In Liew’s Spac, another looming conflict

By Khairie Hisyam

Following his private joint venture worth nearly RM12 billion with Irish developer Ballymore Group, Liew Kee Sin intends to offer his private interest in the deal to his proposed special purpose acquisition company or Spac. But this way lies yet another conflict to add to his many existing conflicts.

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Liew Kee Sin’s proposed special purpose acquisition company (Spac), called Eco World International Berhad and eyeing RM1.9 billion in gross initial public offering (IPO) proceeds, is an ambitious endeavour by any measure.

An interesting aspect of Liew’s recently inked joint venture deal with Irish developer Ballymore Group is that the Spac will have right of first refusal for Liew’s interest in the joint venture, according to various news reports.

This poses the question of whether a Spac listing can proceed with a prospective qualifying acquisition already identified before listing.

To recap, a Spac listing is an IPO of a shell company that does not have an identifiable core business activity or any other income stream.

Effectively investors subscribing to the IPO will be banking on the track record and ability of the Spac’s directors to use the IPO proceeds to secure a suitable asset for the Spac.

Such an acquisition, called a qualifying acquisition, turns the Spac into a regular listed company with an identifiable business activity and income stream. The deadline for such an acquisition is normally 36 months from the listing date of the Spac, according to the Securities Commission’s Equity Guidelines.

Notably any qualifying acquisition must receive the Securities Commission’s blessing and conform to the specifications outlined in the Spac’s listing prospectus.

In the case of Liew’s proposed Spac, if the listing materialises it would be the first Spac in Malaysia to focus on the property sector – specifically, international property markets.

Going by Eco World Development Group’s intended subscription price, valuing a 30% stake in the Spac at RM562.5 million, the Spac seems poised to raise RM1.9 billion in gross proceeds.

This means such a listing if successful would double the amount raised by the previous four Spac listings on Bursa Malaysia, which had all been oil and gas-related Spacs.

What qualifies a property Spac?

However, one question on Liew’s proposed Eco World International listing that KiniBiz had previously examined is what would qualify as a qualifying acquisition for the Spac.

According to the Securities Commission’s Equity Guidelines, a qualifying acquisition must result in a Spac having an identifiable core business with majority ownership and management control, among other things.

However, there can be an exemption under the guidelines if a non-majority stake is consistent with industry norms and if the Spac acquires management control without majority ownership.

That said, having majority ownership is common for listed property developers and this applies to Eco World International too.

A notable requirement is that 90% of a Spac’s IPO proceeds must be placed in a trust account upon listing, of which 80% must be used for the qualifying acquisition transaction. This means if Eco World International raises the targeted RM1.9 billion, it would have some RM1.4 billion to spend on a qualifying acquisition.

However, it remains to be seen how Eco World International intends to define its qualifying acquisition in its prospectus, which has not been published on the Securities Commission’s website.

The definition is important as once outlined, the Spac cannot pursue any other opportunity that does not conform to the definition, even if it means forgoing lucrative potential.

In any case, Liew’s proposed Spac would likely set the tone for other property-related Spacs that may follow, as it would be the first of its kind in Malaysia should the listing happen.

Already analysts are expecting a 1.2-acre piece of land in Sydney, which was acquired by Eco World’s major shareholder in May 2014 and subsequently offered to the company at the same purchase price, to be the Spac’s first acquisition after listing.

However, the value of the Sydney land was at RM84.7 million, meaning there is much room for other acquisitions by Eco World International as per the Equity Guidelines, which allows for multiple transactions provided all acquisitions complete within the 36-month period.

In that sense, the right of first refusal to Liew’s personal interest in the Ballymore joint venture may fit into the Spac’s definition of a qualifying acquisition given the definition has yet to be made public.

Listing with deal in hand?

However the question that arises, is whether a proposed Spac listing can proceed if the management had already identified prospective deals beforehand.

The Securities Commission’s Equity Guidelines do not seem to mention such a circumstance, only specifying the criteria that must be present for any such deal to be approved. KiniBiz did not find any express prohibition of pre-identified qualifying acquisition transactions prior to a Spac listing.

The guidelines do note that for acquisitions from related parties, the Securities Commission requires the transaction to comply with Bursa Malaysia’s Main Market Listing Requirements as far as related-party transactions go.

The requirements define related-party transactions as “a transaction entered into by the listed issuer or its subsidiaries which involves the interest, direct or indirect, of a related party”, which seemingly applies for Liew’s proposed Spac should he offer the right of first refusal for the interest in the Ballymore joint venture.

According to the requirements, among others, such a transaction must be approved by shareholders who must receive independent advice as to the merits of the deal and whether it would be to their detriment or otherwise.

A valuation must also be undertaken if the related party transaction sees more than 5% in terms of any percentage ratios — these ratios include the value of the proposed acquisition against the company’s net asset value among others.

Other requirements include full disclosures of directors’ relevant interests in the proposed qualifying acquisition as well as compliance with relevant laws and regulations.

At publishing time KiniBiz is waiting for a clarification by the Securities Commission on the matter.

Differing standards

That said, however, it stretches the imagination that a Spac director would moot a blank-cheque listing without some idea of what is available on the market as far as the relevant industry is concerned.

This is reinforced by the requirement by the Securities Commission that the management team of a proposed Spac have sufficient expertise, knowledge and experience to achieve what the Spac sets out to do in its listing prospectus and subsequently perform their management duties.

While the Malaysian regulations concerning Spacs do not seem to expressly forbid pre-identified deals for Spacs, sources with knowledge of Spacs had previously told KiniBiz that the exercise is frowned upon.

Notably, the United States prohibits pre-identification of qualifying acquisition targets before a Spac IPO. In contrast, Europe is more accommodating, permitting even advanced state of negotiations in terms of a potential qualifying acquisition target for a Spac at the point of listing.

The Canadian Toronto Stock Exchange takes a middle path in the matter. While a proposed Spac may review potential targets at the point of IPO, it cannot have entered into binding acquisition agreements, either written or oral, although confidentiality agreements and non-binding letters of intent are allowed.

In the case of Liew’s proposed Spac, the question would hinge on the Securities Commission’s stand on the matter as well as how the Spac defines its intended qualifying acquisition.

Governance issues

That said, on the surface, the prospect of Liew offering his proposed Spac first right of refusal to his interest in the Ballymore joint venture raises another spectre of conflict.

While full disclosures and independent valuation would presumably be carried out, the net effect of such a transaction would be Liew raising funds from the market to pay for an interest acquired personally while being allowed to effectively keep it through the Spac.

The possible injection may even come at a profit for Liew, though this remains to be seen as much is still up in the air.

One emerging question is whether it would be more appropriate for Liew to go public with the vehicle he used in the Ballymore deal, though that road takes a longer time as track record and financial performance requirements, among others, would have to be met. In turn, this may explain why Liew chose to do things how he did.

In any case, this potential conflict comes on the heels of prior conflicts examined in the previous part of this issue series, which culminated with the Ballymore deal and its implications.

For one, could Liew as chairman of the Battersea Power Station redevelopment project brought the Ballymore prospect to Battersea’s shareholders? This would reflect his duty as a director to act in the best interests of the shareholders at all times, even when concerning opportunities that may not be capitalised upon by the shareholders.

Another question is whether Liew had gone against the interests of Bursa Malaysia-listed Eco World Development Group Berhad by securing the joint venture through his personal vehicle, denying the potential benefits to the shareholders in favour of himself.

In turn, this raises the bigger question of conflict concerning his proposed Spac, which rides on the Eco World brand – that he does not own in Malaysia despite applying for the trademark in the United Kingdom – and effectively limits Eco World Development Group’s prospects to the Malaysian market.

How such a long trail of conflicting interests within less than two years will eventually be resolved remains to be seen. The first step however would be for the Battersea project board to accept Liew’s resignation.

One thing for sure is that we are witnessing the man’s second coming in the property scene, even if the pieces have not all fallen together yet.

Yesterday: Liew, a man of many conflicts

Tomorrow: How did it come to this?