provide that the share purchase warrants’ expiry date could be based on the completion of the qualifying acquisition, rather than on a fixed date as is currently contemplated by the TSX rules. The TSX is also proposing to exempt SPACs from the requirements to hold an annual meeting within six months of the end of the SPAC’s fiscal year. Again, these amendments codify previous relief granted by the TSX.
Restricted Share Policy
Currently, SPACs are subject to the restricted share policy set out by the TSX, including that restricted securities include takeover protective provisions and a restriction on the issuance of securities that have voting rights greater than those of the securities of any class of listed voting securities of the listed issuer. The Proposed Amendments would exempt SPACs from these restrictions prior to its qualifying acquisition, however any proposed implementation of a dual class share structure or similar structure at the time of the SPAC’s qualifying acquisition would be reviewed by TSX.
The TSX has asked for comment on a number of specific questions relating to the Proposed Amendments, including whether there are any other amendments to Part X that the TSX should consider.
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