S.P.A.C., which stands for ‘Special Purpose Acquisition Company’, are those companies that do not have their own operational activity, but whose function is to raise capital through an IPO in order to subsequently acquire or merge (business combination) with another company with commercial activity (the target company).
Despite the boom in SPACs that we have been experiencing for a couple of years in the USA and in some European countries, they have existed for several decades. To date, none has been carried out in Spain. It is true that there have been promoters or sponsors of Spanish SPACs, but they have decided to develop them in other jurisdictions such as the Netherlands or the USA, mainly due to regulatory issues and a certain degree of legal uncertainty, which I will comment on.
The situation in Spain
The first legal and/or ‘official’ reference to Spanish SPACs can be found in the Draft Bill of the Securities Market Law and specifically in an inclusion to the Capital Companies Law, which will regulate specialities on what it calls ‘Listed companies with acquisition purposes’.
The proposed inclusion is from article 535 bis to (apparently) 535 quinquies. I say apparently, as there has been an error in the drafting of the Preliminary Draft and neither articles 535 quater nor 535 quinquies have been transcribed so, for the time being, we only have the provisions of articles 535 bis and ter to try to understand how the Spanish legislator intends to regulate this type of company.
Article 535 bis
The first of these articles begins, in paragraph 1, with the definition of what is to be understood by a listed company with takeover intentions:
‘1. A listed company with the purpose of acquisition shall be understood to be a company set up for the purpose of acquiring all or part of 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 offer 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’.
At first sight, the definition follows the expected line as to what we can understand by SPAC in Spain. However, in my opinion, it is not clear whether the shareholding to be acquired should be for the whole, for the majority of the capital, or whether we could be dealing with a SPAC acquiring minority shareholdings in different companies through a sale and purchase. From the wording of the Preliminary Draft, it does not seem that there is a minimum percentage which, in principle, allows for this possibility.
The second section aims to regulate what happens until the acquisition or merger materialises with the funds obtained by the different investors, specifically establishing the following:
‘2. 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.’
It seems that the intention is for these funds to be placed in what could be likened to an escrow account, which is widely used in M&A processes. This is a legal figure not regulated in Spanish law, which is similar to and has elements of a deposit and mandate contract. On this point, I feel that a little more development is needed to clarify whether these funds, although immobilised or unavailable, become the property of the SPAC or, on the contrary, whether the SPAC acts as a depositary of the funds.
Paragraph 4, to which I skip in order to comment on paragraphs 3 and 5 together, simply specifies that these specialities will also apply to those SPACs that have securities admitted to trading in multilateral systems.
Finally, paragraphs 3 and 5 state the following:
‘3. Listed companies for takeover purposes shall include in the company name the indication ‘Special Purpose Acquisition Company’, or its abbreviation, SPAC, S.A., until the takeover is formalised and approved’.
‘5. The special provisions of this Chapter shall cease to apply once the acquisition has been formalised or the merger has been registered.’
At first glance, both paragraphs do not say much beyond the text itself. However, I think it is a statement of intent for what I introduced in paragraph 1. In other words, in my opinion, these two paragraphs close the door to the existence of what could be called a ‘permanent’ SPAC whose activity consists, on a regular basis, of merging or acquiring majority or non-majority shareholdings in the capital of other companies. I do not know whether this is intentional or not, but both sections are intended to limit the activity of SPACs to a single acquisition or merger. In short, the question is whether a SPAC is a ‘single-use’ SPAC or whether it can become a ‘single-use’ SPAC again or be a permanent SPAC.
Article 535 ter
Article 535 ter is responsible for trying to provide investors with the right of redemption or reimbursement in the event that they wish to withdraw from the SPAC.
‘1. Listed companies for takeover purposes shall incorporate at least one of the following mechanisms for the redemption of shareholders unless they undertake to carry out the reduction of share capital provided for in paragraph 3:
a) The introduction of a statutory right of separation once the proposed acquisition or merger is announced, irrespective of how the shareholder votes at the relevant meeting.
b) The issue of redeemable shares, without the maximum limit and the provisions laid down in Articles 500 and 501 of this Act, respectively, being applicable. Redemption may be exercised within the period established by the company, at the request of shareholders who were shareholders on the date established for this purpose, whether or not they have voted in favour of the proposed acquisition’.
The first mechanism does not pose any problem, since the articles of association can indeed establish causes for separation other than those already regulated in the Capital Companies Act.
Regarding the second mechanism, and the possibility of issuing redeemable shares, articles 500 and 501 of the Capital Companies Act already regulate this possibility, but with the proviso that redeemable shares may only be issued for an amount not exceeding one quarter of the share capital. This is obviously a problem as we do not know the number of investors or shareholders who will decide not to continue, so it should be addressed to all the shares, which is why it expressly exempts the application of this limit and the provisions of 501.
What is most striking, in both cases, is the extra protection also given to shareholders who voted in favour of the takeover by allowing them to have the right of separation.
The second section establishes the redemption value of the shares and is not particularly complex: ‘shall be the price of the subscription offer prior to the admission to trading of the company’s shares or, if lower, the amount equivalent to the aliquot part of the effective amount immobilised in the corresponding transitional account’.
Concerning the capital reduction mechanism, established in paragraph 3 and which would exclude having to opt for one of the other two, the main drawback I observe, apart from the one relating to the takeover bid regime, which I will comment on, is that, from the wording given in the Preliminary Draft, it seems that it is the company which has to commit to this capital reduction. The problem is that the company cannot commit itself to reducing capital; it is the shareholders who have the power to vote in favour of a reduction, but not the company per se.
The problems of SPACs under the current takeover bid regime
1. Capital reduction for shareholder redemption:
One of the biggest questions that arises with the reduction of capital for the repayment of investors is how it is articulated with the current takeover bid regime and specifically with Article 12 of the Royal Decree on takeover bids. This article establishes the obligation to make a takeover bid when a Spanish listed company, such as SPAC, purchases its own shares for redemption.
The aforementioned regime would not be at all operative since the SPAC would have to make a takeover bid for its own shares and the most practical solution would be for the text of article 535 to exclude the application of article 12 of the Royal Decree on Takeover Bids.
2. The need to formulate a takeover bid as a result of the business combination:
Another problem that may arise in the operation of SPACs is what happens if, as a result of the merger, shareholders of the target company acquire voting rights in the SPAC equal to or above the 30% threshold established in Article 4 of the Royal Decree on takeover bids. Based on Article 3 of the same legal text, the holder reaching this threshold would be obliged to make a takeover bid, which would obviously not make any sense. However, Article 8.g of the Royal Decree on Takeover Bids would allow us to apply to the CNMV for a waiver of the takeover bid on the understanding that the purpose of the merger or business combination is not to take control, but rather in an industrial or business sense.
Once again, we are faced with an impractical regime, as we will need to apply to the Spanish Securities and Exchange Commission (CNMV) for this exemption and have it granted. As in the case of capital reduction, the best solution is that all mergers carried out by SPACs are understood to have a business or industrial purpose and the exemption is automatically applied.
The tax questions of Spanish SPACs
The tax concerns surrounding SPACs are many (taxation of sponsors, merger regime, effective management and taxation of the SPAC itself, etc.), and would require a very thorough analysis by a specialist. In my opinion, from a tax point of view, the two most important challenges at a fiscal level, which should go hand in hand, are the taxation of the SPAC itself and the fact that the merger is covered by the tax neutrality regime. In other words, for Spain to be an attractive jurisdiction to host SPACs, they must have an attractive tax regime that is competitive with neighbouring countries and, on the other hand, the merger, as with other structural modifications that have a valid economic motive, must be covered by the special tax regime of Chapter VII of the Corporate Tax Law.
This regime means that any income arising as a result of the transfer of assets as a result of the merger is deferred; in other words, the merger is not tax exempt, but the taxation is deferred over time, in this case until it is transferred again.
As I said, I leave the analysis of the tax implications to the specialists, but in my opinion, as in the case of takeover bids, the most flexible approach would be to establish a general interpretation whereby mergers carried out by a SPAC in the course of its business are considered to have a valid economic motive and can therefore be covered by the aforementioned regime.
Conclusions
As we can see, SPACs are very interesting and are undoubtedly a useful mechanism in the market. Although so far the project to regulate Spanish SPACs has been rather poor, I understand that the weak points will be addressed and hopefully, we will soon be able to find a clear regulation, without cracks, which will allow investment to be attracted to Spain.
