Introduction
On 28 March 2024, The Securities and Futures Commission of Hong Kong (the “SFC”) published a consultation paper (the “Consultation Paper”) inviting public feedback on its proposals to (i) introduce a statutory scheme of arrangement and compulsory acquisition mechanism for real estate investment trusts (“REITs”), and (ii) enhance the Securities and Futures Ordinance (the “SFO”) market conduct regime (“Market Conduct Regime”) for listed collective investment schemes (“CIS”). The consultation period concluded on 27 May 2024, with the SFC expected to issue consultation conclusive papers soon, aiming to finalize the legislative process by December 2025.
Part I: Proposal to introduce a statutory scheme of arrangement and compulsory acquisition mechanism for REITs
Currently, REITs are not subject to the statutory procedures outlined in the Companies Ordinance (“CO”). Recognizing the industry’s need for a more direct exit strategy akin to the CO, the SFC proposes the addition of a new section in the SFO to establish a fair and equitable statutory framework for schemes of arrangement and compulsory acquisitions to facilitate the corporate restructuring and privatization of REITs. This proposal draws reference from Part 13 of the CO with tailored adjustments to suit the nature and features of REITs, their management companies, trustees, and unitholders.
1.1. Scheme of arrangement
The proposed new sections under the SFO are broadly in line with the existing provisions in the CO, with similar requirements in respect of due disclosure, approval thresholds and court sanction, as outlined below:
| Proposals | Details |
| Steps to establish a REIT scheme | Step 1: Approval by unitholders or creditors at a meeting (“Meeting”), subject to the following voting thresholds:
i. For a scheme entered into with creditors – Requires a majority in number representing at least 75% in value of the creditors present and voting. ii.For a scheme entered into with unitholders – · For arrangements involving a takeover or general offer, requires: (1) at least 75% of the voting rights of the unitholders present and voting; and (2) the votes against the arrangement do not exceed 10% of the total voting rights attached to all disinterested unitholders. · For other arrangements, requires: (1) at least 75% of the voting rights of the unitholders present and voting; and (2) unless the court orders otherwise, a majority in number of the unitholders present and voting. Step 2: Upon obtaining the necessary approval, apply for a court sanction for the scheme. |
| Application to the court to convene a Meeting | The REIT’s management company, trustee, unitholders or creditors may apply to the court to convene a Meeting of the unitholders or creditors, or both, to deliberate on the proposed arrangement or compromise and to seek the court’s approval. |
| Disclosure of material interests to unitholders / creditors | The REIT’s management company, trustee. and each director must disclose any material interests related to the arrangement or compromise in an explanatory statement that will be distributed to the unitholders or creditors. |
| Legal binding effect | A court-sanctioned arrangement or compromise is legally binding on all relevant parties, including the REIT’s management company, trustee, unitholders and creditors. |
| SFC filing of court order | The effectiveness of the court-sanctioned arrangement or compromise is conditioned upon the delivery of a copy of the court order to the SFC for filing. |
1.2. Compulsory acquisition
The proposed compulsory acquisition provisions which apply to REITs closely resemble those in Part 13 of the CO, i.e. a takeover offer by an offeror (“offeror”) and a general offer to buy back shares by the repurchasing company (“repurchaser”) which may be completed by way of a “squeeze-out” or a “sell-out”, subject to modifications to allow a management company or trustee of an offeror or repurchaser to perform certain functions on behalf of the REIT during a compulsory acquisition.
| Proposals | Details | |
| “Squeeze-out” provisions | An offeror or repurchaser, having acquired or bought back at least 90% in number of the units in connection with the offer, is entitled to give notice to the minority unitholders of its intention to acquire or repurchase the remaining units. | |
| “Sell-out” provisions | Minority unitholders are entitled to require an offeror or repurchaser to acquire or buy back the remaining units if the offeror or repurchaser has acquired at least 90% in number of the units. | |
| REIT-specific modifications in relation to compulsory acquisition | Issuance of acquisition notice by the offeror or repurchaser of REIT | The management company or trustee of the offeror or repurchaser can perform the following functions on behalf of the REIT during a compulsory acquisition:
· Apply to the court for an order authorising the issuance of an acquisition notice to buy out the remaining units; and · Apply to the SFC for directions regarding the delivery of acquisition notice when a unitholder’s Hong Kong address is absent from the register of holders. The proposed manner and timing for an offeror or repurchaser to give an acquisition notice, set out below, aligns with the CO: · In a “squeeze-out”: · Notice to minority unitholders – The offeror or repurchaser must notify minority unitholders to buy out their units within the earlier of (i) 3 months beginning on the day after the end of the offer period of the takeover offer or general offer; or (ii) 6 months beginning on the date of the takeover offer or general offer. · Rights of dissenting unitholders – Dissenting unitholders can apply to the court to determine whether the offeror or repurchaser is entitled and bound to acquire or buy back the units. · In a “sell-out”: · Notice to minority unitholders – The offeror or repurchaser must give notice to the minority unitholders of their rights to be bought out within 1 month after the first day on which they are entitled to a sell-out. If the notice is given before the end of the offer period of the takeover offer or general offer, it must state that the offer is still open. · Minority unitholders in exercising their rights – Minority unitholders have 3 months to exercise their rights in a sell-out after the later of (i) the end of the offer period; or (ii) the notice date by the offeror or repurchaser. |
| Roles and responsibilities of a trustee in a compulsory acquisition | Due to the REIT’s lack of legal personality, the trustee is responsible for the following:
· Holding and handling the consideration paid by the offeror or repurchaser on trust for the entitled unitholders; and · In a takeover offer and compulsory acquisition – Registering the offeror as the holder of the acquired units; or · In a general offer for a unit buy-back – Cancelling the relevant units |
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1.3. Other REIT-specific interpretation and modifications in the new Part of the SFO
Definitions and interpretations
It is proposed that the interpretation section should adopt the definitions used in the CO with appropriate modifications and include additional terms (e.g. “management company” and “REIT”) to cater to the operation of a scheme in the context of a REIT.
The concept of “responsible person” of a company under section 3 of the CO will be extended to cover those of the management company to ensure accountability for contravention of or failure to comply with the new Parts of the SFO.
Deeming provisions
The proposed deeming provisions aim to empower a REIT, lacking a legal personality, to act through its trustee and/or management company (or its directors). This includes attributing actions, powers, voting rights, property, undertakings, liabilities, associated rights, and creditor relationships of the trustee and/or management company (or its directors) to the REIT.
Part II: Proposal to enhance the SFO market conduct regime for listed CIS
The SFC’s proposed amendments seek to enhance market integrity and investor protection, with a focus on the obligations of the management company of the listed CIS (and CIS directors for corporate CIS), while streamlining the regulatory framework by not extending certain provisions in Part XV of the SFO to listed CIS and not including trustees and custodians of listed CIS into the various definitions in Parts XIII to XV of the SFO.
2.1. Extending certain Parts of the SFO to cover listed CIS
With reference to previous consultations, the SFC proposes expanding the scope of the following Parts of the SFO to explicitly cover only listed CIS and their management companies:
- Market Conduct Regime:
- Market Misconduct Tribunal (Part XIII) for the civil regime;
- Offences Relating to Dealings in Securities and Futures Contracts, etc. (Part XIV) for the parallel criminal regime;
- Disclosure of inside information regime (Part XIVA);
- Disclosure of interests regime (Part XV);
- SFC’s powers of supervision and investigations (Part VIII); and
- SFC’s powers of intervention and proceedings (Part X).
2.2. Complementary changes
Additional changes will be implemented to support the aforementioned scope of various Parts of the SFO. These further revisions aim to clarify that all listed CIS (including those structured in corporate form) are subject to the Market Conduct Regime specific to listed CIS, as distinct from those for listed corporations, in order to avoid confusion and regulatory overlap. Moreover, adjustments will be made to the existing definitions under Part 1 of Schedule 1 to the SFO to cater for the unique nature of CIS.
Analysis and takeaway
As reflected in the Consultation Paper, the SFC has embarked on a major initiative to enhance the regulatory framework for REITs and CIS. The proposed reforms represent a comprehensive effort by the SFC to bring about an overall improvement in market conduct, integrity, and investor protection in the financial sector in Hong Kong.
Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.
This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.
