Hong Kong: Hong Kong SPAC Is Coming To Town

On September 17, 2021, the Stock Exchange of Hong Kong ("SEHK") released the long-awaited consultation paper on Hong Kong Special Purpose Acquisition Companies ("SPAC"). After a short consultation period ending on October 31, 2021, the SEHK issued the consultation conclusions ("Consultation Conclusions") on December 17, 2021.

Somewhat unexpectedly, the SEHK has made a number of important concessions in the Consultation Conclusions. We believe these concessions will facilitate the development of the SPAC market in Hong Kong by better aligning the economic interests and incentives of the SPAC promoters with the SPAC shareholders:

• Removal of alignment of voting with redemption: In its initial proposal, SEHK only allowed SPAC shareholders who vote against a de-SPAC transaction to require their SPAC shares to be redeemed by the SPAC. After considering the concerns expressed by respondents, SEHK decided to drop this proposal. Thus, as in the United States, UK, and Singapore, SPAC shareholders will be able to require the SPAC to redeem their shares regardless of how they cast their vote on the de-SPAC transaction. We believe this will significantly reduce uncertainty of the de-SPAC transaction.
• Relaxation of warrant dilution cap: In order to better incentivize potential SPAC investors, the warrant dilution cap has been increased from 30% to 50%, which means a SPAC can issue warrants that entitle the holder to purchase up to 50% of the number of the shares in issue at the time of issuance of such warrants. Further, the proposed separate caps on (i) warrant to share ratio (it was originally proposed that a warrant could convert into no more than one third of a share) and (ii) promoter warrants (it was originally proposed that promoter warrants would be capped at 10% of the number of shares in issue upon exercise) have been dropped. The promoter shares will continue to be capped at 20% of the total number of shares in issue.
• Approval of share price-linked performance targets for earn-out rights: SPACs are allowed to issue earn-out rights to SPAC promoters, which can be converted into ordinary shares of the Successor Company if the Successor Company meets pre-determined performance targets. Under the initial proposal, such performance targets could not be based on the trading price of the Successor Company's share. In the Consultation Conclusions, SEHK allowed share price to be used as a performance target if the share price of the Successor Company (i) is at least 20% higher than the issue price of the SPAC share; and (ii) exceeds a pre-agreed volume weighted average price over a set period of time.

That said, SEHK has tightened rules regarding several other aspects of the SPAC regime, which are in line with the SEHK's rationale of having a high-quality regime:

• More stringent requirements on PIPE investment:  In an attempt to mitigate the effect of the removal of the requirement of the alignment of redemption with voting, SEHK has strengthened the requirements for independent private investment in public equity ("PIPE") investments to support the valuation of the De-SPAC Target and the level of investor interest in the Successor Company, including:

  i.  adopting staggered thresholds to cater for de-SPAC targets of different valuations (see table below);

  ii. requiring at least 50% of the independent PIPE investment to be contributed by at least three sophisticated investors (instead of requiring only a single PIPE investor to take up not less than 5% of the shares of the Successor Company); and

  iii. introducing the concept of sophisticated investor, which is defined as either (a) an asset management firm with assets under management ("AUM") of at least HK$8 billion (instead of HK$1 billion), (b) a fund with a fund size of at least HK$8 billion, or (c) a fund managed by a fund manager that has AUM of at least HK$8 billion. This requirement highlights the SEHK's emphasis on having high quality regime with high quality targets.

• Minimum percentage of independent PIPE investment	Valuation of De-SPAC Transaction
  25%	Below HK$2 billion (previously HK$1.5 billion)
  15%	Between HK$2 billion and HK$5 billion
  10%	Between HK$5 billion and HK$7 billion
  7.5%	HK$7 billion or more

• SFC regulatory reach over SPAC board: A SPAC board is now required to include at least two Type 6 and/or Type 9 licensed individuals to help ensure good conduct of the SPAC board and the ability of the Securities and Futures Commission ("SFC") to have jurisdiction over that conduct. SEHK has dropped its initial proposal that required a majority of SPAC directors to be representatives of SPAC promoters. Like a normal issuer, a SPAC board is required to comprise at least three independent non-executive directors comprising at least one-third of the board.

Other notable amendments to the SPAC regime include the following:

• Material change to the key SPAC promoter subject to approvals: In its initial proposal, a material change in a SPAC promoter would require shareholder approval by special resolution and would trigger a right of redemption by the shareholders. In the Consultation Conclusions, the SEHK clarified that a "material change" is where (i) a SPAC promoter which controls 50% or more of the promoter shares changes or if none, the single largest SPAC promoter changes; or (ii) the SPAC promoter holding the SFC license changes. In addition, the continuation of the SPAC upon such material change event will be subject to the SEHK's approval.
• Open market requirement for SPAC initial listing: SEHK decided to reduce the minimum requirement of institutional professional investors at SPAC's initial listing from 30 to 20 after considering commercial practicality.
• License requirement for SPAC promoter: Whilst insisting on the requirement that at least one SPAC promoter must (i) hold at least 10% of promoter shares, and (ii) be a firm that holds a Type 6 (advising on corporate finance) and/or Type 9 (asset management) license issued by SFC, SEHK will consider granting waivers to the licensing requirement on a case-by-case basis. For instance, a waiver may be granted to a SPAC promoter that has overseas accreditation that is equivalent to Type 6 and/or Type 9 license issued by the SFC.

SEHK will accept formal listing applications from SPACs commencing January 1, 2022. We welcome the modifications to the proposed SPAC regime set forth in the Consultation Conclusions. Whilst the Hong Kong SPAC rules may be more stringent than other jurisdictions, we think the SEHK has struck the right balance in proposing a high quality regime that will offer a meaningful alternative listing method to traditional IPOs.

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