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The Special Purpose Acquisition Company: An Investor’s Gold Mine Or Quicksand?

An investment vehicle known as a Special Purpose Acquisition Company provides a high risk, high reward opportunity to be a sector investor in Malaysia, even though you might not know the sector in which you ultimately are going to be investing.

A special purpose acquisition company (“SPAC”) is a publicly-traded buyout company that raises collective investment+ funds in the form of blind pool money, through an initial public offering (IPO).  The purpose of pooling the money is to acquire an existing private company, sometimes in a specified target industry sector such as oil and gas, information technology or hospitality, food and beverages.  The pooled funds are then put into a trust where they are held until the SPAC identifies a merger or acquisition opportunity to pursue and complete.[1]  If the SPAC can’t find a suitable investment with three years, the trust fund money is returned to the investors.

In simpler terms, a SPAC is a “shell” company that first raises money through its IPO to acquire an unspecified target company, and then seeks out a private company to purchase, which will ultimately result in the formation of a publicly traded company.

SPACs started out as an American  concept and have quickly been adopted in stock exchanges around the world, but they are relatively new to Asia. It has been slightly more than half a decade since the Securities Commission of Malaysia (“SC”) introduced the concept of SPACs to the Malaysian market.

SPACs are unique, in the sense that they bring together those with the skills and experience to create value with those who have the capital to help them achieve collective investment goals.  With the absence of the trappings of a typical company such as  an operating history and performance track record to show prospective shareholders, investing in an SPAC is considered risky. Instead, investors largely rely on the credentials of the people running the SPAC, the only “security”the investors have is that the individuals forming the SPAC are usually people who are confident that their business reputations or experiences will enable them to identify a profitable acquisition opportunity and complete such transaction.

The rules governing Malaysian SPACs are contained in  Chapter 6 of the Equity Guideline (Guideline) issued by the SC.  The most essential requirement of an SPAC, amongs tmany, is that it must complete a qualifying acquisition (QA) within 36 months of the date of closing of the distribution under its IPO prospectus. In the event an SPAC fails to complete a QA within the permitted time, it must be liquidated and the raised trust funds must be distributed back to the respective shareholders on a pro rata basis as soon as practicable, as permissible by the relevant laws and regulations.

Some industries seem more attractive to SPAC investments than others.  Since the introduction of SPAC in 2009, in the oil and gas sector (O&G), four companies were listed on Bursa Malaysia, where in 2011, Hibiscus Petroleum Bhd (Hibiscus Petroleum) became the first SPAC in Malaysia and South East Asia, raising RM235 million; in 2013, Cliq Energy Bhd (CLIQ Energy) and Sona Petroleum Bhd (SONA) raised RM364 million and RM550 million, in their respective IPOs; and in 2014, Reach Energy Bhd made history when it became the largest SPAC to be listed by securing investment from CIMB, Hong Leong Asset Management Bhd and Norway’s sovereign wealth fund Norges (among others) raising RM750 million.

Aside from O&G SPACs, around July last year, Red Sena Bhd, raising RM400 million from its IPO became the first non-O&G SPAC to gain approval from SC to list on Bursa Malaysia, rendering it Malaysia’s first food and beverage industry SPAC.

As to date, out of all the above listed SPACs, only Hibiscus Petroleum, the first O&G SPAC, has succeeded in securing a QA and has graduated to become a regular O&G-listed company on the bourse On the contrary, earlier this year, CLIQ Energy and thereafter, SONA, have announced their liquidation after failing to get their shareholders’ approval for the proposed QA. However, so far, only SONA has announced a definite date to distribute cash back to its shareholders. This could be due to the fact that the Guidelines have largely been silent on the expected timeframe for a liquidated SPAC to return the shareholders money, saying that upon a decision of returning money to shareholders, the Malaysian laws of liquidation will kick in.

As for the other SPACs of which the given timeframe for QA completion has yet to lapse, they are most likely still in the ongoing quest to identify one.

It must be noted that recently, there has been a slew of potential SPAC IPOs blocked by the regulator, which could most probably be the results following the liquidation of the SPACs aforementioned. Oil and gas related Matrix Capacity Petroleum, mining SPAC’s TerraGali Resources and Australaysia Resources and Minerals, and Chemara Palmea Holdings; which had sought to be Asia’s first plantation¬-based SPACs, have all been turned down.

SPACs have seen a rise in capital inflows, but not for their fundamental value. Opportunistic investors have snapped up shares on bets that these SPACS will not see their acquisitions through, and be forced to return the cash to shareholders with interest once the three year deadline passes.[2] This is as the ruling of SPACs clearly states that for an acquisition to go through, the SPACs need to get 75% of the shareholders voting for the deal, whereas for any shareholder that does not agree with the acquisition, they will get their money back. This means that even if an SPAC got 95% approval for its QA from shareholders, it will still need to allocate money for the 5% of shareholders who voted a no.[3] Therefore from a speculator’s perspective, it is much easier to make money from SPACs by voting down the QA. On the other hand, from an issuer’s perspective, raising money through SPAC vehicles in such situation is an exercise in futility, and undermines the very premise of SPAC itself.[4]

Unless the wind turns, the current environment could be negative for SPAC market because prospective investors will lose confidence in SPACs, what’s more with the recent weakening of the Malaysian Ringgit which made acquisitions look more pricey, when it is already difficult for SPACs to secure good assets because the sellers already know how much money they have on the table, so the SPACs will have lesser bargaining power. On the other hand, SPACs for oil and gas business may be able to get a good bargain for oil and gas assets in view of the current downturn of the oil and gas market.

It is also true that liquidation, by itself, does not imply failure. In mature markets like the US, acquisition vehicles are regularly liquidated, without this casting a pall over the whole asset class. Nonetheless, after all that’s said and done, as anything else, this SPAC concept also has its own pros and cons, which must be the reason it is still relevant today. As for whether it will stay that way for long, only time --and the market participants, can decide. Bottom line is it is an alternative investment and the regulators should be lauded for providing this alternative.

For more information please contact Mohamed Ridza, our Malaysia LAWorld member in Kuala Lumpur.

Nurul Izzah Jannah Mohd Rasidi

Associate

Mohamed Ridza & Co.

Tel. +603-20924822

ridza@rizdalaw.com.my

www.ridzalaw.com.my

   Endnotes:

[1] Investopedia.com (2005). Special purpose acquisition company - SPAC. Retrieved 12 October 2016 from http://www.investopedia.com/terms/s/spac.asp

[2] Malaysian SPACs: Go hard or go home. (2013). Retrieved October 16, 2016, from http://www.globalcapital.com/article/wqq2hybkct4v/malaysian-spacs-go-hard-or-go-home

[3] Lin, Tee. (2016, March 12). The fading beauty of SPACs - business news | the Star Online. Retrieved October 15, 2016, from http://www.thestar.com.my/business/business-news/2016/03/12/the-fading-beauty-of-spacs/

[4] Malaysian Spacs: Go hard or go home. (2013). Retrieved October 16, 2016, from http://www.globalcapital.com/article/wqq2hybkct4v/malaysian-spacs-go-hard-or-go-home

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