SFC’s Proposed Changes for Privatisation of Hong Kong’s Real Estate Investment Trusts

The Securities and Futures Commission (SFC) published a consultation paper on 28 March 2024 proposing a statutory scheme of arrangement and compulsory acquisition mechanism for real estate investment trusts (REITs).

REIT Proposal

REITs are trusts, not companies, under the Companies Ordinance (Cap. 622) (CO), so its scheme of arrangement and compulsory acquisition mechanisms are not applicable to them.

Therefore, as far as REITs are concerned, Hong Kong lacks a court process either where a bidder may propose a court sanctioned binding arrangement to buy-out minority unitholders, or a statutory process where unitholders may mandatorily be bought out.

The present regime in Hong Kong lags behind those of Australia and the UK, where statutory provisions for compulsory acquisition of REITs exist.

At present, privatisation of a REIT in Hong Kong may only be achieved indirectly, by the REIT disposing of at least a substantial portion of its assets, followed by delisting and de-authorisation procedures – in accordance with the Code on Real Estate Investment Trusts (REIT Code) and The Codes on Takeovers and Mergers and Share Buy-backs (Takeovers Code).

The SFC is now minded to equalise regulations concerning REITs and other publicly listed companies by introducing the below proposals (REIT Proposal) for consultation.

Scheme of Arrangement

 In relation to scheme of arrangement, the REIT Proposal includes:

• introducing relevant legislation under the Securities and Futures Ordinance (Cap. 571) (SFO), allowing arrangement or compromise by way of a mechanism akin to that under the CO;
• requiring compulsory and timely disclosure to unit holders;
• introducing a mechanism for court sanction; and
• introducing a voting threshold; where a scheme requires approval by at least 75% of unitholders’ voting rights, and can be blocked by more than10% of disinterested unitholders’ voting rights. 

Compulsory Acquisition

In relation to compulsory acquisition, the REIT Proposal includes:

• introducing compulsory acquisition mechanisms that are currently in the CO to the SFO, such that they become applicable to REITs;
• introducing “squeezing-out” provisions, whereby the bidder, having acquired at least 90% of the units, will be entitled to purchase the remaining minority units subject to the minority unitholders’ objection right in court; and
• introducing “selling-out provisions”, whereby minority unitholders will be entitled to compel the bidder to buy them out if the bidder has acquired at least 90% of the units.

Next Step

The consultation period of the REIT Proposal will end on 27 May 2024. The SFC targets the legislative procedure to be completed before the legislative term ends in December 2025. 

While details of the REIT Proposal are yet to be ascertained, its principles appear to be in line with the SFC’s stated policy to equalise regulations concerning REITs and other publicly listed companies in Hong Kong.

REIT issuers are expected to closely monitor details of the REIT Proposal and consider if and when appropriate amendments need to be made to the trust deeds of REITs to cater for eventual changes. 

Please also note that the REIT Proposal (which aims to extend the CO’s scheme of arrangement and compulsory acquisition mechanisms to REITs) should be considered in conjunction with applicable requirements under the Takeovers Code, which may be more stringent than corresponding requirements under the REIT Proposal.