Commentary: Has SGX managed to address all governance concerns on SPACs?

Date: May 6, 2021

First published in Business Times on 6 May 2021

Latest proposal suggests several ways to protect investors; with additional safeguards proposed by Sias, its third try to list SPACs may succeed

The Singapore Exchange’s (SGX) Consultation Paper on Special Purpose Acquisition Companies (SPACs), issued last month, has generated a fair amount of interest and debate.

This is the third time SGX has mooted the listing of vehicles with no core businesses. Earlier attempts, in 2008 and 2010, failed because of governance concerns.

SGX’s latest proposal suggests several means of protecting investors.

First, there is a focus on quality companies by requiring a minimum market capitalisation of S$300 million and a requirement for a comprehensive disclosure document when a business is identified.

The Securities Investors Association (Singapore), or Sias, is of the view that it is important for quality companies to be listed on SGX.

Research shows that deals with an enterprise value post-business combination of US$2 billion or more traded significantly better than smaller deals.

Second, SGX is also trying to mitigate dilution risks by not allowing warrants or other convertibles issued to be detached from their related shares.

Sias agrees with this proposal that shareholders who are not in favour of a proposed merger cannot enjoy a free ride by getting their money back but using their warrants to stay in the game.

In addition, due to the highly dilutive effects of warrants, Sias is of the view that instruments such as warrants should be classed as liabilities instead of equity and measured at fair value on a company’s books. They should be marked to market over a period, and the change in their fair value should go into the profit and loss statement.

This will make the impact of warrants clear to investors. Such a proposal is also currently being reviewed by the US Securities and Exchange commission.

Third, SGX is also raising the bar for transparency by requiring SPAC mergers to be accompanied by a circular containing an independent valuation of the business or assets to be acquired.

Fourth, SGX has proposed that a SPAC must appoint a financial adviser to advise on the business combination transaction. Independent shareholders must approve this appointment.

Sias supports this proposal as it will ensure independence in the choice and selection of the financial adviser.

Sias is also of the view that companies and their boards should not be the ones appointing the financial advisers. Sias has always advocated for the appointment to be done by an independent party to ensure that the advice is independent.

We accept the compromise, however, that the choice of the financial advisor be via an extraordinary general meeting (EGM) where shareholders can ask how the due diligence was done for the choice of the financial adviser.

This should be the standard operating procedure for all appointments of financial advisers by listed companies, and not just for SPACs. This will provide comfort for all investors.

More however, can be done. For instance, the issue of whether SPACs will be classified as Excluded Investment Products, which are open to the wider investing public, or Specified Investment Products, which are labelled as high risk and confined to sophisticated investors, was not addressed.

Another question that needs to be addressed is whether there will be a cap on fees charged by the sponsor, and what regulations sponsors will have to observe.

Yet another concern is whether SPACs will be prohibited from investing in a company that was previously listed but then was taken private by a controlling shareholder, usually at a hefty discount.

Globally, two years is the standard time allocated for a SPAC to find a suitable business. SGX has seen fit to propose three years instead. SPACs are presumably founded by well-connected individuals who should already have a good idea of potential target businesses and so, perhaps, two years should be sufficient.

If an extension is sought, in our view, it must require approval from the regulators as well as independent shareholders at an EGM where the sponsors, founders, and concert parties cannot vote.

For the resolution to be carried, there must be 75 per cent of independent shareholders voting for and no more than 10 per cent voting against. Otherwise, the SPAC must be liquidated, and the monies returned.

To ensure minority rights are preserved, the SPAC must be incorporated in Singapore. This would give investors greater confidence that there are laws in the place that protect their interests.

The SPAC should also, at its IPO stage, specify which industry its expertise lies in and is therefore targeting. In addition, there should be a moratorium of at least six months placed on the sale of shares by key SPAC officers.

The market for SPACs is growing rapidly and if SGX doesn’t act now, it could lose out to regional rivals. Some might even go so far as to say that the safeguards proposed are too onerous and restrictive, and the exchange should follow the example of the US where rules are more lax.

An argument could also be made that Singapore, as a developed market, should open the door to other forms of capital raising.

Given the way the market has evolved since 2008, it will certainly be interesting to see what comes of the latest consultation. If SGX does manage to address all significant governance concerns and the additional safeguards proposed by Sias, it could very well succeed with its third try.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)