In April, the NYSE proposed a rule change that would have amended Section 102.06 of the Listed Company Manual to allow a SPAC to “remain listed until forty-two months from its original listing date if it has entered into a definitive agreement with respect to a business combination within three years of listing.” (See this PubCo post.) The current rule imposes a three-year deadline for a SPAC to complete its de-SPAC merger. At the end of last week, the SEC posted a notice that the NYSE had withdrawn the proposal to extend the period that the SPAC can remain listed if it has signed a definitive de-SPAC merger agreement. Why?
As noted above, under current rules, the NYSE will “promptly commence delisting procedures” for any listed SPAC that fails to complete its de-SPAC merger within the shorter of three years or the time period specified by its constitutive documents or by contract—even if the listed SPAC has entered into a definitive de-SPAC agreement within three years of its listing date, but is unable to complete the transaction before the three-year deadline. The NYSE indicated in the proposal that, under current rules, “as a practical matter,” even if the SPAC has entered into a definitive de-SPAC agreement, if it fails to complete the merger by the deadline, the SPAC would have to “liquidate, transfer to a market that provides a longer period of time to complete the Business Combination, or face delisting.” The NYSE noted that the three-year limitation is solely a creation of NYSE rules and that “many SPACs have been able to extend their lives beyond three years either by shareholder approval or other mechanisms provided under their organizing documents.” Under current rules, however, any extension beyond three years, even if approved by shareholders, does not avert the delisting mandate.
The proposal would have extended that deadline to 42 months under certain circumstances. As proposed to be amended, Section 102.06e would have provided that the SPAC “will be liquidated if it has not (i) entered into a definitive agreement with respect to its Business Combination within (A) the time period specified by its constitutive documents or by contract or (B) three years, whichever is shorter or (ii) consummated its Business Combination within the time period specified by its constitutive documents or by contract or forty-two months, whichever is shorter.” If the SPAC failed to comply, the NYSE would promptly commence delisting procedures.
The NYSE proposal was originally posted in April, and in May, the SEC posted a notice of designation of a longer period for SEC action. Then, in July, the SEC posted an Order instituting proceedings to determine whether to approve or disapprove the proposed rule.
The Order explains further that the NYSE supported the proposed rule change because it “believes that a SPAC represents a significantly different investment after it enters into a definitive agreement for a Business Combination, as investors who continue to hold the SPAC’s securities or acquire them after that agreement is executed have knowledge about the operating asset the SPAC intends to own and can be assumed to own the securities because they want to have an ownership interest in the post-Business Combination entity.” As a result, the NYSE “believes that a SPAC that has signed a definitive merger agreement to acquire an identified business does not present the same investor protection concerns as a SPAC before signing such an agreement, which it describes as more purely a blind pool investment. In addition, the Exchange states that delisting a SPAC that has signed a definitive merger agreement when it reaches the three-year deadline may be contrary to the interests of the SPAC’s public shareholders at that time.” As a comparison, the NYSE also indicated that, while Nasdaq’s SPAC listing requirements include a similar three-year limitation, Nasdaq appeal panels have granted additional time to SPACs that have entered into definitive agreements and requested additional time beyond the three years to consummate the de-SPAC merger.
In its Order, the SEC said that the proposal represents a “fundamental change to the well-established requirement that a SPAC’s Business Combination must be consummated within three years or face delisting.” The three-year limit, the SEC observed, was established “to provide protection for public shareholders by restricting the time period a SPAC could retain shareholder funds without consummating a Business Combination. The Exchange does not address how the proposal would affect shareholder protection or why it is appropriate for a SPAC to retain shareholder funds past the current maximum time period of three years and how that would be consistent with the investor protection and public interest requirements of Section 6(b)(5) of the Act.” (The SEC noted that SPAC sponsors have incentives to complete a de-SPAC, in that the “sponsor receives compensation in the form of discounted SPAC shares that generally only have value if a business consummation occurs….These ‘incentives may induce a SPAC sponsor and others to compel the SPAC to complete the de-SPAC transaction on unfavorable terms to avoid liquidation of the SPAC at the expiry of this period.’”) In addition, the SEC pointed out that, with regard to the comparable Nasdaq rule, in July, “Nasdaq filed a proposed rule change that would, among other things, eliminate the discretion of Nasdaq appeals panels to grant such additional time to a SPAC.” (See this PubCo post.) Accordingly, the SEC questioned whether the proposal was consistent with the requirements for investor protection and public interest set forth in Section 6(b)(5).
The SEC also raised concerns about the potential application of the Investment Company Act of 1940 to a SPAC with assets and income “substantially composed of, and derived from, securities.” Those concerns are exacerbated when the SPAC “operates beyond certain timelines, including the one-year and eighteen-month timelines established under Rule 3a-2 of the Investment Company Act of 1940 and Rule 419 of the Securities Act of 1933, respectively.” And “these concerns increase as the departure from these timelines lengthens. If such a SPAC meets the definition of an investment company, it would have to register as an investment company and this would raise issues of its continued listing as a SPAC.”
The burden to demonstrate that the rule proposal is consistent with the Act is on the NYSE, the SEC emphasized, and if it fails to do so, the SEC may not have a “sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act.” Accordingly, the SEC believed that it was appropriate to institute proceedings to determine whether the proposal should be approved or disapproved.
The only comment letter submitted was from the Council of Institutional Investors, which shared “the SEC staff’s concerns that NYSE ‘does not address how [the rule proposal] . . . would affect shareholder protection or why it is appropriate for a SPAC to retain shareholder funds past the current maximum time period of three years and how that would be consistent with the investor protection and public interest requirements of Section 6(b)(5) of the Act.’” CII also argued for disapproval because, in its view, of “the poor governance practices that have been endemic to many SPAC structures.” The comment letter identified two CII-approved best practices for independent boards and director compensation, both of which CII considered to be “critically important for the fair and optimal use of disinterested SPAC investors’ capital.” CII had observed, however, “that many SPACs appear to have challenges in following these two related corporate governance principles,” and the continued existence of these challenges “has significant implications for the protection of investors and the public interest and, in our view, provide an additional basis for the disapproval of [the rule proposal].”
