When Hong Kong's Securities and Futures Commission (SFC) introduced a framework for regulating listed real estate investment trusts (Reits) in 2003, it anticipated that an appropriate regime to govern takeover and merger activity of Reits would eventually need to be considered. That time has now come.
In view of the development of the Hong Kong Reit sector over the past six years, and the expected increase in Reit merger-and-acquisition activity, the SFC has proposed extending the takeover regulations under the Codes on Takeovers and Mergers and Share Repurchases (Takeovers Code) to Reits.
The regulator also plans to address any doubts as to whether the market-misconduct and disclosure-of-interest rules under the Securities and Futures Ordinance (SFO) will directly apply to listed collective-investment schemes, including listed Reits.
The consultation closes on March 8, and the proposals are available on the SFC's website.
"The markets are at a more mature stage, and it's now clearer that Reits operate more like listed companies than, for example, traditional securities investment funds," says Milton Cheng, Hong Kong-based head of the Asia-Pacific Reit practice at law firm Baker & McKenzie."In many ways, a Reit investor's rights and interests are more closely aligned with those of shareholders of listed companies. So it makes sense to apply SFO parts XIII to XV and the Takeovers Code."
He says the amendments are likely to be introduced mid-year.
The reason for the doubt as to whether Reits were included is that the Takeovers Code and the SFO provisions apply to corporations, and arguably not to unit trusts, Cheng adds. "But the SFC did say they'd revisit the position when the Reit market was more developed," he says.
In the case of the SFO, Cheng says the changes would not be radical, but an exercise to level the playing field with Hong Kong-listed companies. "To a large extent, the changes simply make it clear that the legislation on those matters that applies to listed companies now also applies directly to Reits," he adds.
In practice, the SFC had built into key Reit documentation -- such as the trust deed and the trust manager's compliance manual -- checks and balances to prevent market misconduct, such as insider trading by directors, says Cheng. It did the same for the rules on the disclosure of interests.
However, if a breach were to occur in relation to failure to disclose substantial unitholdings, for example, enforcement against the offending unitholder would be a private contractual matter under the trust deed, since the SFC would arguably not have direct authority to intervene.
"This is obviously not ideal," says Cheng. "If the proposals are adopted, the market misconduct prohibitions will be given the force of law and the SFC will have direct powers of enforcement. This will enable Reits and unitholders to be treated consistently with listed companies and their shareholders."
Cheng says that, as far as he knows, there have been no reports of market-misconduct prosecutions in relation to Reits so far. Nevertheless, the new rules will ensure that such matters are dealt with at the market level rather than through the Reit documentation.
Hong Kong is one of several Asian countries with established Reit regimes, which are Japan, Malaysia, Singapore, South Korea, Taiwan and Thailand. The Philippines is in the process of implementing its own legislation, while other markets are working on establishing frameworks, including China, India and Pakistan.