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Introduction of Special Purpose Acquisition Company (SPAC)

2009.10.15

The first Korean SPAC*, Daewoo Securities Green Korea Special Purpose Acquisition Company, was established in December 2009 and was listed on the securities market this month.


SPACs have been in the spotlight in the capital market as it has many merits in diverse aspects. Firstly, from the point of view of general investors, the SPAC will guarantee a return that is equivalent or close to the principal amount, enable the enjoyment of profits accruing from a successful merger and acquisition with small investments and allows high liquidity. Secondly, from the perspective of a corporation that is subject to a takeover, the SPAC can enjoy the effect of becoming a listed corporation through relatively simple procedures and the effect of improvement of financial structure is much larger than that from back-door listing because the merger is targeted to a special purpose company (SPC) that has no contingent liabilities. Lastly, from the view of the financial investors investing in the SPAC (so-called "sponsors"), the SPAC is an investment vehicle that includes all sorts of businesses, such as investment, acquisition, M&A, etc. conducted by investment banks. Therefore, the SPAC is anticipated to be beneficial for the improvement of their profit structure.


In general, the following are pointed out as the major characteristics of the SPAC: (i) the SPAC is formed in a double investment structure in which the management of the SPAC will find the target corporation and its shareholders will decide whether or not to acquire the target, and (ii) the SPAC's profit structure enables the investors to earn profit from their investment by selling the shares of the merged corporation in the stock market, the value of which is increased through the public offering because the target corporation is acquired within a certain period after the establishment of the SPAC.


In the meanwhile, the Korean SPAC is different from the U.S. SPAC in the following aspects: (i) the shareholding ratio of the equity securities investment traders with KRW100 billion or more of equity must be maintained at a level of 5% or more, (ii) the method of financing is limited to the stocks or stock-related bonds (in particular, the issuance of stock-related bonds is prohibited once the SPAC is listed), and (iii) the method of business combination is limited to a merger. On the whole, the characteristics of the Korean SPAC as above are viewed positively from the perspective of its necessity to take root in the Korean market by minimizing any side effects from efforts to harmonize with the current system and laws, such as the Commercial Code the Financial Investment Services and Capital Markets Act, and the introduction of the SPAC.


It is my hope that, as in the case of the private equity fund (PEF) which is judged to be a successful introduction, the SPAC will be also introduced with success and become a mainstay of the capital market.

* A special purpose acquisition company (SPAC) is a corporation formed by private individuals to facilitate investment through an initial public offering (IPO). SPACs are shell companies that have no operations but go public with the intention of merging or acquiring a company with the proceeds of the SPAC's IPO.

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