SPACs Invaders – Implications for D&O insurers
SPACs and the UK Listing Review
The EU's former Financial Services Commissioner, Lord Hill, has delivered the anticipated UK Listing Review which contains recommendations for reform of the UK's current listing regime. This included changes to listing rules with a focus, amongst other things, on special purpose acquisition vehicles (SPACs). SPACs are more flexible than formal IPOs and are used to raise capital in order to merge with/acquire another company. In the US, commentators predict an increase in securities claims involving SPACs, so this development is potentially relevant to London market D&O insurers.
London has historically been seen as a World leading, and Europe's capital, financial hub, but the London markets have been criticised as not attracting new IPOs, particularly in the new economy sectors, such as technology. Chancellor Rishi Sunak launched the Review last November. The aim was to evaluate the UK's listing regime and enhance its position as an international destination when companies are IPO forum shopping. EU capitals, Amsterdam amongst them, are hot on the UK's heels to become the next EU financial powerhouse and business has left for the US and Asia in the wake of Brexit The Review therefore couldn't come soon enough and it recognises the urgency for change so that the UK isn't left behind and can take advantage of future opportunities especially in the tech and science industries.
As set out in the Review, between 2015 and 2020, London accounted for only 5% of IPOs globally and the number of listed companies in the UK has fallen by around 40% since 2008. It goes on to say that only 4 SPACs were listed in the UK last year amounting to just $0.03bn but they have been on the rise elsewhere. In the US, 248 SPACs were listed over the same period amounting to $63.5bn. According to Nasdaq, in 2015, SPACs made up approximately 12% of IPOs. By 2020, that number had more than quadrupled to 53%. This lucrative market is expected to continue to rise this year. Nick Koemtzopoulos, head of Emea equity capital markets at Credit Suisse, told the FT last month that Amsterdam is likely to take an increased share due to its flexibility replicating the US system.
So as to address this discrepancy, the Review recommends changing the current listing rules which require trading to be suspended in the shares of SPACs when a potential acquisition is announced to allow trading to continue, albeit with additional protection for shareholders at the time of acquisition (or de-SPAC). This would include shareholder voting and redemption rights with additional disclosure obligations, as is usual for US SPAC investors.
SPACs are intended to be a low cost vehicle for private companies to have access to the capital markets, but ease of access might encourage some companies to get this public status prematurely, which could store up problems for the future. The public trading after the IPO leaves the directors open to claims and investigations, thereby creating a need for D&O insurance. The London D&O underwriting market should prepare for these changes to be implemented and requests for quotes for SPACs some time in the near future.