Incorporating in Cayman

As my readers and listeners know, this strategy shift is not surprising. Factors pushing new SPAC teams in that direction are the 1% excise tax being levied on SPAC redemptions and the negative SPAC environment the Delaware courts have created with their recent decisions.

I recently spoke with Alexandra Low, a senior attorney with Appleby's Cayman Islands Group, to get an idea of what the Cayman incorporation process entails and how SPAC teams should think about this decision. Here is a summary of our conversation.

What are the advantages of incorporating in Cayman? 

Alexandra Low: With our firm, there is a rapid turnaround time for incorporation once we get the compliance requirements to set up either the sponsor entity or the SPAC entity.

There are also the ability to tailor constitutional documents to suit applicable listing rules and regulations, and the ability to use different types of shares or warrants as required for particular SPACs. Flexible capital maintenance rules permit distributions and redemption and the repurchase of shares from a wide range of sources if the company needs to meet applicable solvency requirements.

Straightforward statutory merger regimes enable the SPAC to merge with its target. There is robust creditor protection, including in relation to the enforcement of security and facilitating the borrowing of additional funds.

Another advantage is the ability to redomicile to another jurisdiction on the de-SPAC side if required later.

The listing process for a SPAC is generally streamlined. Cayman gives immense flexibility to structure incentives in whatever manner investors demand.

Cayman also offers SPACs incorporating outside of the US a more efficient post-acquisition structure and removes additional US tax, legal, or regulatory implications that can arise with a US-domiciled SPAC as opposed to a Cayman-domiciled SPAC.

What about redomiciling? 

Alexandra Low: Over 80% of the transactions I have worked on have been successful in redomiciling. In some of the transactions where the choice is to remain a publicly listed Cayman-domiciled company on a US exchange, there's no issue from our perspective. It's more (of an issue) how it will be structured, and it's usually led by tax decisions. We're not usually involved in that process; we just assist.

The only thing I tell clients is you don't ever want to be—even if it's for a few hours—not registered in either jurisdiction.

Yelena Dunaevsky: The details are always so important, and you definitely need good guidance because good, experienced advisors have seen all the pitfalls and how things can go wrong and they can steer their clients from repeating those mistakes.

What is the current litigation environment in the Cayman Islands? 

Yelena Dunaevsky: On the US side, securities class actions have been holding fairly steady. What we are seeing is an increase in the number of fiduciary duty cases in Delaware that has been driven by MultiPlan and its progeny. There's a very recent decision out of Delaware in the Hennessy/Canoo case where the court granted the defendant's motion to dismiss—a 180-degree turnaround from what it had done previously in similar cases. What are you seeing on the Cayman side? 

Alexandra Low: Failure to consummate the intended business combination transaction can result in several disputes. In some cases, it has led to litigation in the Cayman Islands.

However, the courts of the Cayman Islands are unlikely to recognize or enforce against a Cayman SPAC judgment of courts of the United States predicated upon the civil liability provisions of US federal or state securities laws. We always put in the registration statement disclosure that this is a challenge. Shareholders may have more difficulty protecting their interests, but for SPAC management teams, entities, and directors and officers, Cayman Islands typically offer a more favorable environment.

However, when you look at some of the recent cases, you can assess that Cayman is a favorable jurisdiction.

Yelena Dunaevsky: Litigation concerns are central to the questions I get from clients about incorporating in Cayman. I would say that while it's probably a good bet to incorporate in Cayman, if we're trying to avoid litigation, it's not 100% bulletproof to do so.

What about the insurance side? 

Yelena Dunaevsky: Litigation leads us to insurance coverage. On the D&O insurance side, we're looking at risk from litigation and risk from enforcement actions. That's how you calculate what terms and pricing the insurance carrier can offer.

The underwriters are asking where you are incorporated because they've seen all the Delaware litigation, and some of them have been caught in that Delaware litigation.

Some of the carriers that can write robust policies that are designed to protect against securities litigation and other kinds of litigation in the US are restricted from writing policies for companies that are not in the US. They may be restricted by the jurisdiction of the entity that's being insured. However, there are still mature, established carriers that are able to write policies with the Cayman insured.

Alexandra Low: The SPAC will negotiate a certain D&O coverage and if there's a rush to close, the directors may need a little bit more assistance in terms of understanding their coverage. I don't think they always think that through.

And there are times they're in a tricky situation where they need to know what is covered under their insurance. Although you're covered up to the extent that Cayman Islands law provides, it's always important to privately negotiate your coverage too.

Yelena Dunaevsky: Even if the SPAC team that is doing the IPO is working with a knowledgeable SPAC-focused insurance broker to set up their coverage, the target company’s management team may be coming from the private company world. They may be unfamiliar with the public company D&O world, which is very, very different.

If they insist on using a broker that they've been using for their private company coverage and who has no public company and SPAC experience, they're making a huge mistake. That broker is typically not familiar with US public company issues, litigation, costs, and how the coverage needs to be structured. That's when you run into issues with individual directors who realize they need to start paying out of pocket for something they thought was covered.

What does the near future hold for SPACs? 

Alexandra Low: I'm quite positive in terms of the SPAC IPO side.  I think the management teams and their US counsel are highly prepared. I think we will see a continued uptick in new SPAC IPOs and a lot of de-SPAC transactions close this year as the market remains favorable.

Yelena Dunaevsky: That's what I'm anticipating as well. It's a cautious green light ahead for the SPAC market.