SFC adopts proposal to enhance REIT regime and SFO market conduct regime for listed collective investment schemes

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The Securities and Futures Commission (SFC), in its recent consultation conclusion, adopted the 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 (SFO) market conduct regime for listed collective investment schemes (CIS). Legislative amendments are expected to be in place by 2025-end. Set out below are highlights of the adopted proposals.

REITs:  a REIT is a listed CIS authorised by SFC under section 104 of the SFO. As REITs are constituted in the form of trusts and not companies under the Companies Ordinance (CO), a REIT may 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 Takeovers and Buy-back Codes and the Code on Real Estate Investment Trusts.

Under the adopted proposal, a new part will be introduced in the SFO to the effect that:

• a REIT will be allowed to implement an arrangement or compromise by a similar mechanism under the CO:  due disclosure to unitholders, court sanction and approval thresholds (i.e., at least 75% of unitholders’ voting rights approving, and votes casting against the arrangement not exceeding 10% of disinterested unitholders’ voting rights).

• the provisions for compulsory acquisition under the CO will be replicated to provide for “squeeze-out” and “sell-out” in a takeover offer or in a general offer for a unit buy-back. In other words, if the bidder has acquired at least 90% of the units, the bidder will be entitled to purchase the remaining minority units subject to the minority unitholders’ objection right in court; and at the other end, the minority unitholders will be entitled to compel the bidder to buy them out.

Listed CIS (including REITs):  under the adopted proposal, the following parts of the SFO will be amended to extend the market conduct regimes to listed CIS:

• Part XIII (Market Misconduct Tribunal (MMT))

• Part XIV (Offences Relating to Dealings in Securities and Futures Contracts, etc.)

• Part XIVA (Disclosure of Inside Information)

• Part XV (Disclosure of Interests)

• Part VIII (Supervision and Investigations)

• Part X (Powers of Intervention and Proceedings)

SFC clarifies that in formulating the various definitions in the market conduct regimes, they would have regard to the differing roles and nature of the management company and the trustee of a listed CIS. For example, on ‘inside information’, the subject of the inside information under the regime will focus on the listed CIS itself, and its management company which is akin to directors of listed companies in making executive decisions for the listed CIS. While the SFC reiterated that trustees and custodians would not be excluded from the market conduct regimes – where they commit any misconduct under the regimes, they will be liable – the subject of the inside information under the proposed regime would not be referring to the inside information of the trustees, which are typically part of banking groups and exercise an independent oversight function.

Please reach out to Deacons should you any queries on the above.