Law Times

Law Times • may 11/18, 2009 FOCUS PAGE 13 'Bargains are still out there for the taking' BY JULIUS MELNITZER For Law Times S ince Dec. 19, 2008, shell compa- nies with nothing to offer but a tested management team can raise a minimum of $30 million on the To- ronto Stock Exchange. On that date, the TSX adopted Part X — Special Purpose Acquisition Corporations of the TSX Company Manual, which provides a framework for the listing of SPACs. "SPACs allow entities looking to raise capital an alternative to the restrictive rules and low maximum capital limits of the TSX Venture Exchange's Capital Pool Co. regime and the more formal, high minimum capital threshold of the traditional IPO route," says Alfred Page, a partner with Borden Ladner Gervais LLP's Toronto office. "Given the pronounced shortage of venture capital available in Canada, there has long been a need to fill this niche." The U.S. has allowed SPACs since the early '90s, and Alfred Page $1.9 million compared to the SPAC minimum of $30 million," says Page's colleague and BLG part- ner Carol Derk. "SPACs also offer greater protec- tions to investors." And while SPACs ap- plying for listing cannot have an active business or enter into a binding agree- ment regarding an acquisi- tion, they may enter into non-binding agreements that include confidential- ity terms and non-binding letters of intent. To begin with, SPACs are publicly traded, making them liquid. And while investors in a private equity fund (or, for that matter, a CPC) usually have no say over what investments the fund makes, SPAC investors can vote against an acquisition and receive most of their money back if the transaction proceeds. The escrow requirement also limits the downside risk. Finally, because SPACs are public companies, they are more transparent than private equity funds. There are also specific requirements Carol Derk "This will enhance their attractiveness considerably because they can be formed with an eye on an identified target," Page says. "By contrast, CPCs are restricted in what they can do where a target has been identified." Typically, a management team that has private eq- they have recently experienced a popularity surge. In 2007, SPACs made up more than a quarter of all initial public offerings in the U.S., as 65 of them raised average capital exceeding $100 million. SPACs aren't confined to North America, where the New York Stock Exchange, NASDAQ, and the Ameri- can Stock Exchange all recognize them. They also ap- pear on the Alternative Investment Market (AIM) in London and Euronext. Their credibility is evidenced by the fact that Citi, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS have all participated in these vehicles. In essence, SPACs are holding companies or shells with no operations or business that raise public money with which to acquire an operating business. In this sense, they resemble capital pool companies (CPCs), which have existed for many years in Canada. "But CPCs can only raise between $200,000 and uity, management, or industry experience founds a SPAC. Founders must generally hold between 10 and 20 per cent of a SPAC's equity. Ninety per cent of the IPO proceeds must be held in escrow, and the SPAC has three years to make an investment worth at least 80 per cent of the escrow funds. A majority of SPAC's shareholders, other than the founders, must approve the acquisition. Shareholders who vote against the business acquisition can get their share of the escrow proceeds back, and all shareholders but the founders have the same right if an acquisition does not occur within three years of the IPO. American SPACs have tended to attract sophisticated investors, including hedge funds. "But SPACs also offer an opportunity for retail investors to get in on a private equity-type play," says Andrew Parker, a partner at McCarthy Tétrault LLP's Toronto office. Indeed, SPACs offer some significant advantages over investments in private equity or venture capital funds. for SPAC IPO prospectuses. "Issuers must disclose the valuation methods they intend to use in valuing prospective acquisitions," says Parker's colleague and McCarthys partner Vanessa Grant, "And if a prospectus assumes completion of a qualifying ac- quisition, it should also disclose whether a valuation took place and whether it was independent." In the current climate, however, the future of SPACs is unclear. "The take-up has been very slow," Page says. "But then, it's been hard to get ordinary IPOs off the ground these days, and alternatives are even tougher be- cause so many institutions have been burnt by them." Still, Page notes that SPACs are a good vehicle for existing management teams to take over distressed companies. "Take a major auto supply company that goes down because of current conditions but is still fun- damentally a good company," he says. "The current management team may be the logical ones to get it going again and give the creditors an opportunity to mitigate their losses." Grant believes that SPACs will be attractive in the shoulder period when capital markets start to come back. "We should start to see uptake when things begin moving but prices haven't quite caught up to the move- ment so that bargains are still out there for the taking," she says. LT GAIN PERSPECTIVE ON THE CURRENT STATE OF SECURITES LAW IN CANADA SECURITIES LAW AND PRACTICE, 3RD EDITION BORDEN LADNER GERVAIS LLP This work provides the only textual treatment of securities law in Canada. Organized according to the Ontario Securities Act, the extensive commentary that follows each section interprets and explains the practical implications of the provision, in the light of rulings of the Ontario Securities Commission and court decisions from across Canada, as well as U.S. decisions. It also includes comparison to equivalent Acts of Alberta, British Columbia, and Quebec. ORDER # 9370103-10747 $1,498 13 volume looseleaf supplemented book Supplements invoiced separately 11-12 supplements per year 0-459-37010-3 BROKER/DEALER LEGAL REFERENCE CASE LAW DATABASE - CD-ROM JOEL WIESENFELD, LL.B. This product features a database containing summaries and analysis of more than 100 cases dealing with investment loss actions, disputes between individual Securities Act registrants and their dealers, and issues arising on the defection of a sales representative from one dealer to another. The database contains cases from across Canada, including Quebec civil law broker/ dealer decisions. ORDER # L91070-10747 $499 CD-ROM annual subscription L91070 SECURITIES LITIGATION AND ENFORCEMENT JOSEPH GROIA AND PAMELA HARDIE This comprehensive text explains practical litigation features and discusses complex legislation, policy statements and cases, in a revealing introduction to all significant types of Canadian securities litigation. ORDER # 981421-10747 $125 Softcover August 2007 approx. 480 pages 978-0-7798-1421-3 SECURITIES REGULATION IN CANADA, 3RD EDITION MARK GILLEN, B.COM., M.B.A., LL.B., LL.M. This book discusses the legal environment in which business finance in Canada operates. It provides a review of the current policy discussions underway across the country and features up-to-date references to statutes, regulations, and policy statements. ORDER # 981369-10747 $132 Hardcover August 2007 approx. 700 pages 978-0-7798-1369-8 AVAILABLE FOR 30 DAYS RISK FREE Order Online at www.carswell.com/email Call Toll-Free: 1-800-387-5164 In Toronto: 416-609-3800 THE LAW OF FINANCIAL DERIVATIVES IN CANADA MARGARET GROTTENTHALER AND PHILIP J. HENDERSON This looseleaf service provides a detailed review of the significant legal issues affecting derivatives transactions in Canada, including: an introduction to the different types of derivatives transactions, an introduction to derivatives documentation, a detailed review of enforceability issues, collateralization of transactions, regulatory issues (including securities law issues), duties owed in derivatives relationships, and the tax treatment of various types of transactions with Canadian counterparties. ORDER # 9260286-10747 $292 2 volume looseleaf supplemented book Supplements invoiced separately 2-3 supplements per year 0-459-26028-6 www.lawtimesnews.com Untitled-8 1 5/5/09 4:04:49 PM 12754-10747 MM1 04/09

• Cover
• LSUC Financially Stable
• Statement Analysis
• Focus On Securities Law