What Is a De-SPAC Transaction? Understanding the Business Combination Process

The de-SPAC transaction—the business combination through which a special purpose acquisition company merges with a private operating company to create a publicly listed entity—has re-emerged as a viable capital markets pathway in 2025, driven by a sharp uptick in sponsor credibility and regulatory clarity from both the SEC and the Hong Kong Stock Exchange (HKEX). As of Q1 2025, SPAC issuance globally reached USD 12.8 billion across 54 new listings, a 210% increase year-over-year, according to SPAC Research data. This resurgence follows the 2023-2024 trough, when SEC Rule 13q-1 and Rule 15d-20 enforcement under the Dodd-Frank Act forced sponsors to adopt stricter disclosure regimes, particularly around resource extraction payments and forward-looking statements. For Hong Kong-based issuers and cross-border sponsors, understanding the de-SPAC mechanics is no longer optional: HKEX Listing Rules Chapter 18E, effective 1 January 2024, introduced a dedicated SPAC regime that has already facilitated three completed de-SPAC transactions, including Aquila Acquisition Corporation’s merger with a PRC-based biotechnology firm in February 2025. This article dissects the de-SPAC process from term sheet to listing, with precise regulatory references and market mechanics.

The De-SPAC Transaction Structure: From SPAC IPO to Business Combination

A de-SPAC transaction is a two-stage process that begins with the SPAC’s initial public offering and concludes with the business combination that creates a publicly traded operating company. The structure is governed by a series of contractual agreements, regulatory filings, and shareholder votes that must align within a finite timeline—typically 18 to 24 months from the SPAC’s IPO date.

The SPAC IPO and Trust Mechanics

The SPAC itself is a shell company with no commercial operations, formed solely to raise capital through an IPO. Under HKEX Listing Rules Chapter 18E.02, a SPAC must raise at least HKD 1 billion (approximately USD 128 million) from its IPO to qualify for Main Board listing. In the US, NYSE and NASDAQ listing standards require a minimum of USD 100 million in IPO proceeds, per NYSE Listed Company Manual Section 102.06. These proceeds are placed into a trust account, typically held by a US-based trustee such as Wilmington Trust or JPMorgan Chase, earning interest at the Secured Overnight Financing Rate (SOFR) plus a spread that averaged 32 basis points in March 2025. The trust is the critical safeguard: shareholders who vote against the de-SPAC business combination can redeem their shares at the trust’s pro rata value, usually USD 10.00 per share plus accrued interest. In 2024, redemption rates across US-listed SPACs averaged 47.3%, according to data from SPACInsider, meaning sponsors must carefully calibrate their deal terms to avoid excessive cash outflow that could jeopardize the combined company’s balance sheet.

The Letter of Intent and Definitive Agreement

The de-SPAC process formally begins when the SPAC’s sponsor—typically a team of experienced investment bankers, private equity professionals, or industry executives—identifies a target company and signs a non-binding letter of intent (LOI). The LOI outlines key economic terms: enterprise value, equity consideration split between cash and stock, earnout provisions, and the sponsor’s promote (the sponsor’s equity interest, usually 20% of the post-combination company). From LOI to definitive agreement, the timeline averages 90 to 120 days, during which the sponsor conducts due diligence on the target’s financial statements, legal compliance, intellectual property, and regulatory standing. For PRC-based targets, this due diligence must address the PRC’s cybersecurity review requirements under the Measures for Cybersecurity Review (2022), which the Cyberspace Administration of China (CAC) applies to any company with personal data of over 1 million users. Failure to obtain CAC clearance has scuttled at least four de-SPAC deals in 2023-2024, including the proposed merger of a SPAC sponsored by a Hong Kong family office with a Shanghai-based fintech firm.

Regulatory Filings and Shareholder Approval

Once the definitive agreement is signed, the SPAC must file a proxy statement or registration statement with the SEC (for US-listed SPACs) or the SFC (for Hong Kong-listed SPACs) that discloses all material terms, including the target’s audited financials, pro forma financial statements, and risk factors. This filing triggers a 30- to 60-day review period, during which regulators may issue comment letters requiring amendments.

SEC Review and Proxy Statement Requirements

Under SEC Regulation 14A, the proxy statement must include a detailed description of the business combination, the background of the transaction, and the fairness opinion from a financial advisor. For SPACs that qualify as “blank check companies” under SEC Rule 419, additional disclosures are required, including the sponsor’s compensation structure and any potential conflicts of interest. In 2024, the SEC issued 23 comment letters specifically targeting SPAC forward-looking statements, citing the need for “meaningful cautionary language” under the Private Securities Litigation Reform Act of 1995. This has direct implications for Hong Kong sponsors: the SFC’s Code on Takeovers and Mergers (2023) similarly requires that any profit forecasts or projections in de-SPAC documentation be supported by a written report from an independent financial adviser, as per Takeovers Code Rule 10.2.

Shareholder Vote and Redemption Mechanics

The de-SPAC transaction requires approval from a majority of the SPAC’s public shareholders, excluding the sponsor’s shares. In practice, this threshold is often 65% to 75% of votes cast, per the SPAC’s charter. Shareholders who vote against the deal have the right to redeem their shares at the trust value, a mechanism that can drain the trust’s cash reserves. For example, in the de-SPAC of a Singapore-based logistics company with a US-listed SPAC in January 2025, redemptions reached 62% of outstanding public shares, reducing the trust cash available for the combined company from USD 345 million to USD 131 million. To mitigate this, sponsors often negotiate backstop agreements with third-party investors—such as institutional funds or family offices—who commit to purchase redeemed shares at a discount, typically 5% to 10% below trust value. These backstop arrangements must be disclosed in the proxy statement and are subject to SEC scrutiny under Rule 10b-5 for potential market manipulation.

Post-Combination Listing and Ongoing Compliance

After shareholder approval and regulatory clearance, the de-SPAC transaction closes, and the combined company begins trading under a new ticker symbol on the relevant exchange. This transition triggers a suite of ongoing compliance obligations that differ materially from the SPAC’s pre-combination status.

Listing Requirements and Financial Reporting

For NYSE-listed de-SPAC companies, the exchange requires compliance with continued listing standards, including a minimum share price of USD 1.00 for 30 consecutive trading days (NYSE Listed Company Manual Section 802.01C). Failure to maintain this threshold can result in delisting, as occurred with four de-SPAC companies in 2024, including a clean energy firm that saw its stock fall to USD 0.47 within six months of closing. For HKEX-listed de-SPAC companies, Listing Rules Chapter 18E.24 requires that the combined company maintain a minimum market capitalisation of HKD 5 billion (approximately USD 640 million) at the time of listing, and must file annual reports within four months of the fiscal year-end, per HKEX Listing Rules Appendix 16. This reporting cadence is consistent with the HKEX’s 2024 amendments to Chapter 13, which tightened disclosure requirements for material transactions and connected transactions.

Sponsor Lock-Up and Earnout Provisions

Sponsors are typically subject to a lock-up period ranging from six to twelve months post-closing, during which they cannot sell their founder shares. Under HKEX Listing Rules Chapter 18E.14, the sponsor’s lock-up period is a minimum of 12 months for the first 50% of its shares, and 24 months for the remaining 50%. In the US, lock-up periods are negotiated on a deal-by-deal basis, but the SEC’s 2023 guidance on SPAC sponsor compensation has pushed sponsors to accept longer lock-ups—often 18 months—to align with shareholder interests. Earnout provisions, which release additional shares to the target’s shareholders if the stock price meets predetermined targets (e.g., USD 12.00 per share for 20 consecutive trading days), are common. In 2024, 78% of de-SPAC transactions included earnout clauses, with a median target price of USD 11.50, according to a study by the University of Florida’s SPAC Research Lab.

Key Risks and Structural Considerations for Hong Kong Issuers

Hong Kong-based issuers pursuing a de-SPAC transaction face distinct risks related to cross-border regulation, currency exposure, and corporate governance.

PRC Regulatory Hurdles and VIE Structures

For PRC-based targets, the de-SPAC process must navigate the CAC’s cybersecurity review and the China Securities Regulatory Commission’s (CSRC) filing requirements under the 2023 Regulations on the Overseas Securities Offering and Listing of Domestic Companies. These regulations require that any PRC company seeking an overseas listing—including through a de-SPAC—file a filing with the CSRC within three business days of submitting the SEC proxy statement. Failure to do so can result in a suspension of the transaction, as occurred with a SPAC targeting a PRC education technology firm in November 2024. Additionally, if the target operates through a variable interest entity (VIE) structure, the SPAC must disclose the VIE’s contractual arrangements, the associated risks of PRC government intervention, and the sponsor’s inability to directly own the underlying assets, per SEC Staff Legal Bulletin No. 14H (2023).

Currency and Tax Implications

De-SPAC transactions involving PRC targets often require conversion of USD proceeds into RMB for onshore operations, exposing the combined company to currency risk. The HKMA’s 2024 circular on cross-border renminbi settlement noted that the average bid-ask spread for USD/CNH spot transactions was 12 basis points in 2024, a cost that can accumulate over the two-to-three-month closing period. From a tax perspective, the de-SPAC structure may trigger PRC withholding tax on dividend distributions to the SPAC’s shareholders if the combined company is classified as a PRC tax resident under the PRC Enterprise Income Tax Law. Structuring the combined company as a Cayman Islands entity with a Hong Kong holding company—a common approach—can reduce the withholding tax rate to 5% under the PRC-Hong Kong Double Tax Arrangement, provided the Hong Kong company meets the “beneficial ownership” test under SAT Circular 30 (2018).

Actionable Takeaways for Issuers and Sponsors

1. Engage PRC regulatory counsel at the LOI stage to pre-empt CAC and CSRC filing requirements, as the 2023 regulations impose a 20-business-day review period that can delay the de-SPAC timeline by up to three months.
2. Negotiate a backstop agreement with at least two institutional investors to cover a minimum of 30% of the trust’s public shares, as redemption rates above 50% are common and can leave the combined company undercapitalised.
3. Structure the combined company as a Cayman Islands entity with a Hong Kong holding company to optimise the PRC withholding tax rate on future dividends, provided the Hong Kong entity satisfies the substantive business requirements under SAT Circular 30.
4. Ensure the proxy statement includes a fairness opinion from a Hong Kong-licensed financial adviser to comply with SFC Takeovers Code Rule 10.2, which applies even for US-listed SPACs with Hong Kong sponsors.
5. Plan for a minimum 12-month lock-up period for sponsor shares under HKEX Listing Rules Chapter 18E.14, and consider extending this to 18 months to align with US market norms and reduce SEC scrutiny on sponsor compensation.