London Calling? – Government Proposes Corporate Re-Domiciliation to the UK

• 8 December 2021
• News

The UK government announced in its Autumn Budget that it is considering putting in place a new regime to allow overseas-incorporated companies to re-domicile to the UK and has published a consultation to this effect (the “Consultation“). If the plans go ahead, foreign companies will be able to change their place of incorporation to the UK while retaining their legal identity. The intention is to “strengthen the UK’s position as a global business hub” by bringing the UK into line with various other jurisdictions, such as Canada, Singapore and Australia, which already permit re-domiciliation.

Why allow corporate re-domiciliation?

Currently, the UK does not allow corporate re-domiciliation and any overseas business which wishes to have a UK entity must incorporate a UK entity from scratch and amalgamate it into its group structure. This can be costly and time-consuming and is likely to have significant tax consequences, although a simpler strategy of moving the tax residence of the non-UK entity could be adopted – if the desired commercial benefit can be achieved by this stratagem.

The new regime would allow a foreign body corporate to relocate and change its place of incorporation to the UK, so maintaining operational continuity and, according to the Consultation, in general being able to retain its “corporate history, management structure, assets, intellectual and other property rights, contracts, and regulatory approvals”. As would be expected, any entity which re-domiciles to the UK would need to comply with UK legislation, regulations and corporate governance standards in the same way as any other UK-incorporated entity. One cannot help but draw comparisons with the European Court of Justice’s (the “ECJ“) decision in the 2012 VALE case in which an Italian established company sought to convert to a Hungarian established company. Italian law permitted such a conversion, but Hungarian law only allowed Hungarian established companies to convert. The ECJ held that provided that an EU member state (the “Recipient“) had a conversion procedure in place, it could not prevent a company established in another member state from converting into a Recipient company. The proposed UK re-domiciliation regime will essentially be the UK’s conversion procedure albeit with no limitation being placed on the origins of the converting company.

There is, at present, no suggestion that re-domiciliation between the UK nations, e.g. from England and Wales to Scotland, will be a possibility.

Prior to our leaving the EU, similar regimes were available in the UK in the form of European Companies (Societas Europaea) (“SE“) and pursuant to the EU Cross-Border Merger Directive (the “CBMD“):

• An SE is a European public limited company and can be incorporated in any EU member state. The idea behind SEs is that businesses with entities across several EU member states can be unified and that transfer across member states is easier, with no requirement to incorporate a new legal entity in the transferee state.
• The intention behind the CBMD was to simplify the merging of companies across EU member states. The UK does not have a merger regime (instead companies seeking to “merge” have to transfer the shares or assets and business from the transferor company to the transferee company following which the transferor company can be wound up), but this regime enabled UK companies to merge with companies from different EU member states using a far more straightforward process.

Since the end of the Brexit transition period, neither of these options are now available within the UK (whether a company wishes to transfer into or out of the jurisdiction). The newly proposed UK corporate re-domiciliation regime arguably seeks to achieve a similar outcome on a global scale.

What does the Consultation cover?

The Consultation seeks respondents’ views on the advantages of, and demands for, such a re-domiciliation regime, the eligibility criteria for foreign entities to re-domicile (including solvency requirements) and the tax consequences of establishing such a regime.

The Consultation also requests opinions on an outward re-domiciliation regime whereby UK-incorporated companies could relocate to other jurisdictions. Although several jurisdictions allow this two-way relocation, other countries, such as Singapore, only permit an inward move. Arguably, preventing a company from re-domiciling out of the country at a later date may deter foreign companies from re-domiciling to the UK in the first place, although if it is decided that outward re-domiciliation will be permitted, care will need to be taken to ensure that re-domiciliation cannot be used for short-term gains. To this end, the Consultation asks for thoughts around an exit fee, shareholder approval requirements and settlement of any payments, disputes and overdue obligations. In addition, putting in place a minimum period of time before which an entity which has chosen to leave the UK could re-domicile back again is a distinct possibility.

Will there be conditions to re-domicile?

The Consultation seeks views on certain eligibility criteria which the government is proposing before an entity can re-domicile to the UK but makes clear that an economic substance test is not on the cards.

• Any body corporate will be able to use the new regime as long as there is a comparable form in the UK, its country of incorporation allows it to re-domicile and it complies with the necessary legal requirements to transfer. There will be no sector or industry restrictions.
• The directors of the body corporate will need to satisfy good standing conditions and not be subject to any legal or enforcement action against them.
• Re-domiciliation of the entity must not pose any national security risk or be contrary to public interest.
• The body corporate must have passed its first financial period, be solvent and able to provide certain documentation, including a report setting out the legal and economic effects of the transfer and any implications for its shareholders, creditors and key stakeholders.

Considerations for directors

Directors will need to consider the pull factors carefully, i.e. why do they need the company to be treated as being domiciled in the UK (does that mean that specific grants or tax reliefs may be accessed)? Instead, could the same result be achieved by simply moving the tax residency to the UK by appointing new UK directors and thus ensuring that central management and control (“CMC“) is in the UK? UK tax groups with their tax advantageous treatment typically do not look to the domicile of the company in determining membership of the group.

Moving the domicile to the UK is often likely to be accompanied by a change in CMC and local advice will be needed as to whether these factors will mean an exit or other tax charge in the other jurisdiction.

As ever, directors will need to weigh-up a number of perhaps competing factors when taking such a strategic decision.

Will the regime have any significant effect?

Although it’s far too early to say whether permitting re-domiciliation will have any appreciable effect on the UK’s economy and standing in the global market, such a regime will certainly need a carefully balanced application process. Maintaining the world’s trust and faith in the UK’s corporate and business sectors is paramount but could result in unwieldy and over-burdensome procedural requirements which negate the potential advantages of having such a regime in place.

As at 8 November 2021, there were 3,420 established SEs, suggesting that such a system does find advocates and is appreciated by certain businesses. That said, as at December 2015, the vast majority of SEs were registered in the Czech Republic. Recent figures are difficult to come by, but it shows that certain jurisdictions may be more inclined to utilise the regime than others.

UK take-up of the CBMD also shows significant use with 108 cross-border mergers involving a UK company announced in the year 1 November 2017 to 31 October 2018 (albeit that this was at the time when we were still unsure whether the regime would continue to be effective after 29 March 2019, when the UK was originally set to leave the EU). In the preceding year, this figure was 77.

SEs and cross-border mergers aside, other jurisdictions seem to have effected a workable process although admittedly it is difficult to find evidence or statistics as to how many entities take advantage of such regimes and actually re-locate to those countries. It will certainly be interesting to see the business world’s view once all responses to the Consultation have been received and then how the government chooses to proceed.

If you wish to read the Consultation in full or take part in the Consultation, it can be found here. Responses must be received by 7 January 2022.

Disclaimer

This note reflects our opinion and views as of 25 November 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Real Estate and The National Security and Investment Act 2021

• 11 October 2021
• News

At first blush, one could be forgiven for assuming that the National Security and Investment Act 2021 (the “Act“) would only apply to obviously “dodgy dealings” and “suspect individuals”. However, for anyone who has read our summary of the National Security and Investment Bill or our update following its receiving Royal Assent, it will be clear that the new regime will be far more wide-ranging, potentially catching a plethora of transactions and the parties involved. One sector which could be particularly affected in more ways than one is real estate.

What’s the purpose of the Act?

The Act provides the UK government with far-reaching powers to investigate and scrutinise transactions which could have a national security interest. Although “national security interest” has not been defined within the Act or any governmental guidance to date, the risk factors in any transaction have been listed as:

• Target risk
• Acquirer risk
• Control risk (originally the trigger event risk).

Further information about each of these is included here.

Notification regime

Certain transactions will fall within the mandatory notification regime, while others can be notified voluntarily. The government will also have “call-in” powers where it considers that a transaction may have a national security interest. Real estate transactions or transactions involving real estate could fall within any of these options.

Mandatory notification

Notification will be required if a transaction involves a “qualifying entity” which carries on activity in a “sensitive sector” and results in a “trigger event”. Failure to notify will render the transaction void.

The definition of “qualifying entity” is broad and includes companies, partnerships, limited liability partnerships, trusts, other bodies corporate and so on. As such, the mandatory notification regime does not apply to asset (for example, property) transactions per se although if a qualifying entity owns real estate (whether it’s an operating business with premises or a special purpose vehicle formed for the sole purpose of holding a property) then the mandatory notification requirement may kick in.

A “sensitive sector” is any one from a list of 17 sectors set out by the government which comprise: advanced materials, advanced robotics, AI, civil nuclear, communications, computing hardware, critical suppliers to government, cryptographic authentication, data infrastructure, defence, energy, military and dual-use technologies, quantum technologies, satellite and space technologies, suppliers to the emergency services, synthetic biology and transport.

A “trigger event” will occur if the transaction: (a) results in the acquirer’s share ownership or voting rights in the qualifying entity passing certain percentage thresholds, i.e. 25% (where the acquirer held less than 25% pre-completion), 50% (where the acquirer held less than 50% pre-completion) and 75% (where the acquirer held less than 75% pre-completion); or (b) enables the acquirer to pass or block resolutions.

The mandatory notification regime only applies to share acquisitions, not to asset purchases. So, for example, the acquisition of a company which owns a factory in which medical supplies are manufactured may well be caught and a notification will need to be made to the Investment Security Unit (the “ISU“), which sits within the Department for Business, Energy & Industrial Strategy.

Voluntary notification

In cases where a mandatory notification does not apply, businesses or individuals may instead make a voluntary notification if the transaction in question could involve a national security interest and a “trigger event” will occur as a result. In this case, the definition of “trigger event” is wider and applies if the transaction will result, in the case of:

• a qualifying entity, in the acquisition of (i) more than 25% (where the acquirer held less than 25% pre-completion), more than 50% (where the acquirer held less than 50% pre-completion) or more than 75% (where the acquirer held less than 75% pre-completion) of the votes or shares (or enables the acquirer to pass or block resolutions) or (ii) material influence; or
• an asset, in the acquirer being able to (i) use the asset or use it to a greater extent than before the transaction or (ii) direct or control the use of the asset or direct or control its use to a greater extent than before the transaction.

It is clear from the above, and should be remembered, that whereas the mandatory notification regime only applies to share acquisitions, the voluntary notification regime may apply to both share and asset transactions. As such, the acquisition of a property which lies, for example, adjacent to an army base should be voluntarily notified to the ISU.

Government call-in right

The ISU is able to call-in any transaction which completes on or after 12 November 2020 if they consider that it might involve a national security risk. In the case of a transaction which was not notified but which should have been under the mandatory notification regime, this call-in right lasts in perpetuity. A transaction which could have been notified but was not obliged to be, has a five-year post-completion longstop date in which to be called-in. This period is reduced to six months upon the ISU becoming aware of a trigger event.

In determining whether to call-in a transaction, the ISU will consider various factors and has issued a draft statement setting out how it expects to use its call-in powers (the “Statement“). For example, it refers to land located near to a sensitive site as being potentially an issue of concern which may trigger the call-in. This could cause difficulties in practice. Not only will enhanced due diligence be required to cover off the property in question and the surrounding area, query whether parties will be able to determine to any degree whether a site or nearby land is sensitive or not; given that some locations used by the government or the Ministry of Defence are highly confidential and members of the public have no clue about them, it may be extremely difficult to determine whether a voluntary notification should be made. While the purchase of a tower block which partially overlooks Buckingham Palace could be deemed a potential issue, what about the purchase of a residential apartment block next door to the house of a senior Ministry of Defence official?

The phrase “sensitive site” also begs the question of how far up (and down) from the ground does a sensitive site reach? Say a telecommunications company, which has a network of underground cables, some of which run beneath a sensitive site, is acquired. Would this transaction be caught by the Act?

At present, no searches exist to check for sites with a national security interest and so purchasers will need to rely on maps and plans to determine whether there is cause for concern; such checks are hardly bullet-proof. Whether search providers introduce formal national security searches in the future remains to be seen but in any event, until these issues are ironed out (if they ever are ironed out), parties to transactions will be ever more reliant on their legal advisors who will have to consider all these possibilities and conduct a risk assessment in respect of each transaction and the likelihood of it being subject to a call-in notice. In these cases, getting in first with a voluntary notification is likely to be advisable and we may well see a plethora of “on the safe side” voluntary notifications being made in order to get comfort that an acquisition is not of concern.

Does location matter?

In a word, no. If the property is located outside of the UK but is used in connection with activities carried on in the UK or the supply of goods or services to the UK, then it will be caught by the Act. Similarly, a qualifying entity which is located outside of the UK will be caught if it carries on activities in, or supplies goods or services to, the UK.

While on paper this sounds reasonable, query how the ISU will enforce the Act where there is no English law nexus involved. For example, a US company purchases a factory in Germany from its German company owner. The factory manufactures micro-chips for use in weaponry which is supplied to the UK armed forces – at the point where the UK becomes involved, i.e. the supply, there will not have been a “trigger event” and so the Act will not kick in. Instead, the “trigger event”, i.e. the purchase of the factory, will have occurred between the US company and the German company. Although the property is used in connection with the “supply of goods to the UK”, it is difficult to see how the ISU will be able to effect a call-in of an overseas transaction or expect the parties to even be aware of the Act.

Recent government guidance has suggested that the ISU may “require actions to be taken by” the UK entity, in our example, the armed forces (or the entity in the UK which supplies the armed forces), which could include “additional checks” on the overseas supplier. This may come as a surprise to the UK entity who may not be aware that any “trigger event” has occurred between overseas parties and also to the overseas parties themselves who might not anticipate potential supply issues, particularly if they have no knowledge of the Act.

What orders can the ISU make?

The Act provides the ISU with wide-ranging powers in terms of the information they can request, the orders they can give while an investigation is ongoing, the outcome of any investigation and penalties if orders or the Act are not complied with.

Following completion of any investigation, the transaction may be approved, approved subject to conditions or prohibited from taking place. If the transaction has already completed, the ISU could order it to be unwound although query how this will happen in practice.

Pause for thought

Are you involved in the acquisition of an entity which owns property? Is that entity involved in one of the 17 core sectors or activities which could result in a national security risk? Are you considering a real estate transaction? Could security be enforced over real estate? Could there be a national security interest in respect of the transaction? Is there a sensitive site within the surrounding area? Who will acquire the entity or the land? What is the property’s intended use? Could the Act affect the real estate value? These are now all questions which need to be considered sooner rather than later in any acquisition process. In the main, they will be easily dismissed and the transaction can continue but if there is any possibility that the new national security and investment regime will apply, the appropriate steps will need to be taken.

We’ve already mentioned that the Act may well result in enhanced due diligence in respect of any real estate being acquired and neighbouring property, but investigation into the acquirer and intended use of the property will also become more critical. This is likely to increase costs and lengthen the transaction timetable. Parties to a transaction, in particular banks, may also insist on notification to the ISU or request additional conditions and so it will be important to discuss this with them at the earliest opportunity.

Going forwards, communication will be key and having those conversations with your agents and legal advisors as soon as possible will be of benefit in the long run.

The Statement may provide that “the Secretary of State expects to call in acquisitions of assets rarely and significantly less frequently than acquisitions of entities”, but for the real estate industry, the new regime can, and will, still bite and should not be dismissed lightly.

Key dates

• 12 November 2020 – any transaction that completes on or after this date could be caught by the new regime
• 29 April 2021 – Royal Assent to the Act received
• Late 2021 – further governmental guidance and regulations expected
• 4 January 2022 – commencement of the new regime.

Disclaimer

This note reflects our opinion and views as of 6 October 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

The implications of a “Golden Share” in football

• 11 October 2021
• News

When Tracey Crouch MP published her report on the “fan led” review of football, I was taken by the reference (see page 4) to the intention to “develop proposals…to offer greater protection…through a ‘golden share’ for fans, giving veto powers over reserved items, to be held by a democratic legally constituted fan group”.

This article was picked up and published in full by Law in Sport and can be read here: What Is A ‘Golden Share’ In A Football Club & Should Fans Have One?.

When this was followed up by both Oliver Dowden MP visiting my football club (Brentford FC) and his successor Nadine Dorries MP referencing Brentford’s ‘golden share’, I thought – as the lawyer who advised the Brentford Supporters’ Trust on the implementation of its ‘golden share’ (or BU Special Share as that particular one is known) – that it would be worthwhile reflecting on the key points to consider in relation to such a share.

What is a ‘Golden Share’?

It’s a basic legal principle, well known to corporate lawyers, that a share is just a bundle of rights the benefit of which is held by the holder of such share. So, for this purpose, a ‘Golden Share’ is simply another share (albeit designated as a ‘Golden Share’) which is issued by a company to which certain rights as set out in the company’s articles of association attach.

Tracey Crouch MP, in her report, obviously envisages that football clubs will issue a new share (this ‘Golden Share’) to supporters’ groups. In many cases (including Brentford’s) this will be the club’s existing supporters’ trust which will thereby become the effective custodian of the ‘Golden Share’ and the rights attaching to it.

Why have a ‘Golden Share’?

Looking at Tracey Crouch MP’s report it’s clear that her focus is protecting the ownership of a club’s stadium, badge, location and colours. A ‘Golden Share’ could be used to give veto rights to a club’s supporters to protect all of these matters and so enable fans to protect their club’s heritage.

To my mind, the main benefit of a ‘Golden Share’ is that it provides fans with a say over, what is to them, some of the most important aspects of their club without an existing owner (who has invested a considerable amount in the club) having to give away valuable shares or otherwise asking fans to raise the funds to buy shares from an owner; at the top end of the football club pyramid, such shares will almost certainly be beyond most fans’ means and who’s to say whether an owner would be willing to sell in any event?

‘Golden Share’ considerations

From a purely legal perspective, creating a new class of shares and calling it a ‘Golden Share’ will be a relatively straightforward process for most companies (with a bit more complexity added in if the company is listed) but, based on my experience, there are several key considerations beyond merely creating a new share class:

• Which entity should hold the ‘Golden Share’? As mentioned above, for many clubs this may be easily addressed by using an existing supporters’ trust, but if there isn’t one then consideration would need to be given to setting one up or using some other entity to hold the share so that ownership can continue on a long-term basis via that entity. The upside as I see it is that this is an opportunity for clubs, if used correctly, to gain some real additional engagement with their fans by making the supporters’ trust clearly relevant to the club and involved in its long-term future.
• Which veto rights will be granted to the fans? As I’ve already touched on, Tracey Crouch MP talks about the stadium, club badges, location and colours but it’s crucial that, whichever rights are under consideration, they are defined and drafted precisely, so that it’s clear what is restricted, how the veto will work in practice and what happens in the event of a disagreement. In the case of Brentford, the ‘BU Special Share’ covers a veto over moving the ground unless a successor location, with a certain amount of seating and facilities at least as good as those we currently have, is found in one of the three surrounding boroughs. Any proposal to move the ground has to be put to the Brentford Supporters’ Trust which has the right to veto the move if it doesn’t comply with the specified criteria. In the event of a dispute as to whether the criteria is met then the decision will go to an independent binding arbitration panel to determine.
• What other rights could be granted to fans in relation to a club? This answer is really down to whatever the imagination can create. A ‘Golden Share’ could include a right to appoint a director to the board, a right to certain financial information to be shared, a seat on the Audit or Risk Committees, a specific fan engagement role and so on. While the ‘fan led’ review focuses on heritage assets, such as club name and colours, it’s conceivable that a ‘Golden Share’ could include any other rights and benefits for fans that the existing shareholders are prepared to accept.
• Should all aspects have the same veto rights? Some may consider that certain issues are more important to protect than others, for example, the stadium could be said to trump the club badge or colours, although many fans would consider each of these to be equally important. This lends itself to the question of whether the ‘Golden Share’ should provide differing levels of votes to veto certain actions. In the case of Brentford, only a veto over the stadium was included so that was relatively easy to address. The challenge might come in circumstances where (and I realise this will be heresy to many fans) a major company offers a huge sum of money to a club owner to, say, change the club’s nickname; it will be difficult to navigate the balance between protecting the club’s heritage, with fans having polar opposite views (some may be happy with a change if it means financial salvation or stability while some may never wish such a change to happen) and the ability for the change to be blocked against having to rely on the owner to fund the club without this financial backing.
• How will the fans use the power of veto? If a supporters’ trust is used then the veto right may be vested in the hands of the trust’s board (who are elected by the fans on a regular basis), or it may be that the supporters’ trust is the vehicle (as is the case with Brentford) which canvasses its members as to whether the veto should be used. This will take some thought to ensure that the process allows fans to have their vote and that any time periods for vetoing a decision allow for meetings to be called and votes to be cast and counted.
• Specific legislation for insolvency? Will there be a need for specific legislation to protect fans and clubs in the event of insolvency? While a ‘Golden Share’ grants rights over a company, if that company’s assets are sold then the share will end with that sale and there will be little that the fans can do about it, so I wonder if the government (or the football authorities) might need additional legislation or rules to bind a successor company or its owners.

Conclusion

As a Brentford fan I’m very proud that our owner voluntarily offered up a veto right over the sale of the stadium to the supporters’ group, to show his commitment to the club and its history (it’s well documented that he’s a fan himself); once again Brentford has seemingly led the way in its approach to football (ok – I’m a bit biased here). From a professional perspective too, as the lawyer who advised the Brentford Supporters’ Trust on the implementation of the “BU Special Share”, I’m intrigued to see how the proposals of Tracey Crouch MP are developed in relation to some of the above points and the other issues that will inevitably arise from the imposition on football club owners of a ‘Special Share’ regime.

Of course, there’s nothing to stop any football club owner implementing their own ‘Golden Share’ structure whenever they like and while I’m aware that the likes of Exeter (ownership of the club) and Wycombe (board seat) are engaged with fans at this sort of level, the Brentford ‘model’ (like the club’s on-pitch success) remains a rarity (if not a one-off, at least for now).

Stuart Hatcher is a Partner in our Corporate team.

Disclaimer

This note reflects our opinion and views as of 6 October 2021 (other than in relation to the support of Brentford FC which is definitely Stuart’s own opinion) and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Stuart Hatcher speaks to the Independent: Chelsea’s new owners could ‘set the tone’ by granting fans golden share

Corporate Partner, Stuart Hatcher, has spoken to the Independent about Brentford’s golden share deal, which he drew up in 2012, and how he believes Chelsea’s new bosses should look to do something similar.

From Draftsmen to the Statute Books – The National Security and Investment Act 2021

• 10 May 2021
• News

The National Security and Investment Act 2021 (the “NSI Act”) received Royal Assent on 29 April 2021 but apart from a new piece of legislation appearing in the statute books, it doesn’t appear that much has changed, at least in the short-term. Our summary of the National Security and Investment Bill still stands, save for the amendments set out here.

How has the NSI Act changed from the Bill?

Despite engagement with several organisations, including the Law Society and the Institute of Chartered Accountants in England and Wales, concerning the drafting the of the National Security and Investment Bill (the “Bill”), few amendments were made during the Bill’s passage through Parliament.

The predominant change was to the shareholding and voting thresholds which would constitute a “trigger event”. The Bill provided that notification (whether mandatory or voluntary) and the government’s ability to “call-in” a transaction would apply if the transaction resulted in the acquirer holding a minimum of 15% of the votes or shares in the target entity. This is no longer the case and instead, the transaction must result in the acquirer holding above 25%. That said, voluntary notification and the “call-in” right may kick in where “material influence” has been acquired regardless of the number of shares or votes held.

Is the new regime under the NSI Act now fully operational?

No. In order for the new regime to become fully operational, various pieces of secondary legislation are required. Although the NSI Act enables these to be put in place, the government is not expecting the regulations to be finalised for the next few months; the latter part of this year is being eyed as the target date.

Will more guidance be provided?

Yes, the government intends to provide further guidance in relation to the regime in due course. Some guidance has already been provided in the government’s Statement of policy intent (last updated 2 March 2021) and we can expect to see more being published during the summer. The government also intends to “work closely with investors and businesses…to ensure they understand what is new”; something which will, no doubt, be welcomed by advisors, investors and businesses alike.

Should I be doing anything in the meantime?

Remember to consider transactions that you have entered into since November 2020 and any that you are currently considering or negotiating. Notification may be advisable if there is a chance that they could fall within the new regime.

We are more than happy to discuss this further with you or to assist with the notification process. Please contact a member of our Corporate team to chat about it further.

In the meantime, “watch this space” really does seem to be the most appropriate catchphrase…

Stuart Hatcher is a Partner and Lianne Baker is a Knowledge Development Lawyer in the Corporate team.

Disclaimer

This note reflects our opinion and views as of 10 May 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Is there space in the stack for a SPAC?

• 17 March 2021
• News

Special purpose acquisition companies (SPACs) have been around for a while and although they may have “historically been viewed as a bit shady” (Axios correspondent Felix Salmon), 2020 seemed to have been (at least for them) a good year, with SPACs (particularly in the US) being increasingly used as a means for established private companies to access capital markets and go public.

So, what are SPACs?

Simply put a SPAC is a company that is formed to raise investment capital through an initial public offering (IPO) in order for them to acquire an existing operating company. Often referred to as “blank cheque” companies, a SPAC is created to raise funds through an IPO, with the capital then being held in a trust until a predetermined period elapses or the desired acquisition is made. If the acquisition is not made within a certain period (usually two years), the SPAC has to return the funds to the investors.

The re-invention of the SPAC?

Over the past 12 months, SPACs seem to have re-found favour as sponsors have identified them as an option in their investment armoury. According to Dealogic, 256 SPACs were listed last year, compared to just 73 in 2019, while a recent New York Times article has reported that in the US $42.7 billion was raised by SPACs during January and the first half of February 2021 alone, with many sports personalities, celebrities and well-known investors becoming involved.

Despite the hype surrounding them, SPACs are relatively straightforward structures to create and to understand, with the sponsor merely needing to create a company, undertake the requisite filings that go with the incorporation of a public company and then find investors to buy units in the company. Investors generally acquire a unit that represents one share in the company, along with a warrant that gives them the ability to buy more shares in the future. The attraction for the sponsor is that they usually retain a 20% stake in the SPAC, which can be considered “founder shares.”

The funds raised are put in to trust and are then able to be used only for an acquisition. The SPAC, having now gone public, trades like any other publicly traded company. Retail investors can purchase shares on the open market, even though the actual acquisition is not known (although the sponsor will generally give an indication of the market they are looking to target for an acquisition).

The position closer to home?

While the US market has boomed over recent months, the London market appears to be somewhat lagging. However, in a post-Brexit UK investment publicity drive, the UK Government has shown its eagerness to promote London as a SPAC investment centre with a review of the UK’s listing regime by Lord Hill specifically recommending changes in relation to SPACs to encourage their use.

Currently, trading in a SPAC’s shares is suspended once a target has been found in order to protect investors from price fluctuations. Lord Hill’s report recommends that this should no longer apply and that instead, stakeholders should be given increased rights to find out more about the proposed transaction, sanction the acquisition and redeem their shares. In addition, the report suggests the introduction of dual-class share ownership for a minimum of five years. This would potentially allow SPAC founders to retain a greater level of control for a certain period.

Given that the changes are unlikely to be introduced until much later this year, whether they are enough to increase SPAC activity in the UK will be interesting to see and may well depend largely on the media publicity surrounding SPACs.

The benefits of a SPAC?

The key benefit of a SPAC is that it is already public at the point of its acquisition. Provided that the sponsor finds a target company for it to acquire within the relevant time frame, the mechanism simplifies the process for a private company to go public with only an acquisition being required, rather than a listing.

From the point of view of the private company, not only is the process considered to be an easier way to go public, but it allows access to capital markets and the acquisition creates more certainty as to what funds will come in to the company and shareholders, as opposed to their being at the mercy and vagaries of the underwriters and market makers while trying to get the IPO away.

Shareholders in the SPAC are presented with the terms of the acquisition of the target company and then vote on the acquisition. If the shareholders don’t like the terms they have the power to vote against the acquisition, but if it proceeds they have the option to sell their shares while being able to keep their warrants, so can still benefit from an upside.

Some corporates are also looking at SPACs as a way to buy businesses they might not otherwise be able to afford from their own resources, i.e. by creating their own SPACs to look at possible acquisitions.

Advocates of SPACs claim that they make it easier for private companies to go public, with some describing them as “venture at scale” and some consider them to be an essential tool and option for private companies wanting to buck the trend of staying private for longer and raising money from alternative sources, such as sovereign wealth funds.

And the downside?

Critics of SPACs point to the fact that during 2020, SPACs gave poor returns on investments (although whether this is a trend or just short term will remain to be seen) and that sponsors are in it for their own ends without any regard or fairness for the public investors. According to figures by JP Morgan Chase, while sponsors have achieved an average return of 648% over the past two years, post-acquisition investors earned considerably less than that, with returns of just 44% (albeit some commentators may say that a 44% return in the current market given interest rates, for example, is still an attractive return). Others raise concerns that the business model incentivises doing something – anything – with other people’s money as opposed to making a true strategic assessment of opportunities, particularly if the clock is ticking before funds have to be returned.

Equally, the growth in the SPAC market could be its own challenge – with around 250 SPACs created over the past year, could this lead to parties chasing deals, overcrowding the market and overpaying for companies?

There is also a concern that some companies that would not be suitable for an IPO, or that would benefit from the rigour of an IPO process, could end up becoming public companies via the SPAC route when they would otherwise not persuade the market to take them on? (It will be interesting, for example, to see the fallout from the allegations surrounding one of the high-profile SPAC investments, Nikola Corporation, and whether that dampens SPAC enthusiasm).

Is increased “fairness” the answer?

Could the increased publicity surrounding SPACs and the competition element pave the way for some SPACs to offer “fairer” options for their public investors? A number seem to be taking this step, including:

• Tying up sponsor shares for a certain period
• Smaller sponsor stake
• Correlating the sponsor stake with performance post-acquisition

It may be that in order for SPACs to continue to garner investor support and flourish as an investment tool, changes to their structure along these lines are inevitable and the market will, as it usually does, find its own balance in time.

Conclusion

Possibly the way to look at SPACs is the way one should look at most investment vehicles. None are perfect, some will suit certain types of investment and companies better than others and some will be more suited to professional investors rather than retail investors. On this basis, perhaps, for the right investment, there is space in the capital stack for SPACS to be a useful investment vehicle and option for some companies.

Stuart Hatcher is a Partner, Tasneem-Zohura Alom is an Associate and Lianne Baker is a Knowledge Development Lawyer in the Corporate team.

Disclaimer

This note reflects our opinion and views as of 17 March 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Distributions: At what price?

• 24 June 2020
• News

With businesses and companies trying to return to normal economic life and activity, I consider in this piece some matters that companies may be overlooking when making distributions and in their intra-group transactions.

It is well known that section 829 of the Companies Act 2006 (“CA 2006“) defines a distribution as “every description of distribution of a company’s assets to its members, whether in cash or otherwise”. This clearly captures dividend payments to shareholders but also means, as was established long ago in Aveling Barford v Perion Ltd, that a transfer to a sister company within a group can be a distribution if it is at an undervalue.

If I consider the position relating to cash dividends, it is clear (sections 836 to 839 CA 2006) that directors must have regard to “relevant accounts” which would be the last annual accounts, other than where those accounts do not show distributable profits. If the last annual accounts do not show sufficient reserves then interim accounts must be prepared to identify whether sufficient reserves exist to make the payment. My concern at this time is whether directors are giving proper regard as to whether there should be an impairment since the last accounts date or (if preparing) included in the interim accounts; it might be considered that it is a brave director who thinks their group or the assets they hold have the same value post-lockdown.

Similarly, as many companies look to re-organise their existing groups for perfectly valid reasons (prepare for divestment of non-core assets for example), in transferring shares in subsidiaries or assets intra-group for that purpose, the principles of section 845 CA 2006 and Aveling Barford are more pertinent than ever. Trying to put it simply, if subsidiaries or assets are being transferred at book value then scrutiny as to whether that book value is the market value of the asset is critical. If the book value is not the market value (and this is where my concern comes in as to whether directors have their mind to this, particular as it is often thought of being “only intra-group”) then the company making the transfer will need positive reserves as the transfer will be considered a distribution. If the market value is less than the book value then consideration of the reserves position is even more critical.

This is particularly important for directors as if they make a distribution in breach of the provisions of the CA 2006 they may be personally liable to repay the company for loss if they know or ought to have known that it was not a lawful distribution. I would think it might be hard for directors to argue they didn’t know it was not lawful if they have not considered impairments or the values at which they are transferring assets. Additionally, if profits weren’t available to match the distribution, the distribution itself could be unlawful and any shareholder who knows or has reasonable grounds to believe a distribution is in breach of the provisions of the CA 2006 is liable to repay the distribution (or if a non-cash dividend in specie then to pay the amount equal to the value of the distribution). This is a real double whammy as not only could directors end up personally liable but the transaction could also be unwound.

So, I raise this as a reminder to directors that although their focus may well be on the business and the underlying dynamics and metrics of trading through these difficult times, they should not think that the CA 2006 does not apply and won’t be looked at in future diligence or by other interested third parties, including HMRC.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.