Special purpose acquisition corporation model allowed for tax advantages and dual listing
In an IPO universe where Special Purpose Acquisition Corporations are growing in popularity, Stikeman Elliott LLP successfully helped complete a Canadian company’s first cross-border public offering using the SPAC vehicle.
In April, Lion Electric, a manufacturer of all-electric medium and heavy-duty vehicles, and Northern Genesis Acquisition Corp, a SPAC, completed a previously announced business combination. In early May, the company traded on both the New York Stock Exchange and the Toronto Stock exchange under the symbol “LEV.” Warrants for the company are also trading on both exchanges.
Lion Electric is a manufacturer of zero-emission vehicles. The company designs and manufactures all-electric class 5 to class 8 commercial urban trucks and all-electric buses and minibuses for the school, paratransit, and mass transit segments.
“What’s special about this transaction is that it is the first US-listed SPAC that will also trade on a Canadian exchange,” says Stikeman partner Aniko Pelland. As well, it’s an example of the Canadian entity becoming the surviving company. “Usually, it is the other way around,” he says.
Pelland’s colleague, David Tardif, says the SPAC transaction was done in a way that allows the shareholders of Lion Electric to get a tax rollover advantage, a clear advantage than if the company “were simply acquired” by another player. “This resulted in a higher valuation when going public,” says Tardif.
The other reason why going the SPAC route made sense is that given Lion Electric is in the electric vehicle space, governments in Canada can support a Canadian company with subsidies or other measures. On the flip side, an entity such as Lion Electric can feel more comfortable staying in Canada than relocating to a foreign location.
“So, while we did look at various transaction structures,” Tardif says, it emerged that maintaining the existing company structure “was a pretty significant objective early on.”
SPACs, otherwise known as “blank cheque” companies, have been around for decades in the United States and have been in Canada since 2015 (though the rules guiding them here first came out in 2009).
One way to look at SPACs is that they are shell companies that don’t have business plans of their own but instead look for private companies that do. In some ways, they are like reverse mergers, but not identical. SPACs often come with management and financing, unlike reverse takeovers, which typically involve a private company buying a shell company that has no current operations but trades publicly.
Pelland and Tardif say that SPACs can be suitable for companies in an “earlier stage” of maturity compared to going the IPO route. One reason is that there are fewer front-end fees with a SPAC, an attractive feature for a “concept” company not yet generating a lot of income.
In addition to ensuring the original shareholders in Lion Electric would receive the tax rollover benefit, Tardif says the successful transaction also required working with regulators to ensure compliance on both sides of the border. He says there are U.S. tax inversion rules, resulting in a Canadian company becoming U.S. taxpayers. “When you structure a transaction like this, you want to make sure you get thanks for rollover, but also you’re not triggering the U.S. tax inversion rules,” Tardif says.
“Getting the structure right and making sure that the tax advisers on both sides of the border come up with something that works and poses a less risk for the company and the stockholders,” is the goal, says Tardif.
As well, Tardiff says that despite their growing popularity, SPAC transactions are still relatively novel, and “there is still a lot to learn” about how they work.
Pelland says that while a SPAC transaction is similar to a reverse takeover, one key difference is that control stays within the original company and existing shareholders, opposite what happens in an RTO.
Proceeds from the SPAC merger with Northern Genesis Acquisition saw Lion Electric generate proceeds of US$490 million. Lion Electric used about US$90 million of the net proceeds to pay off its outstanding credit facilities and debt instruments. The rest of the funds will fuel the E.V. company’s growth plans, including an expansion for its U.S. manufacturing facility.
To go along with this, the company has announced plans to open a manufacturing facility in Joliet, Ill, one that would be the largest manufacturing facility for all-electric for medium and heavy-duty urban vehicles in the U.S.
The agreement with the Illinois government has it promising to invest $70 million over the next three years. Once up and running, the plant will be capable of producing 20,000 all-electric buses and trucks per year.
Money raised by the SPAC listing will also assist in developing advanced battery systems and constructing a highly automated battery system assembly facility in Québec.
National Bank Financial, BMO Capital Markets and Roth Capital Partners, LLC served as financial advisors. Stikeman Elliott LLP and Vinson & Elkins L.L.P. acted as legal advisors to Lion Electric. Barclays Capital Inc. served as exclusive M&A, and capital markets adviser, and Husch Blackwell LLP and Borden Ladner Gervais LLP acted as legal advisors to Northern Genesis. Barclays Capital Inc. served as lead placement agents.
Lion Electric CEO Marc Bédard will continue to lead Lion’s management team, overseeing its strategic growth initiatives and expansion.
