Availability of De-SPAC Structuring Alternatives Under Cayman Islands and BVI Company Law
At the business combination stage of the SPAC lifecycle, it is not always the case that a target company which is taken public by an offshore-incorporated SPAC (Offshore SPAC) will continue to be structured as a Cayman Islands or BVI-incorporated holding company after the reverse merger is effected.
If the Offshore SPAC acquires a non-US target company (Foreign Target), the post-merger listed entity is often incorporated in the same jurisdiction as the Foreign Target, with the transaction commonly accomplished by way of a cross-border merger. A possible series of transactions in this scenario (assuming that the Offshore SPAC is incorporated in the Cayman Islands) would be:
- Foreign Target forms a wholly-owned Cayman Islands subsidiary (Merger Sub);
- Merger Sub merges with and into the Offshore SPAC with the Offshore SPAC continuing as the surviving company after the merger; and
- the Offshore SPAC becomes a direct, wholly-owned subsidiary of Foreign Target.
This form of transaction structure was used, for example, in the acquisition of Taboola, the Israeli targeted marketing platform, by ION Acquisition Corp. 1 Ltd., a Cayman Islands-incorporated SPAC at an implied valuation of $2.6 billion, per SEC filings in connection with the transaction.
The statutory merger provisions in Cayman Islands company law allow this form of transaction to be accomplished with ease: typically, a special resolution of the shareholders of the Cayman entity is required to approve the merger, which is generally capable of being passed by 2/3 of voting shareholders at a duly convened and quorate shareholder meeting, along with such other authorization, if any, as may be set out in the Cayman entity’s constitutional documents. The law also requires the consent of certain security interest holders, although it is rare for a SPAC to have granted security over its assets.
If the Offshore SPAC acquires a domestic US target company, it may be the case that the Offshore SPAC will effect a domestication to a US jurisdiction such as Delaware as part of the business combination transaction, with a domestic US entity as the resulting public company. For example, per SEC filings, this deal structure was employed in the acquisition of San Francisco-headquartered property technology company Opendoor by the Cayman Islands-incorporated SPAC Social Capital Hedosophia Holdings Corp. II, in a transaction which valued Opendoor at an enterprise value of $4.8 billion.
As with the Cayman Islands statutory merger provisions, the procedure for effecting a re-domiciliation out of the Cayman Islands (known as a ‘de-registration’) is straightforward. A number of procedural steps need to be taken in the Cayman Islands, including the filing of a declaration by a director of the Cayman Islands entity confirming that, amongst other things:
- it is solvent and able to pay its debts as they fall due;
- the application for de-registration is not intended to defraud its creditors;
- any contractual consent to the transfer has been obtained, waived or released;
- the transfer is permitted by and has been approved in accordance with the company’s constitutional documents; and
- the laws of the jurisdiction where the Cayman Islands entity is transferring have been or will be complied with.
Alternatively, where the parties to the merger can receive their consideration in the form of shares in another entity formed for that purpose, that entity will then list with both the SPAC and the original target vehicle sitting beneath it.
The corporate flexibility and political stability afforded by both the Cayman Islands and the BVI has ensured that both jurisdictions have been vital in the structuring of cross-border mergers, acquisitions, IPOs and investment fund formations for decades. Even if the SPAC IPO boom witnessed throughout 2020 and Q1 2021 continues to taper off somewhat, the Cayman Islands and the BVI will continue to remain absolutely central to the domestic and global M&A markets as the billions of dollars of undeployed capital sitting within SPACs incorporated in these jurisdictions continues to seek out suitable merger targets.