In December 2021, VT5 Acquisition Company AG (VT5), the first Swiss SPAC, was listed on the SIX Swiss Exchange, raising CHF 200 million despite regulatory changes causing a nine-month delay. The subsequent ‘SPAC-winter’, characterized by regulatory scrutiny and an unfavorable economic climate, posed significant challenges, leading to VT5 disclosing difficulties in proceeding with a de-SPAC transaction. Despite these hurdles, VT5 identified R&S International Holding AG (R&S) as an acquisition target, agreeing on a CHF 274 million purchase price. The transaction process involved navigating legal and financial complexities, including securing investor commitments, adjusting to accounting standards, and coordinating a public offering of VT5 shares alongside share redemptions and a subsequently introduced debt component. This intricate de-SPAC transaction was successfully completed in December 2023, amidst challenging market conditions.

By Matthias Courvoisier / Deirdre Ní Annracháin (Reference: CapLaw-2024-01)

On 15 December 2021, the inaugural Swiss SPAC, VT5, was listed on the SIX Swiss Exchange. This listing followed a prolonged and challenging journey, marked notably by a sudden shift in regulatory perspectives. This shift necessitated the establishment of new rules, resulting in a nine-month delay of the SPAC IPO. Despite these hurdles, the VT5 founders raised CHF 200 million in capital as part of the SPAC listing. Additionally, the founders and sponsor collectively contributed CHF 8.1 million in working capital. The ultimate aim, as with all SPAC listings, was to carry out a de-SPAC transaction by 15 December 2023 (date of special meeting). 

Following the successful IPO, the global financial industry experienced a period one could describe as the ‘SPAC-winter’. This downturn was primarily due to the SEC’s intensified focus on certain SPAC-related practices in the United States, an increase in interest rates, and a largely inaccessible PIPE market. Consequently, in the U.S., pursuing a public listing through a de-SPAC process often led to significant investor losses and attracted minimal new investment. The de-SPAC process was also made increasingly challenging for VT5 due to the deteriorating economic climate and declining equity markets prevalent over the course of 2022 and the first half of 2023, which resulted in VT5’s sponsor indicating its intention not to participate in a de-SPAC transaction. This ultimately led to an ad hoc announcement from VT5 disclosing its difficulties to the market in early June 2023. Despite these challenges, as part of an 18-month search, VT5 identified R&S as a potentially suitable acquisition target and initiated discussions with its shareholders to explore an acquisition. 

As it is standard for any major transaction, VT5’s negotiations with the shareholders of R&S (Selling Shareholders) first led to the signing of a non-binding term sheet for VT5’s acquisition of the shares of R&S. To bring certainty to the de-SPAC process, both parties agreed upon a fixed purchase price of CHF 274 million, comprising CHF 213.72 million in cash and CHF 60.28 million in VT5 shares. In order to finance the acquisition, VT5 planned to carry out a concurrent capital raise by way of a public offering of VT5 shares. The quantity of VT5 shares that the Selling Shareholders would receive as consideration was contingent on the offering price in that capital raise, capped at CHF 10.50 per share in order to give the Selling Shareholders comfort on the minimum stake they would hold in the new combined entity. This stipulation effectively established a share price range of CHF 10.00 to CHF 10.50 for the capital raise in the de-SPAC. The floor price of CHF 10.00 was set because SPAC investors opting to remain invested would likely redeem their shares for cheaper ones in the offering, thus potentially decreasing the cash proceeds from the offering and necessitating additional investments. Therefore, there was little incentive to set a lower range.

Establishing the purchase price and the offer price range in this manner introduced certain risks to the transaction and differed markedly from a typical IPO. In a typical IPO, early ‘pilot-fishing’ meetings support the pricing process, but several factors make such an approach impractical in the context of a de-SPAC. Pilot-fishing meetings generally require significant engagement by the target company with external investors as well as presentation of a detailed and comprehensive “equity story”, neither of which may be appropriate or feasible in a de-SPAC transaction, given that discussions between the target and the SPAC may still be at a relatively early stage at the time such meetings would need to be held. Furthermore, given the outcome of negotiations between the target and the SPAC is uncertain until quite a late stage, investment banks may be reluctant to engage their investor base in circumstances where a transaction may never materialize. Additionally, as a SPAC is a listed entity, existing and potential investors that would participate in pilot-fishing efforts would need to agree to non-trading and non-disclosure agreements to protect against insider trading, which is a commitment that few would be willing to make. Approaching a wide number of potential investors would also heighten the risk of information leaks. Therefore, prior to establishing the purchase price for the de-SPAC, it was possible for VT5 to discuss the transaction with only a select number of key investors.

In order to successfully initiate the capital raise, the support of R&S’s management was crucial. This primarily involved establishing the necessary financial statements and participating in the drafting of the offer prospectus. The required financial statements needed to be drawn up within a limited amount of time, and – complicating matters – the target company used Swiss GAAP FER for their accounts, a standard not typically recognized for a SPAC. Therefore, it was imperative to confirm with SER the acceptability of Swiss GAAP FER. SER’s confirmation was facilitated by VT5’s commitment to transition to the Swiss reporting standard immediately after closing of the de-SPAC, rather than the three-month period provided in the relevant rules. The prospectus drafting process required R&S management’s active involvement, introducing dynamics distinct from those in standard M&A transactions and due diligence processes. Additionally, the management needed to be prepared for investor meetings and to provide the customary confirmations for prospectuses and auditors’ comfort letters.

The term sheet for the acquisition of the shares of R&S was finalized towards the end of July 2023. Being non-binding, it did not necessitate disclosure under ad hoc regulations. Nonetheless, it was critical for VT5 to softly announce the transaction early to begin discussions with as many existing investors as possible. Ultimately, VT5 and the Selling Shareholders agreed to a soft announcement on 2 October 2023, identifying R&S as the target and the anticipated offer price range.

The objective was to secure firm commitments from both existing and new investors, or at the very least, garner their soft support. These firm commitments primarily entailed a pledge to subscribe to additional VT5 shares, not to redeem VT5 shares, and to support the de-SPAC process during investor and shareholder meetings. To mitigate insider trading concerns, the commitment specified that subscribers must be price-takers. In facilitating this process, VT5 received an exemption from the Takeover Board from the mandatory takeover obligation, applicable if those making commitments collectively exceeded the 33 1/3% ownership threshold. Additionally, VT5 secured a waiver from SIX Exchange Regulation’s Disclosure Office, ensuring that the prospectus could adequately fulfill the disclosure requirements of those making such commitments. Advisors on future de-SPAC processes could consider articulating the takeover exemptions in the articles of incorporation more broadly, to encompass all potential scenarios of threshold-crossing during the de-SPAC. This might even necessitate considering a straightforward opt-out clause, allowing shareholders of the target company to retain more than a 33 1/3% stake following a de-SPAC.

Understandably, investors wished to review an almost final draft of the prospectus prior to entering into the commitments mentioned above and agreeing not to trade until its publication. This approach proved effective, although the amount of soft support significantly outweighed firm commitments. Additionally, at that time, there was limited visibility regarding the transaction’s potential success. While the anticipated redemption estimates proved to be quite accurate, no one could know for sure at that point in time.

Simultaneous to the due diligence and investor discussions, the drafting of the prospectus and the fairness opinion was underway. A comprehensive prospectus, rather than just an informational document as per SIX SPAC rules, was necessary due to the issuance and listing of new VT5 shares as part of the transaction. These new shares surpassed the 20% threshold outlined in art. 38(1) FinSA, and the exemption under art. 38(2) FinSA in conjunction with art. 37(1)(e) FinSO was also inapplicable, as the transaction was not a merger, but rather a reverse merger, which meant that the combined entity had to fulfill all listing requirements applicable to a newly listed entity, such as the free-float requirement. Because of the reverse-merger structure, the financial statements of R&S could be adopted as the primary financials of the combined group, which simplified the financial reporting in the prospectus and eliminated the need for quarterly reporting following the de-SPAC.

A unique aspect of any Swiss de-SPAC process, as per SIX Exchange Regulation’s rules, is the need for a fairness opinion. Its primary goal is to evaluate the investor shareholders’ options in the SPAC: whether it is more advantageous to redeem their shares in the SPAC or to remain invested. Consequently, the recipients of the fairness opinion were the existing investor shareholders of VT5. By assessing these options, the fairness opinion also implicitly advises on the viability of investing in the offered shares. Ideally, from a prospectus liability perspective, it would have been preferable for the fairness opinion to simply indicate a preference for one option over the other. However, SIX Exchange Regulation mandated a more detailed fairness opinion, akin to those in public takeovers. This requirement raised concerns regarding prospectus liability, underscoring the importance of explicitly stating that the fairness opinion is not part of the prospectus. To further mitigate liability risks, it was crucial to ensure that the information in the fairness opinion was as aligned as possible with the prospectus.

Although the fairness opinion posed certain challenges, it also offered distinct advantages. A key issue was the inability to publish transaction research due to timing constraints. Typically, transaction research is published approximately two weeks before the offer prospectus. However, in this case, publishing the research at this stage would have represented the first major disclosure about the SPAC following the de-SPAC, without assurance that it encompassed all material non-public information. This approach might be viable for IPOs, but it is problematic for de-SPACs, considering the SPAC’s status as a listed company. Additionally, releasing the research report after prospectus publication was not feasible due to the mandated quiet period, which extends to forty days following the first day of trading. Therefore, the fairness opinion served to fill the void left by the absence of transaction research. In future de-SPACs, it might be beneficial to tailor the fairness opinion more closely to a research report’s style and format to meet investor expectations more effectively.

The prospectus underwent review and approval processes at SIX Exchange Regulation. The prospectus had to comply with the informational document requirements specified in the SIX SPAC rules and the prospectus requirements of FinSA. SIX Exchange Regulation also reviewed the fairness opinion. Under the SIX SPAC rules, VT5 was obligated to offer its investor shareholders the option to redeem their shares, a stipulation also embedded in the articles of incorporation as a prerequisite for the de-SPAC. All necessary approvals and exemptions had been secured from the Takeover Board at the time of the SPAC IPO to allow the redemption offer, which was a critical step as any failure here would have fundamentally undermined the SPAC concept. Ultimately, the prospectus, along with the fairness opinion and the redemption offer, was slated for joint publication on 8 November 2023.

At the time of the publication, neither VT5 nor the Selling Shareholders could ascertain the potential success of the de-SPAC and the associated capital raise. VT5 therefore engaged in contingency planning early on. This involved preparations for a possible debt component to finance the acquisition. This was viable due to the target company’s net cash position, enabling the arrangement of a credit facility prior to the special investor and shareholder meetings. A crucial consideration was the impact of the credit facility on the offer: whether to view it as positive or negative, and when to announce the intention to raise debt. After deliberation and an assessment of whether the fairness opinion needed updating, it was concluded that the debt’s size and cost were actually advantageous for investors. The decision was made to announce the potential debt component two trading days before the redemption offer’s expiration and four trading days prior to the closing of the capital raise. This approach was guided by art. 56(5) FinSA, which stipulates that any additions to an offer must be published at least two days before the offer period ends. 

Simultaneously with the drafting of the prospectus and the preparation of the redemption offer, the SPA negotiations were underway. The difficulty lay in coordinating the closing of the SPA with the redemption process, the capital raise, and the payment of consideration out of VT5’s escrow account. Synchronizing the entire transaction on the same day was impossible. The solution involved obtaining a confirmation from the sellers for the banks, stating there were no impediments to settling the SPA. This allowed the capital reduction and capital increase required to finance the purchase price to be registered the morning after the VT5 shareholders’ meeting, followed by the escrow amount release in the afternoon and the settlement of the repurchase offer overnight, along with closing of the capital raise on the subsequent day. On this subsequent day, the debt was also drawn down, the cash component of the SPA was settled, and the initial contribution of R&S shares to VT5 was completed. 

Reflecting on the transaction, what stands out is the recollection of an intensely demanding process which presented a myriad of legal intricacies. The discussion above touches on only a selection of these issues. The transaction’s legal complexity stems from the need to harmonize diverse streams and interests. A de-SPAC, by its nature, is far from a straightforward transaction, thus presenting significant challenges. Despite the hurdles posed by a challenging market and the transaction’s economic and legal complexities, the successful completion of the de-SPAC is a testament to the commendable efforts of both the Selling Shareholders and VT5’s founders.

Matthias Courvoisier (matthias.courvoisier@bakermckenzie.com)
Deirdre Ní Annracháin (deirdre.niannrachain@nkf.ch)