Top tips for financial sponsors on public transactions

Leading and closing complex deals – every day 2 Top tips for financial sponsors on public transactions

Avoiding pitfalls in public transactions

There is a resurgence of interest from financial sponsors in take-private transactions, private investments in public equity (PIPEs) and special purpose acquisition companies (SPACs). The rules will vary in different jurisdictions and it is important to consider how these differences could impact your transaction.

Having advisors who can handle all aspects of the deal is key to efficient execution of these deals. Baker McKenzie’s market-leading and highly integrated multidisciplinary practice groups are comprised of lawyers with transactional and advisory experience in SPAC and de-SPAC transactions, PIPEs and take-privates across a wide range of jurisdictions—please visit our website for more information.

Table of Content Take-Private transactions 03

PIPE transactions 04

SPAC/De-SPAC transactions 05 3 Top tips for financial sponsors on public transactions

Take-Private transactions

WHAT IS IT?

Transactions where companies whose shares are publicly listed on one or more listing venues are acquired by the PE sponsor and subsequently delisted. Traditionally, undervalued listed companies have presented rich pastures for cashed-up sponsors wishing to invest.

Confidentiality and price sensitive information they may need to provide certainty of funds early on in the process (e.g., equity commitment The prospect of a take-private transaction will constitute highly price sensitive information (PSI) letters, certain funds debt facilities or other comfort acceptable to regulators) that the Bidco will in relation to the target. The rules relating to market abuse and insider dealing as well as the have sufficient financial resources to satisfy the consideration payable, there may be restrictions rules apply so that even when the plans are at a very early stage, a financial sponsor on conditions precedent or other customary deal protection mechanisms (such as break fees), or should take steps to: there may be a requirement for comprehensive disclosure of deal terms and/or equal treatment of all shareholders. „ use code names and keep the internal team small on a “need to know” basis „ seek legal and financial advice before approaching the target or any external parties, e.g., Do your due diligence debt providers/potential consortium members While the comprehensive disclosure obligations for listed companies mean that the scope of „ work with your advisers to proactively manage the risk of a leak information that is publicly available is usually greater than in relation to a private company, the „ avoid making any public statement about whether or not you are interested in a potential due diligence on a take-private transaction is very different from a private M&A deal. Access to bid for the target non-public information is usually restricted, and comfort via representations and warranties, and recourse via warranty and indemnity protection limited. Determine disclosure obligations Takeover rules typically require detailed and prescriptive disclosure on the bidder, including in Plan for additional complexity relation to deal terms for management, the financing and funding structure, and plans for the Take-private transactions involve a highly regulated deal process with close supervision by business, some of which may be difficult for financial sponsor bidders, e.g., the UK Takeover Code regulators. This can create complexity and limits the degree of flexibility and creativity that requires disclosure of two years’ consolidated financials. Financial sponsor bidders may be able to financial sponsors typically have in a private M&A context. Take-private transactions involving obtain certain dispensations, though it is important to properly navigate these with the relevant financial sponsors invariably require the bidder to raise financing from lenders to fund a regulatory body. There may also be additional disclosures when acting in concert with other proportion of the purchase price. Putting together a syndicate of lenders for a public deal can be sponsors or shareholders. more challenging than on a private M&A deal due to the limited due diligence on the target and the need to limit the number of people who know about the offer, e.g., the UK’s “Rule of 6”. There The rules are different from a private M&A deal! may also be a risk that a target company may not be fully taken private and a portion remains The public M&A rules aimed at protecting other shareholders and the market and a strictly listed. Retaining the listing would involve additional costs, continued disclosure obligations and regulated deal process means that financial sponsor bidders may need to adapt the approach to an additional layer of complexity. deal structuring and process that they would normally take on a private M&A deal. For example, 4 Top tips for financial sponsors on public transactions

PIPE transactions

WHAT IS IT?

Privately placed transactions in which a PE investor makes a direct investment into a listed target company whose shares are publicly traded on a exchange. Alongside secondary capital raising structures, we are likely to see more PIPEs as listed companies need more and diverse funding to meet the challenges of the post-pandemic world.

Shareholder approvals/listing rules Check your Fund documents Many stock exchanges have listing rules requiring shareholder approvals for PIPEs. These When considering the PIPE route, PE sponsors should check their constituent documents for requirements vary, depending on the jurisdiction, e.g., shareholder approval would likely be restrictions that prevent the fund from making sizeable acquisitions of shares of listed companies, needed for a sizeable PIPE (unless the existing shareholder authorities are sufficient) or if as well as requirements for governance rights and the means and timing of any subsequent exit the financial investor is a related party of an issuer with a premium listing, while in the US from investments. shareholder approval is usually required by both Nasdaq and the NYSE for issuances of 20% or more of outstanding common stock or voting power outstanding pre-issuance. Similar Take-private rules obligations in relation to confidentiality and price sensitive information will apply in a PIPE as in Stakes secured via PIPE deals could lead to eventual take-private transactions, and financial a take-private transaction (see confidentiality and price sensitive information in the Take-Private investors must be mindful of the relevant rules at the PIPE investment stage. In the US, for Transactions section). example, PE funds investing in PIPEs need to be cognizant of the take-private rules that apply in a subsequent if they are affiliates of the target after the PIPE. Similarly, the takeover No one-size fits all for complex rights structures rules in many European countries will trigger a mandatory for all outstanding shares Financial investors on a PIPE typically expect to negotiate for rights over and above those if the PIPE investor becomes interested in shares carrying 30% or more of the voting rights of the available to other shareholders. Depending on the jurisdiction, these may include, among others, company as a result of the transaction. While no such rule applies in the US, a significant PIPE director nomination, additional information rights, anti-dilution protections, veto rights, minority could trigger a change of control. investor protections, use of proceeds requirements and approval rights for major transactions. Applicable company laws may restrict the scope for such additional rights. Listed companies may Due diligence also be reluctant to give special rights beyond those available to other shareholders. Additional While an issuer might share some limited due diligence materials with a prospective PE investor restrictions on share transfers (rights of first refusal, rights of first offer, tag along rights, drag on a PIPE deal, in practice access to non-public information is limited due to principles of equal along rights) may be more difficult to structure or enforce within a syndicate of PIPE investors treatment of all shareholders and existing comprehensive disclosure obligations of the listed and others. company. 5 Top tips for financial sponsors on public transactions

SPAC/De-SPAC transactions

WHAT IS IT?

A SPAC is used to obtain a public listing and at the same time raise funds in an IPO in order to make an acquisition. After the investment phase, the SPAC will search for a target and either acquire or merge with the target company in a de-SPAC transaction. PE funds may either sponsor a SPAC through a pre-IPO investment or merge a portfolio company with a listed SPAC as an alternative to an IPO exit. Philosophically, a SPAC investment aligns with traditional PE investment models in that there is limited risk for PE investors, who also benefit from the liquidity of publicly-traded securities, potential share price rises, as well as flexibility around remuneration/management incentivization structures and additional leveraging opportunities, e.g., receipt of warrants. For a PE investor, there is the added benefit of a structure that allows for the ability to both control the exit timetable and manage a relatively easy exit route from the portfolio company.

An alternative exit route Considerations on the de-SPAC A sale of a portfolio company to a SPAC can be faster and more efficient than through the Alignment of strategic interests between the SPAC and the target company is key. The closer traditional IPO exit route. The target and its shareholders can negotiate the directly the alignment, the more likely it is that the acquisition will make sense to the SPAC shareholders with the SPAC and since the SPAC is already listed and has typically already raised much of the (thereby reducing the risk of redemptions) and to the wider investment community. cash required to fund the acquisition, market volatility and investor sentiment on the valuation of the target are largely taken out of the equation, providing more certainty around valuation and Remuneration structures deal execution. It is important to understand the remuneration structure adopted by the SPAC sponsor. Traditionally, SPAC sponsors are remunerated through the ability to acquire shares in the SPAC Forming a SPAC at nominal value or close to nominal value. This can result in the sponsors obtaining a return in SPACs are capitalized by investors in exchange for founder shares, which generally constitute circumstances where other shareholders will not. around 20% of the SPAC ownership post-IPO. When considering the SPAC route, PE sponsors should check for restrictions that might prevent the fund from forming or investing in a SPAC Investment deadlines and/or restrictions in investments into the asset classes to be targeted by the SPAC. How close is the SPAC to its investment deadline? The closer to the deadline the SPAC comes before agreeing the terms of an acquisition, the more a target company/PE seller is likely to question the sponsors on the valuation and its long-term prospects. Complex financing arrangements Ensuring that a SPAC has sufficient financial resources to complete the subsequent acquisition IPO readiness of the target (de-SPAC process) is critical. In addition to the funds raised at the time of the A “back door” listing through a SPAC does not reduce the amount of work needed to prepare IPO, additional capital may be raised for an acquisition through the use of a forward purchase the target for life as a listed company. Historical financial information on the target will need agreement with the sponsor and/or a PIPE commitment. to be prepared shortly after entering into the acquisition and due diligence done to a standard necessary for adequate public disclosure. Additional fund raising by the de-SPACed entity via the capital markets will usually trigger new and comprehensive disclosures that are similar to an IPO of the company. 6 Top tips for financial sponsors on public transactions

Our proven track record - selected public transaction experience

SPAC SPAC De-SPAC De-SPAC

Aligro Planet Acquisition Company AB BYTE Acquisition Corp. Aurora Acquisition Corp. JHD Holdings (Cayman) Limited

Advised Aligro Planet Acquisition Company Advised on the USD 300 million IPO listing Advised Aurora Acquisition Corp. in a USD Advised JHD Holdings (Cayman) Limited, AB, a special purpose acquisition company, on Nasdaq of BYTE Acquisition Corp., a 6.9 billion de-SPAC transaction to transform an innovative merchant enablement in its SEK 1 billion IPO on Nasdaq SPAC targeting Israeli technology. Better, one of the fastest-growing digital services platform in lower-tier cities Stockholm, main market. homeownership companies in the US, into in China, in the USD 1 billion de-SPAC a publicly traded company. This follows our transaction with East Stone Acquisition advice in the formation and IPO of Aurora Corporation, a publicly traded special in March 2021. purpose acquisition company.

PIPE PIPE P2P P2P

Daimler Radisys Corporation Hengxing Gold West Knighton

Advised Daimler on its PIPE investment in Advised Nasdaq-listed telecom services Advised Hengxing Gold on the HKD 3 Advised West Knighton on the acquisition ArcLight Clean Transition Corp., a public company Radisys Corporation in billion take-private proposal by Shandong of a 68.95% stake in Cityneon and SPAC, in connection with its exiting connection with an exempt PIPE offering Gold Mining Co. Ltd. by way of a scheme delisting and privatization of Cityneon investment in Proterra. of senior secured notes and warrants to an of arrangement. from the Singapore Exchange. affiliate of Hale Capital Partners.

Useful Resources

Global Guide to Take- SPACs: What private Beyond COVID PE Cross-Border Listings Global PIPE Guide Global Public M&A Guide Global SPACs Guide SPACs cross the Atlantic Private Transactions equity needs to know Playbook - UK and US Guide 7 Top tips for financial sponsors on public transactions

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