Cash shells or SPACs (special purpose acquisition companies) are purpose-built vehicles with a stock market quote and a board of directors, but no active business and no assets other than a strong management (or advisory) team with specific sector expertise and the funds raised from financial backers (which will typically include management). The structure gives managers a ready-made stock market listing, a cash war chest and an acquisition currency at a time when, owing to global financial circumstances, the cost of financing is high and transactions are difficult to execute.
Cash shells were extremely popular on the AIM market seven years ago, arriving in such numbers that the LSE was forced to tighten the rules to safeguard the market’s reputation. In March 2005 alone, 31 cash shells rushed to list to beat the introduction of the rule changes the following month, which stipulated that a cash shell must raise a minimum of £3 million, a figure deemed high enough to require at least some institutional interest. Other rule changes included tightening up the stated investing policy and a requirement to seek shareholders’ consent annually to the continuance of the policy should it not be substantially implemented within 18 months of listing.
The last couple of years have seen a number of cash shells not only returning to AIM, but, for the first time, obtaining admission to the Official List of the United Kingdom Listing Authority (UKLA) by way of a Standard listing. The timing of the appearance of these cash shells is a function of the regulatory environment of these markets and the volatile nature of the present economic climate. The cash shell structure is designed to take advantage of any dislocation in the market to acquire assets at favourable prices. When asset valuations start to rise, the opportunity for these acquisition vehicles could well disappear.
The regulatory environment for Standard listed cash shells
Access to the Premium listing segment of the Official List, whereby the issuer is subject to onerous eligibility and continuing obligation requirements and is potentially eligible for inclusion in the FTSE indices, is not possible for a cash shell; there are a number of entry requirements that a shell company simply would not be able to satisfy, which do not apply to Standard listing or to AIM applicants. In particular, a Premium listing applicant is required to have unqualified, consolidated, independently audited accounts covering a three-year period; a revenue earnings record in respect of at least 75 per cent of its business for a three year period; and a history of control over the majority of its assets for at least a three-year period.
AIM cash shells are more heavily regulated than those with a Standard listing. In the last two years, management teams and their financial backers have increasingly been making a virtue of the minimal regulatory requirements applicable to cash shells with a Standard listing while raising very significant amounts of money on IPO. The key factor, as had been made explicit in the listing documents, was that a Standard listed issuer was not required to obtain shareholder approval for the acquisition of a target.
While a Standard listing applicant must prepare a prospectus that is approved by the UKLA, it otherwise benefits from the relaxation of a number of rules that are applicable to Premium listed and/or AIM companies. Currently under the UKLA’s Listing Rules, a Standard listed cash shell is not:
- required to appoint a financial adviser or sponsor on IPO or on a continuing basis (an AIM company is required to appoint a “nominated adviser” (or “nomad”) at all times);
- subject to the “Listing Principles” set out in the UKLA Listing Rules;
- subject to any minimum fund raising requirement (other than to have a market capitalisation of £700,000 as set out in the UKLA Listing Rules applicable to all Official List companies);
- required to set out a formal investing policy or to implement it within any particular time frame (it follows that a change in investing policy is not subject to shareholder approval, nor is its ongoing validation in the event of failure to implement it within a stated period);
- required to seek shareholder approval for significant transactions (including transactions which would be categorised as a reverse takeover or a fundamental disposal of business);
- subject to the restrictions on share dealing (by the issuer or management);
- subject to restrictions as to the price and nature of share issuances or buy backs (although a Standard listed issuer must publish a prospectus if it issues, over a 12-month period, further securities that represent 10% or more of the securities of a class already admitted to trading);
- required to adhere to certain specific ongoing disclosure requirements (other than the general obligation to disclose price-sensitive information);
- required to seek shareholder or sponsor approval for related party transactions (a nomad must confirm to an AIM listed issuer that such a transaction is fair and reasonable insofar as the shareholders are concerned and certain prescribed details of the transaction must be notified to the market);
- required to offer new shares for cash on a pre-emptive basis to shareholders (indeed, typically any statutory pre-emption rights are disapplied prior to the IPO in connection with any shares to be issued to finance an acquisition); and
- required to comply with any corporate governance codes (although certain disclosures as to internal control and risk management procedures must be made in the issuer’s annual report).
In practice, issuers tend to voluntarily commit to certain standards or restrictions in relation to some of the above points, although the UKLA has no power to police compliance with such commitments.
Notable transactions involving Standard listed cash shells
Horizon Acquisition Company plc raised £417.7 million on its IPO and Standard listing in February 2010. Horizon achieved its investment goal by acquiring APR Energy, a Florida-based temporary power provider, in June 2011 for £527 million (£221 million in cash and £306 million in Horizon shares). The group retains its Standard listing.
In June 2010 came the IPO and Standard listing of Nat Rothschild’s Vallar plc, raising £687 million to fund acquisitions in the metals and mining industry. June 2011 saw the acquisition by Vallar of PT Bumi Resources Minerals Tbk, an international mining company, and a reorganisation resulting in the introduction of Bumi plc as the new Premium listed parent company. The acquisition price represented a total consideration of £1.27 billion.
Marwyn Management Partners plc obtained a Standard listing in January 2011, raising a relatively modest £6 million. In August 2011, Marwyn acquired AIM-listed Praesepe plc, a gaming company, having raised approximately £40 million to complete the acquisition. Marwyn’s investment objective is to acquire controlling and non-controlling interests in public and private companies, appointing operational managers with a “buy and build” strategy.
The IPO in February 2011 of Justice Holdings Limited launched by, among others, Nicolas Berggruen, the billionaire backer of hedge fund GLG and Pearl Insurance, raised £900 million. Justice Holdings announced in April 2012 an investment of US$1.4 billion for 29% of Burger King. As part of the transaction, Justice merged with the new Burger King holding company, de-listed from the London Stock Exchange and re-listed on the New York Stock Exchange.
Vallares plc, the second of Nat Rothchild’s vehicles, raised £1.35 billion in June 2011 with a focus on oil and gas assets. In September 2011, Vallares announced the acquisition of Genel Energy International for US$2.1 billion. The enlarged group retains its Standard listing.
Practical considerations and recent developments
These listings, together with the record of successfully completed acquisitions, represent some of the most significant recent transactions in the London market and clearly show that the cash shell concept, particularly by way of Standard listing, remains compelling in current market conditions.
A management team or group of investors thinking of establishing a London-listed cash shell for investment purposes and debating whether to opt for an AIM or Standard listing, should consider the following, in addition to the points referred to above:
- whilst there are a number of advantages of the Standard listing regime over AIM, the involvement of the UKLA in establishing eligibility for listings and approving the prospectus could lead to a longer IPO timetable compared to an AIM listing, where such matters are dealt with by the nomad;
- having considered the feedback from its consultation paper (CP12/2) issued in January 2012, in October 2012 the UKLA adopted the proposals to update the reverse takeover regime as applicable to Premium and Standard listed issuers. Under the Technical Note issued by the UKLA previously in force, transactions by Standard listed shells were treated as reverse takeovers in certain respects, namely (i) on completion of an acquisition, the company’s shares would have been cancelled and the enlarged group would have had to re-apply for a listing on the back of a new prospectus; and (ii) listing may have been suspended pending publication of a new prospectus if there was insufficient information in the market on the target at the time of the announcement. The rule changes do not require that a Standard listed company seek shareholder approval for a reverse takeover. The revised Listing Rules have sought to reduce the information requirements that need to be met, after announcement of a transaction, in order for a suspension to be avoided, for Premium and Standard listed companies alike, and provide that if the company is acquiring another Premium or Standard listed entity and can establish eligibility for a continued listing in respect of the enlarged group, cancellation and re-admission (which would need a UKLA-approved prospectus to be prepared and published) can be avoided;
- whilst the minimum market capitalisation on listing of a Standard listed shell could, under the Listing Rules, be £700,000 the UKLA may query whether an issuer can properly carry out its investment policy with such a small amount of working capital. However, if a small shell listing is envisaged, this figure could still be significantly lower than the £3 million required on AIM;
- the founder incentive structures for the large Standard listings mentioned above have typically been complex, involving a mixture of straight equity and convertible securities, giving the founders an incentive based both on making an acquisition and the longer-term performance of the enlarged group. Further, management of the company and deal selection and execution are often outsourced, under an advisory agreement, to an unregistered advisory entity owned and operated by the founders. The founders have tended to invest a significant proportion of the IPO funding from their own resources. Note that the revised listing rules adopted in October 2012 as a result of the consultation exercise following CP12/2, make the principals of the advisory firm to a Standard listed cash shell (a so-called “externally managed company”) responsible for any prospectus issued by the company and subject to rules on disclosure of share dealings.
AIM cash shell listings, perhaps reflecting their smaller size, have tended to utilise simpler share, board and incentive arrangements. There is no reason why the AIM style is not equally appropriate for a Standard cash shell listing;
as the above example transactions show, there are a variety of potential alternatives in respect of the continued listing of the enlarged group following completion of an acquisition. As stated above, the listing on the Standard segment would (unless the target is a Premium or Standard listed company) be cancelled on completion of a reverse takeover, and it would be possible to list the enlarged group on AIM instead. Otherwise, cancellation of a company’s Standard listing at the company’s request does not require shareholder approval;
the requirement for a Standard listed company to prepare a prospectus if it wishes to issue 10% or more of its shares is not, in practice, likely to create extra work, expense or delay as the cash shell is likely to only issue new shares in connection with an acquisition, which would in any event require the production of a prospectus, or AIM admission document, for the enlarged group;
it should be noted that the flexibility to make major disposals without seeking shareholder approval is a significant feature of the Standard listing regime, and may be of benefit to the company as its business grows over time. Recently, HMV Group sought shareholder approval to move from a Premium listing to a Standard listing (rather than AIM) explicitly to benefit from this flexibility in the context of the company’s strategic review process. The listing category transfer was approved by 99.32% of the votes cast at the EGM; and
it should be noted that the requirements for the inclusion and content of a competent person’s report (CPR) in the prospectus for a Standard listing may be more flexible than those applicable to an AIM admission document. In relation to a Standard listing, the rules governing prospectuses specify content requirements that are recommended rather than compulsory (in particular, there is no compulsory requirement for a valuation of reserves and resources), provide that a site visit is not compulsory (being a matter of professional judgment for the competent person acting in accordance with the approved mineral codes), and establish that it may be possible to avoid the preparation of a CPR altogether by passporting a previously prepared CPR and/or annual market updates of reserves and resources on an overseas market or trading facility.
Ultimately, there are a number of factors which will need to be considered by the management and founders in choosing the most suitable form for a London-listed investment vehicle. Some issuers may consider that a listing on the UKLA’s Official List is attractive to investors, especially when combined with the light-touch regulatory environment, the absence of a sponsor requirement, the absence of an obligation to seek shareholder approval for a reverse takeover and, depending on the issuer’s circumstances, the potential to list with a modest fundraise. However, some issuers may find the requirement to prepare a full prospectus on the enlarged group, vetted by the UKLA, to continue the Standard listing following a reverse takeover to be onerous, although it is open to the issuer to switch to an AIM admission (or indeed, a non-UK market) for the enlarged group instead. For natural resources companies, the potential flexibility in relation to CPR requirements may mean that an ongoing Standard listing for the enlarged group is attractive.
Paul Airley, Partner, Fladgate LLP (firstname.lastname@example.org)