SPAC Developments in Luxembourg

Since 2020 all across the United States and Europe special purpose acquisition companies (SPACs) have become a considerable alternative to traditional IPOs, gaining much interest from investors and market participants alike. Luxembourg is not an exception to this trend and recently several SPACs have been set up and successfully listed. The first SPAC to be set up was Lakestar SPAC 1 SE in February 2021. Other SPACs that followed were 468 SPAC I SE and OboTech Acquisition SE. More recently, a business combination between
Alvotech Holding S.A. and Oaktree Acquisition Corp. II SPAC was achieved. Furthermore, on 16 August 2022 the Commission de Surveillance du Secteur Financier (CSSF) granted a derogation from the requirement to launch a takeover bid for the shares of Odyssey Acquisition S.A. as a result of the subscription for newly issued shares on 22 April 2022 in the context of the business consummation between Odyssey Acquisition S.A. and BenevolentAI Limited. ¹

Luxembourg's attractive regulatory corporate and listing law frameworks have turned the country into a major potential hub, which is likely to become one of Europe's preferred destinations for such projects.

What exactly is a SPAC and how is it structured?

Generally speaking, SPACs are blank-cheque companies which are set up in order to raise the necessary funding with respect to the acquisition of a future, not yet identified, target company in a reverse merger. They provide private companies with a means to access public markets and offer investors an opportunity to embark on joint investments with more experienced sponsors and market participants.

Usually, a SPAC can use only a restricted timeframe during which the target company is identified and its acquisition is completed (in many instances such timeframe is between 18 and 24 months). If the SPAC is unable to complete  the acquisition of an appropriate target company by the applicable deadline, the funds that have been raised from investors must be returned to the investors. Typically, the investors also have the right to redeem the shares they acquired in the preceding IPO and have their original investments paid back to them prior to the acquisition taking place should they not approve of the target company selected, but rather prefer to exit the structure.

Although SPACs are often structured similarly to private equity funds, they do not fall under the scope of Directive 2011/61/EU on alternative investment fund managers as they have been set up with the aim to become a fully operating company or at least a holding company of a group that includes the target company once the acquisition of the target company has been fully consummated. Given that they do not impose any limitations and requirements on the profiles of the investors in most instances, any individual or legal entity can buy shares.

Furthermore, often target companies can negotiate specific fixed lock-in prices of their stock with the sponsors of the SPAC. Thus, target companies may succeed in avoiding possible value decreases that a classic IPO can cause, in particular in times of market uncertainty. Also, there is often the possibility to negotiate the sale price of the target company in a sale to a SPAC. In this respect investors can decide whether or not to exit the structure and withdraw their capital before the acquisition occurs. If such a situation arises, the sponsors of the SPAC may nonetheless agree to fund any cash shortfalls at closing so that the acquisition can still go ahead. This makes SPAC investments considerably investor-friendly.

Given that the SPAC, despite being a shell company, is a corporate entity with legal personality, it is generally allowed to have its shares or units admitted to trading on a public stock exchange, thus enabling investors to benefit from all the advantages in terms of trading and information disclosure which are available to listed companies.

Which corporate law framework applies to SPACs?

Luxembourg corporate law allows SPACs to adopt various legal forms such as a European company (société européenne), a public limited company (société anonyme) or a limited stock partnership (société en commandite par actions).  In this respect it is fair to say that the legal form of the public limited company (société anonyme) has proven particularly popular as it has relatively low incorporation costs (the minimum share capital at the incorporation being EUR 30,000). Furthermore, it can relatively easily be merged with a target company which has been set up under the laws of another EU Member State and converted into a European company to be governed either by Luxembourg law or by the law of the target company subsequent to the acquisition of the target.

Another major advantage of Luxembourg law with respect to the set-up of SPACs is its flexibility to make adjustments based on the specific context of the project. Thus, it is generally possible to create different classes of shares such as ordinary, preferential and redeemable shares to which different financial and voting rights are attached. In this respect, voting and non-voting shares can be issued, which are to be held by different investor types. Along the same lines, the articles of association of a SPAC usually contain the possibility to issue redeemable shares allowing investors that do not wish to continue with their investments to redeem the shares they hold.

Likewise, the powers and tasks given to the management body of the SPAC can be adapted and restricted to specific decision-making topics with varying representation rules provided within the general Luxembourg corporate law framework, taking into account specific constraints and idiosyncrasies of the envisaged target company merger.

Are there specific issues that might occur in the context of the listing of a SPAC?

Since a SPAC is ultimately a legal entity which does not differ that much from other operating companies in terms of its corporate structure, no particular, ie SPAC-specific, listing and prospectus approval regime applies to it. Consequently, in order to obtain a listing on the Luxembourg Stock Exchange, a prospectus must be produced and approved by the relevant competent approval authority under general Luxembourg prospectus rules.

In this respect, two main market venues are offered by the Luxembourg Stock Exchange, ie the regulated market and the Euro MTF market. An admission to trading on the regulated market requires the prior approval by the CSSF of a prospectus compliant with Regulation (EU) 2017/1129 (the Prospectus Regulation) provided that Luxembourg is indeed the SPAC's home Member State for prospectus purposes. Once approved, such a prospectus can also be passported into another EEA Member State for the purposes of a listing on such EEA Member State's regulated market.

A listing on the Euro MTF, being a Luxembourg multilateral trading facility, only triggers the application of the Rules and Regulations of the Luxembourg Stock Exchange (the ROI). The competent approval authority for such a Euro MTF listing is the Luxembourg Stock Exchange and not the CSSF.

However, in the context of an IPO conducted by a SPAC, a prospectus under the Prospectus Regulation will have to be approved for the purposes of making a public offer in Luxembourg. The publication of such a public offer prospectus is required prior to the IPO taking place in non-exempt offer scenarios, ie in situations in which the offeror of the securities cannot benefit from an exemption from the obligation to publish an approved prospectus.² Such a public offer prospectus will need to set out the terms and conditions of the offer as well as the main characteristics of the securities which are to be offered to the public. Furthermore, the total amount of the offer, the number of securities offered, the price of each security or the minimum subscription amount per investor must be specifically referred to in the prospectus. Also, the investment scope and all parameters to be applied with respect to the identification and acquisition process of the future target company must be sufficiently described.³

Once listed on a regulated market of the Luxembourg Stock Exchange, the SPAC will be subject to all applicable rules, in particular under Regulation (EU) No. 596/2014 on market abuse (the Market Abuse Regulation), the Luxembourg law of 11 January 2008 on transparency requirements (the Luxembourg Transparency Law) ⁴ and the ROI. With respect to a listing on the Euro MTF, in addition to the Market Abuse Regulation in terms of disclosure requirements, only the rules set out in the ROI will be applicable as such issuers are not subject to the Luxembourg Transparency Law.

If the intention is to list the target company and not the SPAC, once the reverse merger has been consummated, it is important to note that the question of the conditions under which such listing can be obtained will require a separate analysis given that the newly acquired company and not the SPAC would be the issuer in such case.

Does the Luxembourg Stock Exchange provide any specific guidance on the listing of SPACs?

In August 2021 the Luxembourg Stock Exchange published a framework with the objective to provide guidance to sponsors and other professional intermediaries in the context of a listing of securities issued by SPACs on its markets (the SPAC Guidelines).

The SPAC Guidelines are essentially recommendations that SPAC issuers should take into account when structuring their listing project and are therefore not obligatory. These recommendations are as follows:

1. Funds raised by SPACs should be placed in an escrow account with a regulated financial institution and issuers should document an order of priority for outgoing payments.
2. The issuer should grant redemption rights to the SPAC shareholders and describe the conditions under which the rights can be exercised.
3. The majority of the shareholders should approve the business combination with the target company in a general meeting (de-SPAC process) and the issuer should provide the shareholders with the information necessary to make an informed decision about the exercise of their redemption rights.
4. In the prospectus accompanying the admission to trading, the issuer should describe its business strategy to deliver insights on the target industries and geographies where it seeks acquisition opportunities.
5. The timeframe for the consummation of the business combination should be defined and limited in time.

The Luxembourg Stock Exchange emphasises that the SPAC Guidelines are not to be understood as an exhaustive or mandatory list of features that any SPAC would need to comply with in order to obtain a listing on the Luxembourg Stock Exchange. Deviations from these recommendations in specific cases might therefore be possible.

Consequently, as part of its general review and approval process, the Luxembourg Stock Exchange reserves the right to consider any other feature of a SPAC (eg management lock-up periods, sponsor commitments or remuneration mechanisms) when assessing a listing request or approving a Euro MTF prospectus.

Are there any issues that could arise under Luxembourg takeover rules where the SPAC has been admitted to trading on a regulated market?

An obligation to launch a takeover bid under the Luxembourg law of 19 May 2006 on takeover bids (the Luxembourg Takeover Law) can arise. Where the shares issued by the SPAC have been admitted to trading on a regulated market and provided that new shares are to be issued within the context of the merger of the target company which will be subscribed for by specific shareholders of the SPAC, such as the sponsors acting in concert.

The Luxembourg Takeover Law establishes a framework for both mandatory and voluntary takeover bids. Generally speaking, it is applicable to Luxembourg-incorporated issuers of securities carrying voting rights which have been admitted to trading on a regulated market. Consequently, listings on multilateral trading facilities such as the Luxembourg Euro MTF market are not sufficient. Furthermore, it is not applicable to open-ended funds (ie issuers which operate on the principle of risk-spreading and the units of which can be repurchased or redeemed at the holders' request).

a) Obligation to launch a bid 

Pursuant to article 5(1) of the Luxembourg Takeover Law, a mandatory bid must be made whenever a natural or legal person (as a result of their acquisition or the acquisition by persons acting in concert with that person) obtains securities of a target company which, when added to any existing holdings of those securities, directly or indirectly provide a specific percentage of voting rights in the target company, thereby giving that person control of the target company. Control over the target is obtained if the relevant person(s) hold(s) a percentage of 331/% of voting rights in the target company. Generally speaking, the acquisition of such a controlling holding needs to occur during the time of listing. Therefore, usually issuers that are already controlled by a certain shareholder or shareholders acting in concert at the time the relevant securities were first admitted to trading on a regulated market cannot become the target of a mandatory bid. The reason for this is that, in such a case, control had already been established before the admission to trading took place.

b) Persons acting in concert

Control is oftentimes not acquired alone but by persons acting in concert. Under the Luxembourg Takeover Law, persons acting in concert means natural or legal persons who cooperate with the offeror or the target company on the basis of an agreement, which is either express or tacit, oral or written, and which is aimed at acquiring control of the target company. Strictly speaking, any person acting in concert is also under the general obligation to launch a mandatory bid and therefore any derogation granted from the obligation by the CSSF must be addressed and granted to all persons involved (ie main offeror and persons acting in concert). In a SPAC context sponsors may qualify (depending on the features of the case) as such persons acting in concert.

c) Derogation from the obligation to launch a takeover bid 

However, in specific contexts a derogation from the obligation to launch a takeover bid can be obtained from the CSSF. Such a derogation was granted in March 2022 in the context of the acquisition of a company incorporated under German law ⁵ by a Luxembourg-incorporated special purpose acquisition company ⁶ and (as mentioned in the preamble to this article) in August 2022 in the context of the business combination between Odyssey Acquisition S.A. and Benevolent AI Limited. The derogations were granted in accordance with article 4(5) of the Luxembourg Takeover Law to the persons subscribing for newly issued shares in the SPACs and acting in concert as they temporarily acquired control of the SPACs. The shares issued by the SPACs had been admitted to trading on the regulated market of the Frankfurt Stock Exchange and Euronext Amsterdam, respectively, and the CSSF was the competent authority with respect to the granting of any derogation under the Luxembourg Takeover Law in both cases pursuant to article 4(2)(e) of the Luxembourg Takeover Law.

In both contexts, the CSSF's decision was based on the argument that the shareholders of the SPAC during the process of the business acquisition and combination had the possibility to make an informed decision as to whether or not they should stay in the structure. According to the CSSF, this was in particular reflected by the fact that the business combination was submitted for approval in the context of the extraordinary general meeting of shareholders of the SPAC and the possibility of an unlimited exit for shareholders not approving the proposed acquisition of the target company. Thus the CSSF came to the conclusion that the interests of the minority shareholders had been sufficiently taken into account and protected,so the application of article 5(1) of the Luxembourg Takeover Law was not necessary.

Despite the listings having been obtained on the Frankfurt Stock Exchange and Euronext Amsterdam the CSSF was also the competent authority for the granting of such a derogation, as both contexts were a situation of shared supervision pursuant to article 4(4) of the Luxembourg Takeover Law.

Generally speaking, this means that whenever the securities issued by a Luxembourg- incorporated target company have been admitted to trading on an EEA-regulated market other than the one operated by the Luxembourg Stock Exchange, the competent supervisory authority with respect to any takeover bid is not the CSSF but the supervisory authority of the EEA Member State where the regulated market is located. Consequently, the takeover framework applicable in that EEA Member State is the main legal framework under which any bid would have to be launched.

However, in such cross-border contexts according to article 4(2)(e) of the Luxembourg Takeover Law matters relating to the information to be provided to the employees of the target company and all matters relating to company law, in particular the percentage of voting rights which confers control and any derogation from the obligation to launch a bid, as well as any squeeze-out and sell-out procedures, among others, are governed by the Luxembourg Takeover Law. On the other hand, most procedural aspects of the takeover bid will, however, be governed by the laws of the EEA Member State where the listing has been obtained. This includes aspects such as the offer price, the contents of the offer document and the disclosure of the bid.

Favourable outlook for the future

Investment banks and sponsors but also retail investors looking for new investment opportunities will most likely welcome the increasing interest setting up SPACs in Luxembourg. In particular, the accessibility of the CSSF and it deal-specific experience, as referred to above, as well as the straightforward and investor-friendly listing framework provided by the Luxembourg Stock Exchange will undoubtedly prove to be a great asset to Luxembourg and should be likely to further increase its position as a major business centre in Europe.

Authors: Isabelle Lentz, Partner; Markus Waitschies, Senior Expertise Lawyer; Katia Fettes, Counsel

_{1 ISIN: LU2355630455, Euronext Amsterdam regulated market listing.}

_{2 These exemptions are set out in article 1(4) of the Prospectus Regulation.}

_{3 The main framework applicable with respect to the content of the prospectus is Commission Delegated Regulation (EU) 2019/980 of 14 March 2019.}

_{4 The Luxembourg Transparency Law is applicable to issuers whose home Member State for transparency purposes is Luxembourg. Luxembourg- incorporated issuers of shares which have been admitted to trading on a regulated market (which need not necessarily be the one operated by the Luxembourg Stock Exchange) automatically have Luxembourg as transparency home Member State. Such issuers cannot choose from among the competent supervisory authorities of several EEA listing venues.}

_{5 HomeToGo GmbH.}

_{6 Lakestar SPAC I SE (renamed HomeToGo SE) ISIN:LU2290523658).}