Two acronyms have been echoing throughout international capital markets: PIPEs and SPACs. While private investments in public equity “(PIPEs”) have been a traditional financing technique, Switzerland’s regulator FINMA has finally given the green light to SIX Swiss Exchange (“SIX”), Switzerland’s largest stock exchange, to allow listings of special purpose acquisition companies (“SPACs”). International DE-SPAC deals have demonstrated that PIPEs play an essential role in the SPAC life cycle.

By Ralph Malacrida / Thomas Reutter (Reference: CapLaw-2021-57)

1) Private Investment in Public Equity (PIPE)

A PIPE transaction involves a private placement of equity or equity-linked securities in a listed company. PIPEs are minority investments that are offered to one or more institutional investors, private equity and strategic buyers with or without involvement of underwriting banks.

a) Popularity of PIPE Deals

PIPEs are an increasingly popular source of funding in the current global economy, on the one hand for listed companies seeking new capital but facing difficulties in raising it by way of a traditional pro rata rights issue due to COVID-19 and volatile stock markets, and, on the other hand, for potential investors seeking to deploy record levels of dry powder. In particular, PIPEs have proven to be a very useful and widely accepted capital raising tool in the context of acquisition financings. PIPE investors usually are professional investors as defined by the Swiss Financial Services Act (FinSA) (including insurance companies, entities under prudential supervision, enterprises and investment structures for high net worth individuals with a professional treasury unit as well as large corporates), as well as hedge funds and private equity firms. 

From an issuer’s perspective, PIPE deals have a number of advantages. In particular, they can be completed quickly, involve lower transaction costs compared to public offerings, require preparation of limited offering documentation, may be marketed on a confidential basis, and result in increased holdings among institutional (long-term) investors. Disadvantages include the fact that investors sometimes ask for a discount to market on the issue price (to be compensated for lock-up obligations), the offering cannot be made to the public, and not more than 20% of new shares can be placed without triggering a prospectus requirement.

Potential PIPE subscribers may be interested in investing in a SPAC in connection with a DE-SPAC process because it offers the opportunity to acquire a sizeable stake in a listed company at a negotiated (and discounted) price.

b) Deal Process

While financial sponsors would generally expect to conduct comprehensive due diligence when acquiring a significant interest in a privately-held company, access to non-public information of a public company is limited for a minority investor in a PIPE due diligence. This is because the listed issuer publishes financial statements and is subject to ad hoc disclosure obligations on any material developments and hence the relevant information for an investment decision should already be in the public domain. However, this not always the case. Notable exceptions often include acquisition financings In addition, a PIPE investor usually must agree to standstill restrictions which limit, among other things, the investor’s right to buy additional securities of the issuer and/or specify lock-up periods during which the acquired securities may not be transferred.

As PIPE transactions are designed to move quickly, the transaction documentation is limited. It includes an engagement letter and a placement (accelerated book building) agreement between the issuer and the placement agent (with respect to share offerings), or a purchase agreement between the issuer and the investors as well as terms and conditions (regarding equity-linked instruments), confidentiality agreements, legal opinions, placement memoranda (if any), capital increase documentation, and press releases.

c) Corporate Requirements

No shareholders’ approval is required for a PIPE transaction if the board has existing shareholder authorities to issue new shares. Most Swiss listed companies have created authorized share capital that can be used for this purpose. The shareholders typically delegate the decision as to whether pre-emption rights should be disapplied to the board of directors, subject to some fundamental principles determined by the shareholders. In practice, international proxy advisory firms recommend to support these authorizations if the non-preemptive capital issuance is limited to 10% of the issued share capital. 

In the absence of existing authorities, new share capital must be created and existing shareholders’ pre-emption rights must be withdrawn, requiring a shareholders’ resolution by a majority of two thirds of the votes represented at the meeting and the majority of the nominal value of the shares represented (unless provided otherwise in the articles of incorporation). Pre-emption rights apply to capital increases for both cash and non-cash consideration. Therefore, cash box structures, which are a common feature in the UK, do not exist in Switzerland. 

Corporate law does not specify the discount at which new shares may be issued. In practice, the discount is often in line with international practice in the range of 5% to 10% to the last closing price, but may be higher on the grounds of special circumstances. In our view, a strict limitation to a maximum discount of 5% as advocated by some writers in Switzerland, is misplaced. It is important to note that the question of the “permissible” discount does not relate to the validity of the share issuance but rather to a potential liability of the board of directors. In light of this, we believe the measures adopted by the board to mitigate the discount, such as e.g. a bookbuilding procedure by reputable banks, are more important than the actual discount resulting from such procedures. 

d) Prospectus and Capital Markets Requirements

Under the FinSA, no prospectus is required for an issuance of shares if the issuance represents less than 20% of the number of shares already admitted to trading during the period of the previous 12 months, provided that the placement falls within the scope of a public offer exemption. Therefore, given that the size of a PIPE deal normally involves less than 10% of the existing share capital and is offered to “professional clients” (within the meaning of FinSA) to whom public offers may be made without a disclosure document, it can be marketed and sold without a prospectus. In a PIPE transaction, the issuer often instructs a placement agent to identify potential investors and/or carry out an accelerated book building to place the new shares. In an accelerated bookbuilding, the new shares can be placed within hours after the end of a trading day. 

While the NYSE and the LSE require shareholder approval for certain issuance of shares to related parties such as directors, officers, shareholders (and affiliates) as well as entities in which they have a substantial direct or indirect interest, no such related party transaction requirements exist in Switzerland.

As soon as the PIPE investor has entered into the contractual agreement to make an investment, the investor will have to comply with requirements regarding disclosure of major shareholdings. This applies to both equity and equity linked instruments. Under the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIA) significant shareholdings in listed companies must be disclosed. The relevant percentages triggering the disclosure obligation are 3%, 5%, 10%, 15%, 20%, 25%, one-third, 50% and two-thirds. 

As far as the issuer is concerned, an ad hoc publicity announcement must be made as soon as the issuer has entered into an agreement with the PIPE investors. Under Article 53 of the Listing Rules of the SIX, the issuer must report price-sensitive facts within the sphere of its activity to the market as soon as it becomes ware of them and earmark such disclosure as “ad hoc announcement pursuant to art. 53 LR”. 

e) Takeover Law Requirements

Normally a PIPE deal will not trigger the obligation to launch a public offer under Swiss takeover laws, unless the percentage of voting securities that are acquired combined with the voting securities already held by the PIPE investor exceeds 33 1/3%. According to article 135 FMIA, a mandatory offer is triggered if an investor – acting alone or in concert with others – obtains a shareholding in excess of 33 1/3% of the voting rights of a target company, irrespective of whether or not such voting rights may be exercised. 

The FMIA allows a listed company to exclude the obligation to make an offer by opting up or opting out of the mandatory takeover regime in the articles of association. If no opting up/out was included in the original articles of association, there is a whitewash procedure similar to the one in the UK. An opting out/up clause may be introduced in the articles if approved by the shareholders by (a) the majority of the votes represented at the shareholders’ meeting, being the ordinary quorum applicable at the company for amendments to the articles of association and (b) the majority of the minority shareholders at the same shareholders’ meeting. For this purpose, a minority shareholder is a person that neither directly nor indirectly nor acting in concert with others holds a share in the controlling stake of 33 1/3% of the voting rights nor has requested that the board of directors introduce an opting up/out clause in the articles. [tbd: Reference to MCH decision?]

f) Corporate Governance

Due to the issuer’s obligation to treat shareholders equally, as a matter of principle the issuer may not give PIPE investors rights that other shareholders do not have, except in limited circumstances or if a separate class of preferred shares is created (which in Switzerland would be very rare in the context of a PIPE deal). In practice, investment agreements sometimes contain board representation rights, veto rights, conversion features, and lock-up obligations.

An agreement between the issuer and the PIPE investor governing matters beyond the purchase of the PIPE instrument (e.g. governance rights, exercise of voting rights, rights of first refusal etc.) likely qualifies as acting in concert and therefore results in an obligation to disclose the aggregate holding of equity securities. PIPE investors and the issuer will make sure that any acting in concert between them will not result in an obligation to launch a mandatory public offer.

g) Insider Trading

Insider trading restrictions may affect the timing and structuring of a PIPE transaction. Under the FMIA, dealing in securities on the basis of, or simply disclosing, information that is not publicly known and would affect the price of securities if it were made public can be both a criminal offence (article FMIA 154) and a breach of administrative laws (article 142 FMIA). It is a criminal offence if made with an intent to realize a financial gain, whereas a person can commit an administrative offence simply by either trading on the basis of, or disclosing, inside information irrespective of the intentions.

The Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FMIO) sets out safe harbor defenses in relation to scenarios in which the use and/or disclosure of insider information is permitted. Safe harbor defenses exist with respect to public share buyback programs, stabilization activities after a public offering, transactions carried out in implementing one’s own investment decision and the disclosure of insider information to persons who need the inside information in order to fulfill their legal or contractual responsibilities, or that must receive the information for the purpose of entering into a contract subject to the documented advice that the inside information may not be exploited. 

As a rule, the fact that the issuer is contemplating a PIPE deal usually is price sensitive non-public information. Therefore, if the placement agent is contacting potential investors, it must inform the investor that the information is price-sensitive and request that the confidential information be kept confidential before disclosing the issuer’s identity. On the one hand, the fact that the investor learns about the PIPE transaction does not prevent him from committing to subscribing new shares from the issuer on the grounds that implementing one’s own investment decision is not insider trading. On the other hand, if the issuer has postponed the disclosure of price-sensitive information that is not related to the contemplated PIPE, according to Swiss insider laws, the issuer would not be allowed to issue or sell new shares to the PIPE investors (and neither would the PIPE investors be allowed to buy them), without first disclosing the price-sensitive information to the public to “cleanse” it.

The insider trading issue is particularly relevant for PIPE investments made for the purpose of funding the acquisition of a target company of a substantial size. Clearly, the fact of the planned acquisition as well as the contemplated target is price sensitive non-public information. In such a scenario, is it permissible for the issuer to disclose these facts to the PIPE investor? If yes, is it permissible for the PIPE investor to enter into a binding commitment before such information is in the public domain? In our view, in both cases the answer should be yes. However, it should be noted that many scholars and practitioners take a different view, in particular on the second question. Unlike other jurisdictions, Swiss insider trading laws have no express safe harbor or defense if both parties to a transaction are in possession of the same inside information (sometimes referred to as “equal information defense”). 

However, the disclosure of material (price sensitive) non-public information (MNPI) is permissible based on a specific safe harbor if the recipient needs to receive the MNPI for the purpose of entering into a contract (Art. 128 lit. b FMIO). In our view, a professional investor that is about to enter into a funding commitment, i.e. a “contract”, in relation to the subscription of securities in a SPAC needs to receive information about the SPAC’s contemplated acquisition target because otherwise the investor would have no information about the investment and would not be in a position to commit making it. The indirect funding of the DE-SPAC transaction through a PIPE so as to allow the SPAC to make the contemplated acquisition is the raison d’être of the investment. In other words, the contemplated acquisition is inherently part of the PIPE investor’s investment decision. 

In addition, Art. 127 al. 1 FMIO provides for a safe harbor in relation to the investment in securities while in possession of certain inside information (as opposed to the mere disclosure of it). The safe harbor permits the implementation of an investor’s own decision to purchase securities despite the fact that the contemplated purchase may qualify as MNPI. The safe harbor is subject to the condition that the investor’s investment decision may not be taken due to MNPI other than the investor’s own decision to purchase the securities. The rationale of this safe harbor is that the implementation of an investor’s own investment decision does not result in an unjust enrichment of the investor compared with other investors and does not jeopardize a level playing field for all capital market participants. 

For the same reasons, the safe harbor of Art. 127 al. 1 FMIO should apply to a PIPE investment in the context of a DE-SPAC transaction. The purpose of a SPAC is to look for a target and to effect a business combination with it. The facts that a DE-SPAC transaction is pursued, the existing shareholders of the SPAC have redemption rights, and the DE-SPAC transaction is an essential element of it, are public information. Even if a PIPE investor enters into a commitment to investing in securities of the SPAC based on specific information about the SPAC’s contemplated acquisition of a target at a time when the target has not yet been disclosed to the public, does not change the analysis. The PIPE investor will not be unduly enriched and there will be no unlevel playing field for capital market participants. The reason is that the SPAC shareholders need to approve the business combination and benefit from share redemption rights if a business combination is completed; furthermore, completion of the PIPE transaction is conditional on completion of the business combination. The PIPE investors are not misusing inside information for their own benefit but are engaged in validating a contemplated acquisition of a SPAC in the ambit of a DE-SPAC transaction, which is the purpose of the SPAC’s existence. The legitimate purpose of PIPE transactions in this context is underlined by the fact that PIPE investors commit themselves to lock-up undertakings for a significant time post-closing of the PIPE investment. Therefore, PIPE investors that enable the implementation of DE-SPAC transactions should be able to avail themselves of the safe harbor of Art. 127 al. 1 FMIO and fall outside the scope of the prohibition to misuse inside information as required for a breach of applicable Swiss insider trading provisions.

2) PIPEs in DE-SPAC Transactions

a) The Lifecycle of a Special Purpose Acquisition Company (SPAC)

A SPAC is formed for the purpose of raising a pool of cash in an initial public offering (IPO) and depositing the cash proceeds into a trust account. The deposited funds must be used to buy an operating company in a business combination transaction by a set date (usually within 18 – 36 months from the SPAC IPO date). The transaction in which the SPAC is combined with a private target company is generally referred to as a “DE-SPAC” (see Matthias Courvoisier, CapLaw-2021-49; Claude Humbel/Thomas van Gammeren, CapLaw-2021-16).

After formation, a SPAC raises capital by issuing units (usually consisting of a share and a warrant) in an IPO. Subsequently, the search for a suitable acquisition target begins. The target cannot be identified prior to the closing of the IPO. If the SPAC had already selected a target at the time of the IPO, detailed information regarding the target would be required to be included in the IPO prospectus. This would delay the IPO process and jeopardize the advantages of a SPAC IPO versus a traditional IPO. During the next stage, the business combination is negotiated with the target and/or its shareholders and in parallel the (PIPE-)financing transactions are lined up. Finally, following shareholders’ approval of the business combination, the DE-SPAC and the (PIPE-)financing transactions are closed. If the SPAC fails to complete a business combination by the set date, the SPAC returns the amounts held in trust to its shareholders and is liquidated.

b) DE-SPAC Financing Need

In many cases, the IPO proceeds of a SPA will fall short of the funds necessary to buy the acquisition target. In addition, one key feature of the DE-SPAC process is that an investor that does not approve of the terms of the DE-SPAC transaction may seek redemption of its shares. In some cases, redemptions may involve a substantial percentage of SPAC shareholders, even close to 100%. In consequence, from the SPAC’s perspective, there is no certainty regarding the amount of cash available to pay for the acquisition of the target and provide the liquidity required to run the business.

As a result of this, the funding gap must be filled through debt and/or equity financing, most commonly through PIPEs. Typically, the PIPE deal is contingent on the completion of the business combination in the DE-SPAC transaction.

c) DE-SPAC PIPE Structures

Generally, a PIPE undertaken in connection with a DE-SPAC transaction is the same as a PIPE in relation to a listed company that already runs an operating business. However, a number of issues exist because the listed SPAC is a cash box, and the PIPE must be synchronized with a business combination between the SPAC and the private target company running the (future) business of the combined entity. 

In international transactions, the announcements of the DE-SPAC and the PIPE deals are usually timed to occur simultaneously. The PIPE is conditional on the closing of the business combination by a certain date. During the interval between announcement and closing, which typically lasts several months, the PIPE investors bear the price risk. This means that PIPE investors must have entered into binding commitments following the due diligence exercise and the negotiation of the investment agreements at the time before the deal is announced. This deal structure raises issues under Swiss insider trading laws in the view of many Swiss scholars and practitioners. We believe the deal structure should be permissible in Switzerland as well (see 1(g) above), even more so in the context of a DE-SPAC where the target company rather than the SPAC is economically the investee company. However, some uncertainty remains in the absence of pertinent court decisions. 

In an alternative structure, first the business combination between the SPAC and the private target company is signed and all price-sensitive information is disclosed to the market and then the PIPE offering process is started. This sequence of events ensures compliance with insider trading restrictions but is subject to increased conditionality.

A theoretical middle of the road approach would give PIPE investors access to non-public material information about the private target company at the beginning of the process but keep the identity of the SPAC secret. Once the public announcement about the execution of the business combination agreement between the SPAC and the private target company is made, the PIPE Investors will be able to commit themselves quickly.

d) The new SIX Disclosure Requirements for a DE-SPAC

The recently published new rules of SIX on SPACs also contain detailed minimum provisions governing the DE-SPACing process. These include the requirement to publish an information document which is intended to form the basis for the shareholder vote to approve or disapprove the contemplated DE-SPAC. 

This information document must include a fairness opinion of an independent body regarding the fairness of the transaction and, in particular, the valuation of the target. In addition, the information document has to contain detailed disclosure about the acquisition target and its financial statements, its corporate governance and the contemplated transaction which have obviously been inspired by the requirements for equity prospectuses pursuant to the Swiss Financial Services Ordinance. Hence, the audited financial statements of the target group for the past three financial years have to be disclosed or incorporated by reference in the information document. These statements do not have to be reconciled to the accounting standard used by the SPAC. However, a description of the main differences between the respective standards has to be included unless the target group already uses IFRS or US GAAP.

The disclosure has to include a discussion of the rationale for and the risks associated with the transaction, a description of (personal) interests of the directors and officers of the SPAC when evaluating the target, a disclosure of potential conflicts of interests (also with regards to members of the banking syndicate) and the expected dilution of the IPO shareholders resulting from the DE-SPAC. The new rules also require the preparation and publication of a “supplement” to the information document in case new facts arise or are established between the time of the publication of the information document and the shareholder vote which could have a significant influence on the decision of the investors.

e) Due Diligence by PIPE investors

Even if the information document mandated by the new SIX SPAC rules will be available to PIPE investors in a SPAC, PIPE investors will probably insist on direct access to target information. In the US, prospective PIPE investors are allowed to conduct due diligence on the private target company and to have access to non-public information before the combination is completed and announced to the public. The same should be permissible in case of a Swiss listed SPAC. As mentioned, the target company rather than the SPAC is the PIPE investor’s counterparty from an economic point of view. Hence, as in a PIPE transaction of significant size and for the reasons set out in 1(g) above, neither the investors nor the banks on behalf of the investors should be prevented for insider law reasons from getting access to the information required to be disclosed to them in view of their investment decision. 

It is an open question whether the banks involved in a PIPE would be comfortable with PIPE investors relying only on the information document required by the new SIX rules for the shareholder meeting deciding on the DE-SPAC. Unless this document is the equivalent of a prospectus and satisfies the needs of the banks to establish a due diligence defense (disclosure letters of lawyers, comfort letters of auditors, etc.), we doubt that this would be the case. Notwithstanding this, if such a (draft) document were available at the time when PIPE investors take their investment decisions, the banks involved in the PIPE placement would enable access to such document by the PIPE investors as part of the investors’ due diligence, but the banks can be expect to emphasize that the document was produced by the SPAC issuer without the banks’ involvement.

f) Investment Agreements and Undertakings by PIPE Investors

– An investment and subscription agreement is entered into on the one hand by the SPAC issuer and on the either by a placement agent acting on behalf of the PIPE investors or by the PIPE investors themselves. The SPC issuer will have to give representations and warranties and agree to indemnification undertakings.

– At the time when the investment agreement is executed, the SPAC has very limited access to funds because the IPO proceeds are held in a trust account for special purposes. This increases the risk of placement agents that are involved in the offering if the deal is aborted. Once the business combination is completed, the issue concerning the trust account no longer exists.

– To determine the amount of the required financing and to secure the marketing of the PIPE transaction, the SPAC will often seek to obtain commitments from existing SPAC shareholders or affiliates not to redeem SPAC shares in connection with a business combination. SPAC investors that plan to invest in the PIPE typically agree to this.

– In addition, the SPAC will want some SPAC shareholders to sign lock-up agreements to prevent them from selling SPAC shares during a specified period following completion of the business combination. Typically, PIPE investors will want this period to be longer than any lock-up agreed to by the PIPE investors.

– Supporting agreements with SPAC shareholders must in any event be considered carefully because they may result in the SPAC and the relevant investors acting in concert. This may trigger disclosure obligations and, depending on the arrangement, potentially even an obligation to make a mandatory public offer, which the parties will want to avoid.

g) Conclusion

The new rules of SIX have paved the way for listings of SPACs in Switzerland. If, as a result of this, listings of SPACs occur, there will also be DE-SPAC transactions down the road and thus PIPE investments. These PIPE investments can be expected to follow international market practice. However, as shown above, some additional complexities and uncertainties may have to be overcome in Switzerland due to its insider trading laws and the specific requirements for a DE-SPAC transaction under the new SIX rules. Nevertheless, we believe that these additional uncertainties and complexities are manageable; they should not prevent the successful completion of DE-SPAC transactions facilitated by PIPE investments.

Ralph Malacrida (ralph.malacrida@baerkarrer.ch)
Thomas Reutter (thomas.reutter@advestra.ch)