Introduction

Blank check offerings of securities in the U.S. public capital markets have been around for some time, but in the past such offerings were primarily associated with small offerings of $5 million or less.  Today they are being used in much more sophisticated offerings for hundreds of millions of dollars in many diverse industries--in addition to shipping--such as metals, mining, media and entertainment.

Last December, International Shipping Enterprises, Inc. (“ISE”) concluded an initial public offering of securities in the United States as a blank check company.  The deal created great interest in the shipping community because of its size.  It successfully raised approximately $182 million after expenses, of which JPMorgan Chase Bank currently holds approximately $180 million in a trust account awaiting the completion of a business combination.  

What Is a Blank Check Offering?

In contrast with a normal initial public offering (“IPO”) involving an existing business with assets, revenues, customers and a financial track record, a blank check company is typically a newly-formed corporation with no substantial assets and no business or track record, although the promoters or principals of the company are likely to have very strong track records in the industry.

Like any other IPO, the company must file a registration statement with the Securities and Exchange Commission (“SEC”).  The SEC reviews and declares the registration statement effective before any sales of securities are completed.  Because the blank check company has no on-going business and its financial statements are limited, the registration statement preparation and SEC review are often less time consuming than in a traditional IPO. 

ISE’s registration statement stated its purpose as follows:

We were formed to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more vessels or an operating business in the shipping industry.

This statement illustrates the essential “blank check” that the subscribers give to the blank check company in the IPO.  In return for investing in a company with such an open-ended purpose, its public shareholders receive the protections detailed below and described in more detail in the registration statement:

• After the IPO, a major bank holds the net proceeds (less an amount for working capital purposes) in a trust account.
• The blank check company must consummate a transaction within 12 months (or 18 months if it obtains a letter of intent by the 12th month) or the bank returns the funds in the trust account to the shareholders and the company is dissolved.
• A majority of the public shareholders must approve any transaction (the shares issued privately to the founding shareholders before the blank check company’s IPO are not counted for purposes of this vote).  The founding shareholders of the blank check company also agree to vote any shares of common stock acquired by them in accordance with the public majority.
• Shareholders may opt out of the blank check company if they do not agree with the proposed business combination.  Those shareholders voting against the business combination may exchange their shares for a pro rata share of the trust fund, including interest, if the transaction is later consummated.
• A business combination may not proceed if more than 20% of the shareholders elect to opt out.
• As stated, if the shareholders do not approve a proposed business combination within the time allowed, the funds are returned and the company is dissolved.
• The fair market value of any target company or vessels comprising the business combination must equal at least 80% of the net assets of the blank check company.  The rationale behind this rule is that the money was raised for the purpose of making an acquisition, not to provide the company with proceeds for general corporate purposes or to turn the company into an investment fund.

ISE modeled these features on the requirements of Rule 419 of the Securities Act of 1933, which the SEC promulgated for small blank check offerings.  In practice, the shareholder protections found in much more sophisticated blank check offerings now are similar to, but in many respects different from, those found in Rule 419 offerings.

Approval by the Shareholders

Since its IPO, ISE has negotiated an agreement to acquire all the shares of Navios Corporation for cash.  About one-third of the cash will come from the proceeds, and ISE will borrow the balance.  ISE will next solicit its shareholders’ approval of the transaction by preparing and filing proxy solicitation materials with the SEC.  Because a blank check company’s initial registration statement does not provide any information about a specific business, its proxy statement will contain information similar in certain respects to that provided in the case of an IPO of the target, including a description of the operations of the target business and certain required financial information regarding the business.  The proxy statement may also include additional matters for which the company is seeking shareholder approval.  ISE’s proxy statement will set forth the mechanics by which its shareholders may vote in person or by proxy, on whether to approve the acquisition of Navios.   

Some Considerations in Using a Blank Check Company

Persons contemplating a blank check IPO should consider the following, much of which is unique to blank check offerings:

• We believe two important factors contributed to the success of the ISE offering:  first, the strong U.S. demand for shipping offerings; and second, the credibility of the principal and majority shareholder of ISE.  Since ISE was not able to describe an existing business as part of the roadshow or sales process for the IPO, the background and credibility of the principal were of greater importance than in a traditional offering.
• The IPO process is public and prospective vessel and business sellers can obtain the information concerning the blank check company.  When the blank check company enters negotiations for potential acquisitions, for example, such sellers will be able to determine the minimum amount of money that the blank check company has available and/or will be required to spend in a given time.
• It is difficult for a blank check company to provide a deposit to a prospective seller or to provide any assurance that the shareholders will approve the transaction.  If the deal is not approved, all funds in the trust account are returned to the shareholders.  Some source other than the blank check company must provide any earnest money.
• The blank check company may face timing constraints.  Since a business combination must be consummated within 12 or 18 months, acquiring more than one target company or one set of vessels can be difficult, given the filing and due diligence requirements.
• The 80% net asset rule may limit the selection of business combination possibilities.  Unless combined with other assets or businesses, smaller target companies are less than the minimum value required.  Since it is contemplated that the blank check company may issue additional equity or debt securities as consideration, or may borrow a portion of needed funds, there is no similar limitation on the maximum amount that the blank check company may pay for a target business or vessels.
• Whereas a traditional IPO issuer normally files a registration statement on either Form S-1 or F-1, the blank check company will need to prepare and file additional proxy solicitation materials in accordance with the Securities Exchange Act of 1934.
• As with any company that becomes public, one must consider the cost of compliance with the new rules regarding the corporate governance of U.S. public companies, including those pertaining to independent directors, audit committees, testing of internal financial reporting and disclosure controls, certification of such matters by senior officers, and so on.

Conclusion

ISE’s successful IPO and its developments to date with its proposed acquisition prove that the blank check offering is a viable alternative to the traditional IPO route in the United States.  For certain issuers in the shipping industry it may be a preferable vehicle for tapping the U.S. capital markets.