On 18 March 2023, Law 6/2023 of 17 March on Securities Markets and Investment Services was published in the Official State Gazette. This new Law brings with it many relevant new developments in our securities market; however, in this article I will focus exclusively on the regulation of the so-called Spanish Special Purpose Acquisition Companies (SPACs).
1.- The new Securities Markets Law
The regulation of the Spanish SPACs, introduced by the new Law, is the first Spanish regulation of this type of company, which has been very popular for many years in other countries such as the USA. Of course, I welcome this regulatory initiative, which our market has been calling for for some years now, but in my opinion, as we shall see, it does not answer many of the questions that many specialists have raised since the Draft Bill of the Securities Market Law.
The mechanism used for regulation has been, by means of Final Provision six of this Law, to add a new Chapter to Title XIV of the Capital Companies Act. Specifically, Chapter VIII bis has been introduced, entitled “Specialities of Listed Companies with Acquisition Purposes” and comprising articles 535 bis to 535 quinquies.
2.- The Spanish SPACs
2.1.- Listed company for takeover purposes
Section 1 of the first article defines what a Listed Company for Acquisition Purposes is and specifically states:
“… a company that is incorporated for the purpose of acquiring all or a stake in the capital of another listed or unlisted company or companies, whether directly or indirectly, by way of sale or purchase, merger, spin-off, non-monetary contribution, global transfer of assets and liabilities or other similar operations, and whose only activities up to that time are the initial public offering of securities, the application for admission to trading and those leading to the acquisition which, if appropriate, is approved by the General Meeting of shareholders”.
The definition given has remained unchanged since the Preliminary Draft of the Law, as expected, without any particularity. On this point, I would like to highlight the non-existence of a minimum acquisition percentage, i.e. the SPAC may acquire 100% or 1% of the share capital of another company.
Section 2 of Article 535 bis establishes the obligation that “the funds obtained in the public offer of securities shall be immobilised in an account opened in a credit institution in the name of the listed company for the purpose of the acquisition”. In this section which, a priori, does not pose much difficulty or complexity, I believe that some development is lacking. It is established that they will be “immobilised” but it is not clear, in my opinion, whether the SPAC is going to function as a depository (as something similar to an escrow account) or whether, on the contrary, the funds will pass into the ownership of the SPAC. I am inclined to think that they will be held by the SPAC and that is why I think we should have a little more detail as to when and how the funds will be made available, as I understand that the SPAC, even if it does not achieve the purpose of the acquisition, will have incurred costs that it will have to bear. The lock-up is imposed in order to provide protection for investors, but it is not entirely clear to me how operational this will be.
Section 4 (I will refer to section 3 when I comment on paragraph 6) regulates the deadlines that the SPAC will have for the acquisition of the target company. In principle, the maximum period that the articles of association may provide is 36 months for the formalisation of the acquisition agreement. An extension of a further 18 months is permitted by a decision of the general meeting “…subject to the same requirements as for an amendment to the articles of association”. This last sentence, which I understand is included in order to specify it concretely and to give greater protection, raises a doubt in my mind as to whether or not it will be necessary to register the change in the articles of association. By expressly stating “…with the same requirements…” it seems that in principle it would not be a statutory modification and that it is the rule that requires the same requirements to be applied because it is not. In other words, it could be interpreted that the Law enables the 18-month extension, fulfilling the requirements for the amendment of the articles of association (notice of meeting, majorities, etc.), but without requiring the amendment of the articles of association itself and therefore registration in the Companies Register. I do not think that this is of major importance and I understand that the articles of association will have to be amended, but the wording certainly seems to exclude the possibility of an amendment to the articles of association. Finally, I wonder what would happen if the General Meeting, in a resolution adopted by all the shareholders, approves the 20-month extension. Would the Registrar not register it if it were a modification of the articles of association? Would it cease to be a SPAC?
Section 5 merely extends the regime to SPACs that have securities admitted to trading on multilateral trading facilities.
Finally, section 6 determines that the specialities established in the chapter will cease to apply once the acquisition has been formalised or, in the case of a structural modification such as a merger, once it has been registered. In my opinion, the relevant aspect of this point is that it definitively closes the door on the SPAC’s activity being a continuous or permanent activity, i.e., once the acquisition has been made (I understand that it is only one) the rule ceases to apply. This is related to the requirement in section 3 that the company name must include the words “Sociedad cotizada con Propósito para la Adquisición” or the abbreviation “SPAC, S.A.” until the acquisition is formalised, as well as to section 1 that the SPAC’s only activity up to that point must have been the initial public offer of securities, the application for admission to trading and the activities leading to the acquisition. If it were not for the provisions of section 1, it could be interpreted whether a SPAC could be “re-activated” but I understand that it clearly excludes a company that has had any activity (holding activity, trading activity, etc.) other than any of the above from the scope of application.
2.2.- Shareholder redemption mechanisms
I would go so far as to say that, probably as a result of the financial scandals that have occurred with SPACs in other countries, the legislator’s main concern when articulating this figure has been how to provide protection for investors.
In Spanish law, it is Article 535 ter that regulates these mechanisms, making it compulsory for SPAC to incorporate them:
(i) a statutory right of separation once the SPAC announces the acquisition and irrespective of the direction of the shareholder vote.
(ii) the issue of redeemable shares without the limits of Articles 500 and 501 of the Capital Companies Act being applicable and at the request of the shareholders and irrespective of how the shareholder votes.
The most remarkable thing in my opinion is the extra protection that is also granted to those who voted in favour of the takeover. This is a clear example of the legislation’s fear of the investor being left unprotected, as I understand the coverage for those who vote against, but granting this right to those who vote in favour also generates a certain insecurity for the SPAC that could affect the viability of the project.
Finally, the possibility is established for the SPAC to carry out a capital reduction for redemption as a repayment mechanism. In fact, the obligatory nature of the two previous mechanisms would be exempted in the event that they undertake to carry out the capital reduction. On this point, the question arises as to where and who must undertake to carry out the capital reduction. It is clear that the company cannot undertake to reduce capital, it must be the shareholders who undertake to vote for or against the capital reduction and, in this case, where would they have to commit themselves? Would it have to be established in the articles of association, in a shareholders’ agreement, at a meeting? I don’t think the idea is far-fetched, but the mechanism for the reduction is not very refined and I need some clarification to resolve the questions I have raised.
2.3.- Specialities of SPACs in relation to PTBs
One of the most sensitive issues that came to light (due to the silence of the Draft Bill) was how the takeover bids (PTBs) regime would converge with the different situations that could arise in the operation of a SPAC.
The regulations governing takeover bids, Royal Decree 1066/2007, of 27 July, on the Takeover Regime, establishes the obligation to make a takeover bid in the situation where a shareholder achieves, in accordance with article 4, a controlling stake. Obviously, this would completely distort the meaning of the SPACs and it is article 535 quarter that provides an answer to this.
The article is divided into possible scenarios, setting out:
(i) If a shareholder, as a result of the acquisition approved by the SPAC, takes a controlling interest, this shareholder is exempted from the obligation to make a takeover bid.
(ii) If, as a result of the redemption mechanism discussed above, a shareholder takes a controlling position, it will also be exempted from the obligation to make a takeover bid.
In the first two cases, the exemption will be automatic without the need for the National Securities Market Commission’s approval.
(iii) In the event that a capital reduction is carried out as a redemption mechanism, the offer referred to in Article 338 of the Capital Companies Act and Article 12 of the Takeover Act must include:
“a) The price of the takeover bid shall be the amount equivalent to the aliquot part of the effective amount tied up in the transitional account referred to in section 2 of Article 535 bis above at the time the redemption right is exercised.
(b) The company may, instead of redeeming the acquired shares, approve their delivery in exchange to the shareholders of the acquired company as full or partial consideration for the acquisition.
(c) Provided that the company has limited its activities to the offer of shares and those leading to the acquisition or merger as provided for in Article 535 bis, there shall be no right of creditors to object”.
I do not know why the legislator did not exempt the obligation to make a takeover bid in this third scenario of capital reduction as a mechanism. I would like to think that there is a practical reason that I do not know, since what common sense tells me is that the obligation to formulate the takeover bid referred to in the aforementioned articles should have been directly exempted, as in the other two cases.
2.4.- Treasury stock and obligation to publish a prospectus
The last article regulating SPACs in Spain, 535 quinquies, acts as a catch-all to:
(i) Exempt from application of the limit on treasury stock, established in article 509 of the Capital Companies Act, in the event of a capital reduction as a redemption mechanism.
(ii) Establish that, although the merger transaction to be carried out may be exempt from publishing a prospectus, the National Securities Market Commission, taking into account the particularities (nature and complexity) of the transaction, may require it.
3.- Conclusions
As I have been saying, I believe that there are many issues that remain unresolved and, in my opinion, a little more development and foresight should have been invested in a figure that could be a focus for attracting foreign investment in Spain.
One of the issues I missed was the set of tax “contingencies” that could arise from the merger. In Spain there is a special tax neutrality regime for structural modifications, obviously including mergers, which, under certain circumstances, results not in an exemption but in a tax deferral. Unless I am mistaken, there is no express provision for merger operations in a SPAC to be automatically included in the special tax regime. I believe that an opportunity has been missed to cover this aspect as well and to provide legal and fiscal certainty to SPAC operations and, therefore, to make Spain much more attractive in this market.
This article includes general information and it does not provide professional or legal advice.
