The Hong Kong Stock Exchange concluded its consultation to create a listing regime for special purpose acquisition companies in Hong Kong. The approved new listing regime will come into effect on January 1, 2022 with certain amendments to the original proposals.
The Hong Kong Stock Exchange (HKEx) will implement the proposals as set out in its Consultation Paper subject to certain amendments. Key amendments to the Consultation Paper are discussed below. A LawFlash published in September 2021 details the key features of the Hong Kong SPAC listing regime proposed by the HKEx and adopted by the HKEx.
The HKEx acknowledges that the minimum requirement for 30 institutional professional investors at a SPAC’s initial listing may not be commercially viable for some SPACs. The HKEx has decided to lower the threshold to 20 institutional professional investors. A SPAC will still be required to (1) distribute at least 75% of the securities it issues for its initial listing to institutional professional investors, and (2) distribute the securities it issues for its initial listing to a minimum of 75 professional investors overall.
The HKEx will impose a licensing requirement on SPAC Promoters. Under the new SPAC listing regime, at least one of the SPAC Promoters must be a firm holding a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license issued by the Securities and Futures Commission (SFC). In addition, the licensed SPAC Promoter must be interested at least 10% of the Promoter Shares. Taking into account that there may be high-quality SPAC Promoters who have substantial overseas SPAC experience and who hold similar overseas accreditation but are not licensed by the SFC, the HKEx will consider waiving the SFC licensing requirement on a case-by-case basis if the SPAC Promoter has overseas accreditation issued by the relevant regulatory authority that the HKEx considers to be equivalent to Type 6 and/or Type 9 licenses.
The HKEx requires an adequate representation of SFC-licensed individuals on the board of a SPAC and that there must be at least two Type 6 or Type 9 SFC-licensed individuals (including one director representing the licensed SPAC Promoter). The role served by these directors on the board is not restricted, subject to compliance with the applicable Listing Rules (including the independence requirements applicable to a director appointed as an independent non-executive director). The requirement seeks to ensure that the SPAC Promoter’s directors are senior management of the relevant SPAC Promoter, and have fiduciary duties of skill, case, and diligence to SPAC investors and the SPAC as a whole.
Under the Hong Kong SPAC listing regime, the SPAC shareholders will be able to redeem their shares irrespective of how they cast their vote on a de-SPAC transaction. In return, the HKEx decided to strengthen the requirements for independent PIPE investments to support the valuation of the De-SPAC target and the level of investor interest in the successor company. All PIPE investors must be Professional Investors (as defined under Section 1, Part 1 of Schedule 1 to the Securities and Futures Ordinance—Chapter 571 of the Laws of Hong Kong).
In addition, a SPAC will be required to raise the following amounts from independent PIPE investors, aimed to cater for de-SPAC targets of different sizes.
|
Negotiated De-SPAC value |
Minimum Percentage of Independent PIPE Investment |
|
Below 2 billion Hong Kong dollars ($256 million) |
25% |
|
2 billion Hong Kong dollars ($256 million) or more, and less than 5 billion Hong Kong dollars ($641 million) |
15% |
|
5 billion Hong Kong dollars ($641 million) or more and less than 7 billion Hong Kong dollars ($897 million) |
10% |
|
7 billion Hong Kong dollars ($897 million) or more |
7.5% |
The HKEx requires that at least 50% of the independent PIPE investment must come from at least three sophisticated investors, each being an asset management firm with assets under management of at least 8 billion Hong Kong dollars ($1.02 billion) or a fund of a fund size of at least 8 billion Hong Kong dollars. A fund managed by a fund manager that has assets under management of at least 8 billion Hong Kong dollars would qualify as a sophisticated investor for this purpose. This is to ensure that a substantial portion of independent PIPE investment originates from large institutional investors.
The HKEx has decided to adopt a warrant cap of 50% of the number of shares in issue at the time such warrants are issued, which aims to limit dilution and provide sufficient commercial incentive for potential investors in a SPAC’s initial listing. Any promoter shares will be included in the denominator for the purpose of this calculation.
In addition, the HKEx requires that (1) new investors in a successor company must be fully informed of this dilution prior to their investment, and (2) the minimum exercise price of the SPAC warrants and promoter warrants must be at a price that represents at least a 15% premium to the issue price of the SPAC shares.
A SPAC is permitted to issue earn-out rights to SPAC Promoters that are convertible into ordinary shares of the successor company, provided that the successor company meets the pre-defined performance targets. As SPAC Promoters may not be involved in the management and operation of the successor company, it may have no influence on the successor company’s business performance.
The share price is allowed to be used as a performance target for the earn-out rights, as long as those share price performance targets are (1) at least 20% higher than the issue price of the SPAC shares at listing of the SPAC; and (2) satisfied by exceeding a pre-defined volume weighted average price of the successor company’s shares over a period of no less than 20 trading days within a 30 consecutive trading day period (with such period commencing at least six months after the listing of the successor company). A SPAC Promoter must not be granted the right to the earn-out rights through the issuance of promoter shares at the time of the SPAC’s initial listing.
As expected, the market embraces and supports much of the proposal by the HKEx, and with the amendments, the Hong Kong SPAC listing regime creates another route for quality Chinese, Asian, and international companies to list in Hong Kong. This is generally a welcomed move to ensure that Hong Kong continues to maintain its world-leading position as an international financial center with diversified offerings.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Hong Kong
Billy Wong
Ning Zhang