Proposals for REITs and Market Conduct Rules in Hong Kong.
On 28 March 2024, the Securities and Futures Commission of Hong Kong (“SFC”) launched its two-month consultation on proposals to (i) introduce a statutory scheme of arrangement and compulsory acquisition mechanism for real estate investment trusts (“REITs”) (“REIT Scheme Proposal”) and (ii) enhance the market conduct regime for listed collective investment schemes (“CIS”) under the Securities and Futures Ordinance (“SFO”) (“Listed CIS Proposal”).
In this article, we summarise the proposals regarding the REIT Scheme Proposal and the Listed CIS Proposal.
REIT Scheme Proposal
Currently, REITs in Hong Kong lack a statutory mechanism for corporate restructurings, such as privatizations, similar to the one available for companies formed under the Companies Ordinance of Hong Kong (“CO”). Presently, REITs can only be privatised indirectly through the disposal of all or a substantial part of its assets followed by a delisting and deauthorisation in accordance with the Codes on Takeovers and Mergers and Shares Buy-backs and the Code on REITs.
The SFC hopes to address this gap by introducing the REIT Scheme Proposal.
Key features of the REIT Scheme Proposal
- New part in the SFO: A new part will be introduced in the SFO that would allow REITs to implement schemes of arrangement and compulsory acquisitions.
- Based on CO provisions: The proposed mechanism will be modelled after the CO provisions (e.g. approval mechanisms at meetings) and adopt the definitions used in the CO. Provisions will also be modified to accommodate the unique structure of REITs. For example:
- The REIT’s management company, trustee, unitholders, or creditors can apply to the court to order a meeting of the unitholders or creditors (or both) to consider and approve the proposed arrangement or compromise and to sanction it.
- The REIT’s trustee, management company, and directors must disclose any material interests they have in the arrangement or compromise in an explanatory statement to the REIT’s unitholders or creditors.
- If the court approves the arrangement or compromise for a REIT, it becomes legally binding on all relevant parties, including the REIT’s trustee, management company (acting on behalf of the REIT), and its unitholders or creditors.
- The court’s order approving the arrangement or compromise is only effective once a copy of the order is submitted to the SFC for filing. This requirement recognizes the SFC as the primary regulator overseeing REITs.
- A REIT, which lacks legal personality, can take action or exercise its powers through its trustee, management company or directors, via deeming provisions.
- Safeguards for unitholders: The proposal includes safeguards for unitholders (especially minority unitholders), such as mandatory disclosure requirements, voting thresholds, and court sanction for schemes. REIT unitholders would enjoy a similar level of protection as shareholders of listed companies incorporated under the CO.
- Compulsory acquisition: The proposal also seeks to replicate the CO provisions for compulsory acquisition of shares in a takeover offer or general offer for a share buy-back, adapting them for REITs. This would allow for “squeeze-out” and “sell-out” scenarios, where a majority unitholder can acquire the remaining units.
Listed CIS Proposal
In line with the initial consultation in 2012, the SFC is working with the Hong Kong Government to extend the existing market conduct regimes under the SFO to all non-corporate listed entities, ensuring that they are subject to the same level of regulatory scrutiny as listed corporations. To address technical complexities identified in the earlier drafting process, the SFC proposes to refine the previous proposals.
Key features of the Listed CIS Proposal
- Scope: The Listed CIS Proposal focuses on listed CIS, which is the only type of non-corporate entity currently listed on the Stock Exchange of Hong Kong Limited, instead of all non-corporate listed entities as proposed in 2012.
- Streamlining: The Listed CIS Proposal streamlines the proposed legislative amendments by (i) focusing the various obligations under the market conduct regime on the management company of the listed CIS, rather than the trustee or custodian, and (ii) excluding certain divisions in Part XV of the SFO, where similar regulatory requirements are already in place (e.g. provision of information pursuant to constitutive document, keeping of register of holders and investigation powers).
- Consequential changes: The proposal includes consequential changes to existing definitions and provisions regarding investigation and intervention powers in the SFO to accommodate the application of market conduct regimes to listed CIS.
Timeline
The SFC invited market participants and interested parties to submit their views by 27 May 2024. As of date, the SFC has not published its consultation conclusions. The target completion of the legislative process is before the end of the current legislative term in December 2025.
Conclusion
Overall, the SFC’s consultation paper is much welcome – it presents a comprehensive plan to strengthen the regulatory framework for REITs and listed CIS in Hong Kong. The proposals should enhance investor protection, promote market integrity, and ensure a level playing field for all market participants.
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