Being the first special purpose acquisition company (“SPAC”) which has been listed on The Stock Exchange of Hong Kong Limited (“SEHK”) in Hong Kong for over 18 months, Aquila Acquisition Corporation (stock code: 7836) (“Aquila”) has recently announced details of its proposed merger with Chinese iron and steel e-commerce platform ZG Group for the purpose of effecting a de-SPAC transaction. Since all Hong Kong-listed SPACs are required to complete a De-SPAC Transaction within 36 months after listing, we take this opportunity to highlight the key features on the relevant rules and requirements in relation to a de-SPAC transaction.

De-SPAC transaction of Aquila

Aquila was the first SPAC listed on SEHK and raised about HK$1 billion. According to its website, Aquila targets technology-enabled companies in “new economy” sectors such as green energy, life sciences and advanced technology and manufacturing in Asia, with a focus on China. The merger target, ZG Group, was valued at around HK$10 billion, with approximately HK$605 million coming from the committed private investment in public equity (PIPE) investment. The merger is now pending, with Aquila’s shareholder voting expected to take place in early December 2023. Upon completion, Aquila will become a wholly owned subsidiary of the target, with ZG Group becoming the listed company while Aquila will be de-listed from the HKEX.

What is a SPAC?

A SPAC is a type of shell company with no commercial operations, and its sole purpose is to raise funds through an initial public offering (“IPO”) for the purpose of acquiring a business (“De-SPAC Target”) at a later stage (“De-SPAC Transaction”). Following the IPO, the SPAC is required to publish an announcement of a De-SPAC Transaction within 24 months and to complete a De-SPAC Transaction within 36 months. It may file a request to SEHK for an extension of any of the above deadlines, provided that the SPAC has received the approval of the extension by its shareholders at a general meeting. SEHK however retains the discretion in granting an extension and any extension so granted will be for a period of up to 6 months only.

In case a SPAC fails to meet any of the deadlines as mentioned above, SEHK may suspend the trading of the SPAC which will then be required to, within 1 month of the suspension, return the funds raised at its IPO to its shareholders, and be delisted by SEHK.

What are the requirements of a De-SPAC Transaction?

1.       New listing requirements

a.       The terms of a De-SPAC Transaction must include a condition that the transaction will not complete unless listing approval of the shares of the listed issuer resulting from the completion of the De-SPAC Transaction (“Successor Company”) is granted by SEHK.

b.       The Successor Company must meet all new listing requirements including minimum market capitalisation requirements, financial eligibility tests, IPO sponsor appointment requirements, due diligence requirements and documentary requirements.

c.       The Successor Company must appoint at least 1 sponsor to assist it with the listing application at least 2 months prior to the date of its listing application.

2.       Eligibility of De-SPAC Targets

a.       At the time of entry into a binding agreement for the De-SPAC Transaction, a De-SPAC Target must have a fair market value representing at least 80% of the funds raised by the SPAC from its IPO.

3.       Independent Third Party Investment

a.       The terms of a De-SPAC Transaction must include investment from independent third party investors who must be professional investors (“Independent Third Party Investors”).

b.       The total funds to be raised from the Independent Third Party Investors (“Independent Third Party Investment”) must constitute at least (i) 25% of the negotiated value of the De-SPAC Target (“Negotiated Value”) if the Negotiated Value is less than HK$2 billion, (ii) 15% of the Negotiated Value if the Negotiated Value is HK$2 billion or more but less than HK$5 billion, (iii) 10% of the Negotiated Value if the Negotiated Value is HK$5 billion or more but less than HK$7 billion and (iv) 7.5% of the Negotiated Value if the Negotiated Value is HK$7 billion or more.

c.       At least 50% of the Independent Third Party Investment must be contributed by at least 3 investors who each is either (i) an asset management firm with assets under management of at least HK$8 billion; or (ii) a fund with a fund size of at least HK$8 billion.

4.       Announcement and listing document

a.       For the purpose of the De-SPAC Transaction, an announcement must be made by the SPAC as soon as possible after the terms of the De-SPAC Transaction have been finalised, and a listing document must be issued and despatched by the SPAC at the same time as or before the SPAC gives notice of the general meeting to approve the De-SPAC Transaction.

b.       Nevertheless, both must be submitted to SEHK prior to publication and can only be published or issued after SEHK has confirmed to have no further comments on the documents.

5.       Shareholder vote

a.       A De-SPAC Transaction as well as the terms of any third party investment to complete a De-SPAC Transaction must be approved by the SPAC’s shareholders at a general meeting. Written shareholders’ approval will not be accepted in lieu of holding a general meeting.

b.       Shareholders of the SPAC and their close associates must abstain from voting on the relevant resolution(s) at the general meeting if they have a material interest in the transaction.

6.       Share redemptions

a.       A SPAC must provide its shareholders with the opportunity to elect to redeem all or part of their shares in the SPAC prior to a general meeting to approve the De-SPAC Transaction. The period for election should start on the date of the notice of the said general meeting and end on the date and time of commencement of the said general meeting.

Conclusion

In light of the potential significant and adverse consequence of failing to meet the deadlines under the Listing Rules, and the fact that all Hong Kong-listed SPACs were listed within 2022, it is expected that other Hong Kong-listed SPACs will announce their De-SPAC Transactions soon. The De-SPAC Transaction of Aquila, if successful, will boost the market’s confidence in SPAC listings in Hong Kong.