The use of BVI companies in public equity transactions
By Jose Santos, Partner, and Karen Gilbert, Senior Associate, Forbes Hare – BVI companies are listed on most of the major public exchanges of the world, including NYSE, AIM, LSE, TSX, NASDAQ, HKSE, and are attractive as listing vehicles in a variety of geographical markets and business sectors such as mining, pharmaceuticals, real estate, oil and gas.
In particular, over the last decade, BVI companies have been frequently incorporated as special purpose acquisition companies (SPACs) focused on acquiring targets in emerging markets, the use of which is now on the rise again following an extended period of limited activity.
What is a SPAC?
A SPAC is a newly-formed company which is incorporated by a qualified management team/sponsor for the purpose of raising funds through the initial public offering (IPO) of its securities in anticipation of identifying and acquiring an operating business within a particular industry sector and geographical market.
A SPAC raises funds through its IPO, most of the proceeds of which are placed into a trust account. The SPAC has a set period of time (typically around eighteen to twenty four months from the date of the IPO) during which the management team will identify an acquisition target. If the SPAC finds a target, a press release announcing the entry into an agreement, in principle, to acquire the relevant business is issued. The SPAC then prepares an information circular disclosing the business to be acquired and seeks shareholder approval of the proposed acquisition. Should the SPAC fail to find a target within the acquisition period, the funds held in the trust account are returned to the public investors and the SPAC is usually liquidated.
SPACs provide transparency to investors who receive full disclosure of the proposed acquisition allowing them to either approve or reject the acquisition while electing the redemption of their shares for a pro rata proportion of the IPO proceeds held in trust.
Benefits of a BVI listing vehicle
- No BVI corporation tax is payable by the listed BVI issuer.
- No BVI tax is payable by investors.
- The existence of experienced and professional legal advisers, many of whom have both onshore and offshore experience of public equity transactions.
- The BVI is a well-established, mature jurisdiction which is recognised by many of the world's major financial institutions.
- The territory's flexible company laws
Flexibility of BVI corporate law in the context of SPACs
BVI law permits the listing vehicle to be structured with a tailor-made constitution complying with the listing rules of the relevant exchange. The memorandum and articles of association of a SPAC should be carefully drafted to include specific business combination provisions safeguarding public investors during the period between its IPO and the acquisition of the target, while providing sufficient flexibility to complete the acquisition within target acquisition period.
Subject to the memorandum and articles of association, BVI law provides for shareholder resolutions to be approved by majority vote. With SPACs, however, it is typical for the constitutional documents to require a higher threshold of approval for certain actions, such as amendments to the business combination provisions of the constitutional documents. BVI law is sufficiently flexible to permit different levels of voting majorities.
Where permitted by its constitutional documents, a BVI company may be liquidated without shareholder approval. This is a useful feature for SPACs which are usually wound up at the end of the specified target acquisition period if a target has not been acquired.
Advantages of SPACs to investors:
- the potential for substantial capital gain on the closing of a business combination transaction;
- limited risk, in that SPAC IPO proceeds are held on trust pending approval of the acquisition via shareholder vote;
- a minimum liquidation value per share in the event no business combination is effected;
- the opportunity to invest in private equity type transactions which are usually restricted to private equity funds;
- shareholders have voting control and the opportunity to have most of their funds returned if a target is not identified or, subject to certain redemption thresholds, if they reject the proposed acquisition (even if it is approved by the majority);
- no cash compensation is payable to the management team pending the acquisition;
- greater liquidity than private equity deals as the SPAC securities are publicly traded;
- the share price is not as volatile as that of other companies as a SPAC's main asset is the IPO proceeds held on trust.
Inevitably, SPACs sometimes fail to identify a suitable target business within the required time period, or are unable to obtain shareholder approval of the proposed business combination. Despite this, over the course of the past year, Forbes Hare has offered advice in several SPAC transactions involving BVI companies, with respect to both IPOs and related business combinations and there is more activity in the pipeline. The recent resurgence in successful SPAC acquisitions has assisted in keeping the BVI at the forefront of cross border acquisition transactions.
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