top of page
  • Writer's pictureKılıç Çaylı & Partners

"SPAC" in Capital Markets Legislation: Partnership for Merger Purposes

Updated: Jan 27

A Brief Review of Legal Nature and Elements of a SPAC


Corporate Finance Series : 01 - Special Purpose Acquisition Company (SPAC)


"SPAC" in Capital Markets Legislation: Partnership for Merger Purposes
SPAC, SPV, and Merger Partnership Concepts

SPAC, SPV, and Merger Partnership Concepts


Today, there are certain instruments that we frequently hear about in capital markets and corporate finance that are created for the funding of companies: SPAC and SPV. SPV, meaning "Special Purpose Vehicle", refers to a financial integrity that is designed for the external financing of a company, specific to that company and limited to that company. There are various legal structures for this purpose. SPAC, or "Special Purpose Acquisition Company", is a specific type of legal entity that is one of the financial instruments considered within the scope of SPV.


The "SPAC" structure, which is considered to be exclusive to foreign capital markets, is actually included in the Turkish Capital Markets Legislation: "Partnership for Merger Purposes".


"SPAC" is defined in subparagraph (b) of Article 4 of the Communiqué on Mergers and Demergers ("Communiqué")[1]. Although there is no consolidated regulation in the Turkish capital markets legislation regarding the concept of a merger target company, various sub-legislation provisions regulate the characteristics of a merger target company.


As a matter of fact, in addition to the Communiqué on Mergers and Demergers, the Borsa Istanbul Listing Directive[2]("Directive"), the Communiqué on Repurchased Shares[3], and the Communiqué on Material Transactions and the Right to Separation[4] contain various regulations on merger target companies.


Based on the aforementioned legislative provisions and the definition in the Communiqué in general, the elements of a merger target company are briefly summarized below.


What is the Purpose of a SPAC? Which Activities Can a Partnership of this Nature Engage in?


According to the definition in the Communiqué, the most important distinguishing element of a SPAC is the purpose behind its establishment. A SPAC is established for the purpose of merging with a non-public corporation, not for the purpose of engaging in independent commercial activity.


Therefore, it would be contrary to the purpose and nature of the establishment of the SPAC to have any other field of activity or to engage in any other activity other than the purpose aforementioned. The only activity of the SPAC should be to carry out the necessary works and transactions to merge with a non-public corporation.


Is It Mandatory to Stipulate a Period of Time for the Realization of the Merger Purpose?


Since the company was established for the purpose of merging with a non-public company, it is necessary to determine a period of time for the realization of the targeted merger activity. Otherwise, it is inevitable that undesirable consequences such as serious uncertainties regarding how long a company, which exists solely for the purpose of a merger, envisages achieving this goal and what actions it plans to take to achieve this goal within the specified period, will occur.


This period determined by the Company will be announced to the public with the explanatory circular. There is no limitation in the capital markets legislation regarding the period to be determined.


In the event that the targeted merger transaction cannot be realized by the company within the specified period, a voluntary repurchase transaction will be carried out for the shares of all shareholders. Knowing that they will have the opportunity to sell their shares in case the company fails to achieve its target provides a guarantee to the shareholders of the company.


What is an Investment Strategy? Is it Mandatory for SPACs to Have an Investment Strategy?


The SPAC must have a predetermined investment strategy. In this sense, the investment strategy includes the SPAC’s plans regarding the size, financial qualifications, and type of non-publicly traded company with which it intends to merge.


The purpose of requiring the determination of the investment strategy is to demonstrate that the corporation, which has expressed its will to merge with another incorporation, will realize this purpose in a certain way and that the necessary planning has been made for this purpose.


In other words, it is necessary to outline the strategy that the corporation will follow in order to realize its objective.


What are the Restrictions on Share Sales in Merger Purpose Corporations?


Pursuant to both the definition in the Communiqué and Article 11 of the Directive, for the initial listing of the SPAC’s shares to be issued through a public offering, the ratio of the shares offered to the public to the paid-in or issued capital of the company to be formed after the public offering must be at least 50%.


The Directive also permits the public offering of a maximum of 90% of the shares of the merging company[5]. In addition, at least 80% of the shares offered to the public must be sold to institutional investors[6][7].


The definition in the Communiqué states that the company may allocate a maximum of 10% of the proceeds from the public offering to corporate expenditures. By restricting the expenditure area of the amount that should constitute at least 90% of the public offering proceeds, it is obliged to be used for the voluntary repurchase of the shares of the shareholders who voted unfavorably in the event that the merger transaction is approved; and if the merger cannot be realized, it is obliged to be used for the voluntary repurchase of the shares of shareholders other than the founders[8].


Conclusion


From a VC's perspective, SPAC is a more challenging instrument than other financial instruments used in the venture capital field. This is because;


  • Fund management is required to contribute at least 10% of the total capital. Alternative instruments do not have such an obligation.

  • It is quite easy for the partners, which we call LLP-Limited Liability Partners in the terminology, that is, partners who only put capital into the financial instrument as financial investors but do not participate in the management, to leave the Partnership. This makes it difficult for the fund manager to keep a certain amount of capital stable for a certain (and long) period of time. In fact, when a significant amount of capital is returned, the Partnership may become unable to fulfill its purpose and may be forced to liquidate. However, with alternative instruments, fund managers can build legal safeguards against the return of capital by shareholders.

  • Alternative financial instruments make it possible to invest in companies located in other countries. The fund manager's portfolio options are much wider, allowing them to optimize the fund's return. On the other hand, it is not possible to invest in different countries with the Merger Purpose Partnership.


Although it has various limitations, SPAC provides fund managers in the field of venture finance with an alternative tool in addition to the existing tools. It can be a very favorable tool for investing in venture companies that have reached their maturity stages and have the potential to provide guaranteed and relatively high returns in a shorter period of time.


Kivilcim CAYLI

Deniz KARADUMAN



[1] In subparagraph b of Article 4 of the Communiqué "Deposits for the purpose of offering at least half of the shares representing the capital to be formed after the public offering to the public in line with a predetermined period and investment strategy, and then merging with a non-publicly traded corporation, not having any activities other than achieving this purpose, using a maximum of ten percent of the proceeds from the public offering for the activities specified in the articles of association and/or the prospectus issued for going public, and returning the balance to the shareholders other than the founders in case the targeted merger transaction is not realized within the predetermined period, a corporation that commits to invest in one or more of the government domestic debt securities and similar investment instruments and discloses the cash management policy required in this framework to the public in the prospectus issued due to the public offering, that will carry out the voluntary repurchase transaction for the shares belonging to the shareholders who voted negatively at the general assembly meeting where the merger transaction was approved and, in the event of its termination, for the shares belonging to all shareholders other than the founders, within the framework of the principles specified in the prospectus and that has the phrase "merger oriented corporation" in its trade name. (The full text of the Communiqué is available here in Turkish) [2] The full text of the Directive is available here in Turkish. [3] The full text of the Communiqué is available here in Turkish. [4] The full text of the Communiqué is available here in Turkish. [5] Paragraph (c) of Article 11 of the Directive reads as follows: "For the initial listing of the shares of the merging corporation to be issued through a public offering, the corporation shall; (...) c) The ratio of the sum of the shares held by the founders, members of the board of directors, and personnel authorized in management in the partnership capital to the partnership capital must be at least 10% (...)." [6] The concept of institutional investor is defined in Article 4 of the Communiqué on the Sale of Capital Market Instruments as follows: "refers to professional customers (...) other than those defined in the Board's regulations on investment institutions and deemed professional based on demand." [7] Paragraph (b) of Article 11 of the Directive stipulates that; “(...) For the initial listing of the shares to be issued by the merging company through public offering, (...) at least 80% of the shares offered to the public must have been sold to institutional investors, (...)". [8] Nilsson Okutan, Gül. Sermaye Piyasası Hukukunda Birleşme Amaçlı Ortaklık. On İki Levha Yayıncılık, December 2016.

8 views0 comments

Comments


bottom of page