Hong Kong Consults On Extending Takeover Code To REITS

by Mary Swire, LawAndTax-News.com, Hong Kong

12 January 2010

Hong Kong’s Securities and Futures Commission (SFC) has launched a consultation to solicit public comments on extending the existing corporate codes on takeovers and mergers, and share repurchases, to real estate investment trusts (REITs).

The existing codes currently apply to Hong Kong public companies and companies with a primary listing of their equity securities in Hong Kong. The codes do not apply to REITs, which are legally constituted in the form of trusts.

The current rules of the REIT code provides that where a REIT undertakes any form of merger, takeover, amalgamation and restructuring, the REIT’s trustee and/or management company shall as soon as practicable consult with the SFC on the manner in which such activities could be carried out so that it is fair and equitable to all unit-holders. The REIT code does not otherwise contain any detailed regulatory framework for conducting such activities.

At the time the REIT code was issued in 2003, experience from overseas REIT markets indicated that there would not be active takeover and merger activities. However, since the launch of the first REIT in 2005, the SFC has seen increased corporate activities amongst REITs, including asset acquisitions and on-market unit repurchases conducted by their management companies on their behalf.

The SFC has therefore said that it now believes, given the development of REIT markets in Hong Kong and other parts of Asia, and rising occurrences of mergers and acquisitions of REITs, it is an appropriate time to review the regulatory regime governing takeovers and mergers of REITs, with a view to providing better protection for minority unit-holders.

It believes that takeovers and mergers of REITs should be governed by the regime under the codes as that would be the most appropriate framework to govern takeovers and mergers of REITs. REITs are organized as unit trusts, but the typical structure of a REIT, unlike traditional collective investment schemes (CIS), is more akin to listed companies.

All SFC-authorized REITs are listed and traded on the Stock Exchange of Hong Kong, and, from an investor’s perspective, a REIT and a listed property company are in substance very similar to each other economically and in terms of the basic rights and interests attached to units in a REIT and shares in a listed company, despite their different legal form and structure.

The SFC believes that, once the takeovers and mergers codes are applicable to REITs, the protection and safeguards under the codes, such as transparency and sufficiency in information furnished and prompt and full disclosure of information to market, will be available to ensure that minority unit-holders would be treated even-handedly in a takeover situation.

"We believe the proposals represent a step forward in defining a regulatory infrastructure that better protects the interest of investors and assists the further development of Hong Kong's REIT market," the SFC's Chief Executive Officer, Martin Wheatley, said.

At the same time, views are also being sought on applying certain provisions in the Securities and Futures Ordinance to listed CIS so as to clarify and enhance the regulation of market conduct regarding dealings in them, by applying to them the parts of the Ordinance that deal with market misconduct and disclosure of interest requirements for listed companies.

Comments from interested parties should reach SFC by March 8. After the consultation period, SFC has said that it will analyze the comments received and aim to adopt a balanced and pragmatic approach for the purposes of enhancing investor protection and assisting the further development and growth of the Hong Kong REIT market.

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