23 June 2021
SPACs and traditional IPOs: An offshore perspective
Offshore jurisdictions have long been a popular choice for listing vehicles and feature prominently on over 20 exchanges worldwide.
On the leading US and Asian exchanges Cayman Islands (Cayman), British Virgin Islands (BVI) and Bermuda companies are the offshore heavyweights, with Cayman remaining the favoured jurisdiction for Asia-based sponsors looking to raise capital by way of an initial public offering (IPO).
For decades, the process for many Chinese and other Asia-based businesses to go public in the US was the traditional underwriter-led IPO on NYSE or Nasdaq. Despite increasing regulatory scrutiny on US-listed Chinese companies, Chinese businesses continue to follow this well-trodden path. Just this month, China's ride-sharing business DiDi Chuxing filed for what will likely be the largest IPO in the US this year using a Cayman company as the issuer.
Nearer to home, Cayman companies account for approximately 55% of issuers listed on the main board of the Hong Kong Stock Exchange (HKEx) - far outnumbering any other domicile - and in 2020, approximately 95% of IPOs on HKEx used a Cayman company. That trend looks set to continue in China following listing reforms made in 2019 to encourage IPOs of Chinese businesses domestically, including on Shanghai's recently launched SSE STAR Market (STAR Market), China's equivalent to Nasdaq. To date, 100% of foreign 'red chip' companies registered (or awaiting registration) on the STAR Market are Cayman companies.
2020 saw the resurgence of special purpose acquisition companies (SPACs) as an alternative to traditional IPOs, particularly on US exchanges. A SPAC does not have an operating business – it is a 'shell' company formed for the purpose of raising capital through an IPO for use in a subsequent merger or acquisition of an unlisted target company (known as a de-SPAC transaction). Taking a private company public via a de-SPAC transaction can be achieved on a faster timeline than a traditional IPO, at a lower cost, and with a greater degree of certainty around valuation.
There were 248 SPACs launched on US exchanges in 2020, raising a war chest for acquisitions of US$83 billion. The SPAC boom continued into this year, with more SPACs launched in just the first quarter of 2021 alone (a total of 298) than in all of 2020. However, recent regulatory scrutiny has led to a steep decline in the number of SPAC IPOs, with only 32 SPACs launched in April and May.
Most SPACs formed by sponsors pursuing US targets are incorporated in Delaware. The vast majority of SPACs formed by sponsors pursuing targets outside the US are incorporated offshore (with Cayman dominating, but BVI also popular) to allow for a more efficient structure following the de-SPAC transaction and to minimise any tax or legal complexities that may arise as a result of using a US entity. Approximately one-third of all SPACs launched in 2020-21 were incorporated in Cayman. Cayman LLCs are also increasingly being formed instead of Delaware LLCs to act as the sponsor vehicle.
Despite the recent slowdown in SPAC activity, we continue to see interest from a broad range of Asia-based sponsors and investors (including Chinese fund managers and family offices) for listings of offshore SPACs on US exchanges, especially in the technology sector. We are also seeing many offshore SPACs looking east to explore opportunities in China and Southeast Asia for de-SPAC transactions, where a number of venture capital and private equity backed emerging companies with compelling growth prospects are located.
Although Nasdaq and NYSE currently have the lion's share, several Asian jurisdictions are now considering allowing SPAC listings in their home markets. At present, South Korea and Malaysia are the only two Asian countries that permit them. Given the success of the SPAC format, HKEx and the Australia and Singapore exchanges are now engaged in public consultations in order to explore changes to their listing rules that would allow SPACs to list with certain conditions.
As we begin to see more SPACs listed outside the US, an increasing number of de-SPAC transactions and greater interest from Asia-based sponsors, we expect the use of Cayman, BVI and other offshore companies will continue to increase in relation to Asia-connected SPAC deals.
Why are Cayman and BVI so popular for SPACs and traditional IPOs?
The answer is relatively simple: Both jurisdictions offer political and economic stability, a trusted legal system (with their roots in English law), tax neutrality, speed to market and lower costs whilst continuing to align with international gold standards. Cayman and BVI vehicles have been central to deal flows in China since the late 1980s, are well understood across the rest of Asia (and in the US) and are widely accepted by global exchanges, institutional and private investors, lenders, rating agencies, underwriters and regulators.
Some particular features of Cayman and BVI company law which make such jurisdictions well suited to SPACs and traditional IPOs include:
Laws are progressive and allow Cayman and BVI companies to tailor their articles of association to cater to sponsors' needs and to the listing rule requirements of the relevant exchange. For example, a company may in its articles implement certain provisions to allow for the issue of warrants and different classes of shares suitable to the SPAC model, regulate a SPAC's entry into a de-SPAC transaction, cater for defensive takeover tactics such as 'staggered boards' and 'poison pills', allow for weighted voting rights and/or provide for additional shareholder protections. Cayman and BVI companies may have unrestricted objects in their articles, which is crucial for SPACs with broad investment mandates.
Mergers, takeovers and migrations
Both Cayman and BVI have straightforward statutory merger regimes modelled on Delaware law, which are familiar to US lawyers and conducive to de-SPAC transactions.
In both jurisdictions, there is no takeover code or legislation applicable to listed companies (unless that company is regulated in the BVI or Cayman or, in the case of a Cayman company, it is listed on the Cayman Stock Exchange), nor are there any statutory prohibitions on financial assistance or restrictions in respect of defensive mechanisms which the board of directors could utilise in respect of actual or potential takeover or merger offers, subject to their usual fiduciary duties.
It is also possible to migrate Cayman and BVI companies to other jurisdictions and vice versa without triggering a disposal of assets or requiring a novation of liabilities.
These features offer flexibility and creative solutions to any pre-IPO restructuring and/or acquisition, outside of a typical share swap. They are also particularly ideal for SPACs as they offer a quicker, lower cost and simplified process when it comes to the acquisition of target companies.
Geopolitical developments between the US and China, heightened regulatory scrutiny of US-listed Chinese businesses by US regulators and potentially higher trading multiples upon a re-listing in China (or Hong Kong SAR) are key drivers for the recent spate of "take-private" transactions of Cayman and BVI companies by way of schemes, tender offers and statutory mergers.
There is no need to register or file a prospectus for companies making public offers outside Cayman or the BVI. The issuer may therefore focus on the listing rule requirements of the relevant exchange, without the need to consider any additional "layer" of Cayman or BVI law requirements. Equally, there is no need to obtain the approval of any regulatory authority in either Cayman or BVI in respect of the issue or transfer of shares (or depositary receipts).
Dividends and distributions
Cayman and BVI have flexible capital maintenance rules allowing distributions to be made, and shares to be redeemed and repurchased from, a wide range of sources provided there are no restrictions in the company's memorandum or articles of association (and subject to the company meeting applicable solvency criteria).
No directors or officers are required to be resident in Cayman or BVI.
If structured properly, a Cayman or BVI company listed on a US exchange may be eligible to qualify as a "foreign private issuer" allowing it to take advantage of reduced disclosure and reporting requirements, certain exemptions from US proxy rules and the ability to apply certain "home country" standards in respect of key corporate governance practices.
Although interest in SPACs now rivals the traditional IPO in popularity, we continue to see a steady flow of traditional IPO work for Chinese (and Southeast Asian tech) businesses using offshore structures to make their public debut, particularly on the STAR Market, Nasdaq and NYSE.
There is some speculation about whether SPAC IPOs will make a comeback in the US. Indeed, the SPAC frenzy witnessed throughout 2020 and Q1 2021 has recently tapered off as a result of the SEC's increased scrutiny of, and guidance issued to, SPACs in April this year. However, Asian sponsors and potential target companies in the region remain bullish on SPACs.
It remains to be seen which Asian exchange will become the region's go-to for SPACs and whether Asia will be the next to see the SPAC boom. What is certain is that Cayman and BVI will continue to remain central to global capital and M&A markets as more Asia based SPACs are launched and large numbers of existing cashed-up SPACs race to identify merger targets. If 2020 was the year of the SPAC, 2021 may well prove to be the year of the de-SPAC.
Carey Olsen's global corporate team is one of the largest and most widely recognised in the offshore world, advising on all aspects of corporate law including SPACs and traditional IPOs, mergers and acquisitions (including de-SPAC transactions), joint ventures, corporate restructurings and listings of both debt and equity securities on internationally recognised stock exchanges.
Our full service Singapore and Hong Kong offices supply Asia-based clients with Mandarin and Bahasa language capability and on-the-ground legal advice on the laws of Bermuda, the BVI, the Cayman Islands and Jersey.
The corporate team at Carey Olsen Singapore have advised a number of Chinese/Asian clients and underwriters in connection with IPOs of offshore companies on the STAR Market and on US and Asia-Pacific stock exchanges.
An original version of this article was published by China Business Law Journal, June 2021.
© Carey Olsen 2021.