Although the use of ‘blank check’ vehicles dates back to the 1980s, there has been a proliferation of Special Purpose Acquisition Companies (SPACs) as a means of raising capital over the last 18-24 months (mid-2019 to present). The rise of SPACs has – despite a recent slowdown – been unprecedented, both in terms of the number of new SPAC listings taking place and the amount of capital raised.
Of the 248 SPACs which listed in the US in 2020,[1] 94 were incorporated in either the British Virgin Islands (BVI)[2] or, predominantly, the Cayman Islands.[3] This highlights the significance of these international finance centers to the re-emergence of SPACs as a dominant force in the US capital markets.
By June 2021, the number of new SPAC IPOs had begun to fall away from its peak in Q1 2021: whereas the first three months of 2021 saw more capital raised by SPACs than in the whole of 2020,[4] the number of new SPAC listings fell sharply from April 2021.[5]
This drop-off has been attributed to a combination of possible factors. The Securities and Exchange Commission’s statement in April 2021 (the SEC’s Statement)[6] concerning the treatment of warrants in a typical SPAC structure as liabilities on a SPAC’s balance sheet rather than as equity undoubtedly led to a pause amongst SPAC sponsors and service providers while the ramifications of the SEC’s Statement were digested and some financials had to be restated. Further, large numbers of investment opportunities caused institutional investors who typically participate in the Private Investment in Public Equity (PIPE) financing element of SPAC transactions to become more discerning, and merger valuations were impacted by significant competition amongst large numbers of SPACs simultaneously hunting for a target.
As the SPAC IPO market begins to cool slightly in the US, the attention of many M&A practitioners is turning to the substantial levels of capital sitting within SPACs seeking a merger target – recently estimated by Goldman Sachs to be around $129 billion.[7] Given that SPACs are required to spend money within a certain period or return it to shareholders via redemptions, this seems certain to have a meaningful impact on the domestic and cross-border M&A markets at least through the first half of 2023 as these vehicles begin to effect ‘de-SPAC’, or business combination, transactions.
Since a substantial proportion of SPACs’ dry powder is contained within Cayman Islands or BVI incorporated entities,[8] it is pertinent to analyse the range of options available pursuant to the laws of those jurisdictions to effect a de-SPAC transaction once the SPAC’s management team has identified a merger target.
Initial choice of Cayman Islands or BVI as jurisdiction for SPAC incorporation
The selection of a jurisdiction for the incorporation of a SPAC (i.e., whether it should be formed in the US or offshore) is typically driven in large part by complex US tax considerations which are both beyond the scope of this article and outside the scope of offshore counsel’s involvement in the structuring process.
However, generally speaking, where the SPAC’s management team has ascertained that it is more likely than not that the acquisition of a non-US based company – rather than a domestic US company – will be targeted by the SPAC, a non-US jurisdiction is often selected as the jurisdiction of incorporation of the SPAC.
The Cayman Islands or the BVI are commonly selected as the jurisdiction of a non-US SPAC’s incorporation for a number of reasons:
- the entity may be a ‘foreign private issuer’ from an SEC perspective if correctly structured;[9]
- both the Cayman Islands and the BVI are tax neutral, with no withholding taxes, capital gains or stamp duty levied;[10]
- the company law frameworks in each jurisdiction are flexible but sophisticated, with a simple solvency test for distributions, no corporate benefit requirements, and bespoke governance requirements capable of being included in tailored constitutional documents; and
- there is considerable market familiarity (amongst sponsors, institutional investors, bankers and US counsel) with the use of vehicles incorporated in these jurisdictions.
Just as the corporate flexibility of Cayman Islands and BVI vehicles is attractive at the IPO stage of the SPAC lifecycle, the range of options provided by Cayman Islands and BVI company laws to achieve a desirable structuring outcome in the de-SPAC transaction is notable.
Availability of de-SPAC structuring alternatives under Cayman Islands and BVI company law
At the business combination stage of the SPAC lifecycle, it is not always the case that a target company which is taken public by an offshore-incorporated SPAC (Offshore SPAC) will continue to be structured as a Cayman Islands or BVI-incorporated holding company after the reverse merger is effected.
If the Offshore SPAC acquires a non-US target company (Foreign Target), the post-merger listed entity is often incorporated in the same jurisdiction as the Foreign Target, with the transaction commonly accomplished by way of a cross-border merger. A possible series of transactions in this scenario (assuming that the Offshore SPAC is incorporated in the Cayman Islands) would be:
- Foreign Target forms a wholly-owned Cayman Islands subsidiary (Merger Sub);
- Merger Sub merges with and into the Offshore SPAC with the Offshore SPAC continuing as the surviving company after the merger; and
- the Offshore SPAC becomes a direct, wholly-owned subsidiary of Foreign Target.
This form of transaction structure was used, for example, in the acquisition of Taboola, the Israeli targeted marketing platform, by ION Acquisition Corp. 1 Ltd., a Cayman Islands-incorporated SPAC[11] at an implied valuation of $2.6 billion, per SEC filings in connection with the transaction.[12]
The statutory merger provisions in Cayman Islands company law allow this form of transaction to be accomplished with ease: typically, a special resolution of the shareholders of the Cayman entity is required to approve the merger, which is generally capable of being passed by 2/3 of voting shareholders at a duly convened and quorate shareholder meeting, along with such other authorization, if any, as may be set out in the Cayman entity’s constitutional documents. The law also requires the consent of certain security interest holders, although it is rare for a SPAC to have granted security over its assets.[13]
If the Offshore SPAC acquires a domestic US target company, it may be the case that the Offshore SPAC will effect a domestication to a US jurisdiction such as Delaware as part of the business combination transaction, with a domestic US entity as the resulting public company. For example, per SEC filings,[14] this deal structure was employed in the acquisition of San Francisco-headquartered property technology company Opendoor by the Cayman Islands-incorporated SPAC Social Capital Hedosophia Holdings Corp. II, in a transaction which valued Opendoor at an enterprise value of $4.8 billion.[15]
As with the Cayman Islands statutory merger provisions, the procedure for effecting a re-domiciliation out of the Cayman Islands (known as a ‘de-registration’) is straightforward. A number of procedural steps need to be taken in the Cayman Islands, including the filing of a declaration by a director of the Cayman Islands entity confirming that, amongst other things:
- it is solvent and able to pay its debts as they fall due;
- the application for de-registration is not intended to defraud its creditors;
- any contractual consent to the transfer has been obtained, waived or released;
- the transfer is permitted by and has been approved in accordance with the company’s constitutional documents; and
- the laws of the jurisdiction where the Cayman Islands entity is transferring have been or will be complied with.[16]
Alternatively, where the parties to the merger can receive their consideration in the form of shares in another entity formed for that purpose, that entity will then list with both the SPAC and the original target vehicle sitting beneath it.
The corporate flexibility and political stability afforded by both the Cayman Islands and the BVI has ensured that both jurisdictions have been vital in the structuring of cross-border mergers, acquisitions, IPOs and investment fund formations for decades. Even if the SPAC IPO boom witnessed throughout 2020 and Q1 2021 continues to taper off somewhat, the Cayman Islands and the BVI will continue to remain absolutely central to the domestic and global M&A markets as the billions of dollars of undeployed capital sitting within SPACs incorporated in these jurisdictions continues to seek out suitable merger targets.
[1] https://spacinsider.com/stats/.
[2] Per an analysis of the SEC Form S-1s filed by SPAC issuers in 2020, which disclose the SPAC’s jurisdiction of incorporation.
[3] Ibid.
[4] https://spacinsider.com/stats/.
[5] SPAC Research, reported in CNBC article ‘SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest’, Yun Li, 21 April 2021.
[6] SEC Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), 12 April 2021.
[7] Goldman Sachs analyst note (led by David Kostin) dated 21 April 2021, reported by businessinsider.com, ‘SPACs could drive $900 billion of dealmaking over the next 2 years despite the boom slowing, Goldman says’, Harry Robertson, 22 April 2021.
[8] See supra note 2.
[9] SEC Division of Corporation Finance, ‘Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers’ (Part II: Foreign Private Issuer Status).
[10] See, for example, section 242 of the BVI Business Companies Act 2004 (as amended).
[11] https://www.sec.gov/Archives/edgar/data/1821018/000121390021003870/ea133754-8k_ionacquis1.htm.
[12] Reuters.com, ‘Taboola to go public through $2.6 billion blank-check deal’, 25 January 2021.
[13] Part XVI, Cayman Islands Companies Act.
[14] https://www.sec.gov/Archives/edgar/data/1801169/000110465920112009/tm2030455-1_s41.htm.
[15] Techcrunch.com, ‘Opendoor to go public by way of Chamath Palihapitiya SPAC’, Alex Wilhelm, Natasha Mascarenhas, 15 September 2020.
[16] S. 206 Cayman Islands Companies Act.
