6. A listing applicant may consider listing a business trust, a corporate trust, or a company that owns a business trust by balancing the commercial needs and the regulatory issues that it needs to overcome.
7. Relevant provisions of the Securities and Futures Ordinance ("SFO"), Companies Ordinance ("CO"), Companies (Winding Up and Miscellaneous Provisions) Ordinance and Listing Rules generally apply to a corporate trust or a company that owns a business trust. Business trusts, unlike companies, are not subject to the provisions for shareholder protection under the CO and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (or equivalent company laws of the jurisdiction where a company is incorporated), the SFO and other laws and regulations applicable to listed companies. The Listing Rules do not currently contain provisions which expressly deal with the listing of business trusts (Updated in March 2014).
8. Our principle is to ensure that holders of units in business trusts are subject to investor protection standards comparable to those required of Hong Kong corporate issuers. To this end, unitholders must be given the same level of protection as shareholders and key relevant SFO provisions must apply.
9. A listing applicant will need to address the issues and the additional requirements and modifications discussed below. This Guidance Letter suggests possible approaches listing applicants may consider in order to address a particular issue. It is for the listing applicant to ensure that the relevant key provisions of the SFO apply to its proposed structure as a whole. The listing applicant will also need to confirm or obtain legal opinions satisfactory to the SFC that the key provisions of the SFO would apply.
10. Having addressed the regulatory issues, we will consider listing applications and regulate business trusts by applying the same principles as those applying to any company seeking a listing on the Exchange. To achieve this, we will modify the current regulatory framework for listed companies in the Listing Rules on a case-by-case basis to apply to business trusts in a manner that fully preserves all the current Listing Rule requirements for investor protection, disclosure and corporate governance.
Issues to consider in listing a business trust
Application of the SFO
11. We and the SFC consider that it is essential for unitholders of listed business trusts to have the same level of protection as shareholders of listed companies. The key relevant provisions in the SFO must apply to business trusts as they apply to listed companies. The key provisions include:
(a) Market manipulation: Parts XIII and XIV of the SFO cover civil and criminal liabilities for market manipulation in respect of listed securities of listed corporations. It covers aspects such as false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transactions and stock market manipulation;
(b) Insider dealing: Parts XIII and XIV cover civil and criminal liabilities for insider dealing. Generally, insider dealing takes place when a person connected with a corporation with relevant information deals in, or procures others to deal in, the listed securities of the corporation. Relevant information refers to information about a corporation or the listed securities of the corporation which if known is likely to affect the share price;
(c) Disclosure of interests in shares: Part XV of the SFO imposes duties to disclose interests in shares of listed corporations and short positions of the shares on those who acquire or dispose of the interests or have or cease to have the positions;
(d) Powers of the SFC to apply to the courts for certain orders if the business or affairs of a listed corporation have been conducted in a manner that is oppressive to its members, involves misconduct towards its members etc., under section 214 of the SFO;
(e) Powers of the SFC to require production of documents concerning the affairs of a listed corporation under section 179 of the SFO; and
(f) Powers for shareholders of a listed corporation to require the listed corporation to investigate those interested in its shares under sections 329 and 331 of the SFO.
Issue 1: A listed business trust is not a "listed corporation"
12. The provisions in paragraph 11 apply to "listed corporations" as defined in the SFO. However, listed business trusts are not "listed corporations" and unitholders are not shareholders of "listed corporations".
13. A listing applicant should consider a structure that will result in the key relevant provisions of the SFO being applicable to the business trust and its unitholders. One approach to satisfy this requirement could be through using a form of "Stapled Securities" structure, which is discussed in paragraphs 29 to 33 and illustrated in Appendix 1. Other approaches may include a HKT Trust structure (stock code: 6823). As mentioned in paragraph 6, a listing applicant may also consider listing a corporate trust or a company that owns a business trust.
Issue 2: Directors or employees of the trustee-manager are not persons connected with the corporation
14. Directors or employees of the trustee-manager are not persons connected with the corporation under section 247 of the SFO for insider dealing as a business trust is not a corporation.
15. The trustee-manager and its directors/employees should have day-to-day management or business relationships with the business subsidiaries or related corporations of the holding company or operating company and these individuals could be persons connected with the corporation under section 247 of the SFO. The business trust and the holding company/listed company could also have the same board of directors. This approach is illustrated in Appendix 1.
Issue 3: Relevant information for the business trust may not be relevant information for the corporation
16. Relevant information for the business trust may not be relevant information for the corporation as defined in section 245 of the SFO for insider dealing.
17. The business trust could have a duty to account for a percentage of earnings (plus all assets on wind-up) to the holding company/operating company so relevant information for the business trust could become relevant information for the corporation, and in addition could also list the corporation that operates the trust assets. The business trust and the corporation will both be "listed issuers" under the Listing Rules and subject to the provisions of the Listing Rules and the SFO. This approach is illustrated in Appendix 1.
Issue 4: The affairs of the business trust are not the affairs of the corporation
18. The affairs of the business trust are not the affairs of the corporation under section 214 that can be the subject of a complaint if conducted in an oppressive or unfairly prejudicial manner.
19. The trust deed could provide that the holding company/operating company has the right and duty to enforce a deed covenant in favour of its members (who are also unitholders under the Stapled Securities arrangement) so that the affairs of the business trust could be the affairs of the holding company/operating company. This approach is illustrated in Appendix 1.
Application of the Takeovers Code
20. A listing applicant should consider a structure that can ensure the compliance with and application of the Takeovers Code. An example of such is the HKT Trust (stock code 6823).
Application of the Listing Rules
Issue 1: Potential conflict between duties of the trustee-manager to its shareholders and those to the trust's unitholders
21. In a business trust, the trustee-manager has legal ownership of the trust property and manages it for the benefit of the unitholders. The trustee-manager and its controller (usually its shareholder which established the business trust) can control or exercise significant influence over the trust. There is a potential conflict between the duties of the trustee-manager to its controller and those to the trust's unitholders.
22. Since the trustee-manager operates the trust, our approach is to apply all the Listing Rule requirements relating to an issuer's directors to the trustee-manager's directors, including provisions for unitholders to elect or remove these directors by ordinary resolution.
23. To afford further investor protection, we will impose additional requirements including:
(a) The business trust must have a trustee-manager acceptable to the Exchange. We would normally expect that the trustee-manager does not carry on any business other than the management and operation of the business trust as its trustee-manager.
(b) The trustee-manager must prepare and publish its accounts under the standards and requirements in the Listing Rules applicable to listed companies.
(c) The trust deed must provide that the business trust's unitholders can remove the trustee-manager by ordinary resolution in general meeting.
(d) The trustee-manager's directors must give priority to the interests of the unitholders as a whole if these conflict with the trustee-manager's own interests. The trust must include in its corporate governance report the policies and measures taken by the trustee-manager to manage conflicts and potential conflicts of interests between (i) the business trust and (ii) its controlling unitholder, or any director or controlling shareholder of the trustee-manager.
(e) The definitions of connected person will be extended to include the trustee-manager, its directors and controlling shareholder, and any of their associates.
Issue 2: Distributions
24. Unlike a company, a business trust can make distributions to unitholders in excess of its net profits. The company law restrictions on the amount of dividends that can be paid do not apply to business trusts.
25. We will require that when the trust announces any distribution to its unitholders, the trustee-manager's board of directors must on reasonable grounds confirm that, immediately after making the distribution, the trustee-manager will be able to meet, from the trust property, the liabilities of the trust as they fall due.
26. Each listing applicant will be required to sign a listing agreement with us before the commencement of dealing in its units on the Exchange. Appendix 2 provides a general form of the addendum to the listing agreement, which sets out the principles described above and the additional requirements and modifications we will impose on the trust.
27. Companies incorporated in certain jurisdictions can make distributions to their shareholders in excess of their net profits.
Other issues—Governance issues
28. A listing applicant should also address, among other things, the following issues:
(a) risks and consequences if the trustee-manager becomes insolvent;
(b) consequences of breach of trust;
(c) redemption or repurchase of the stapled units;
(d) segregation of the trustee-manager's assets from the trust's assets;
(e) exercise of the trustee-manager's powers and its ability to invest and manage the trust's assets and other assets/business operations.
29. Stapling is an arrangement under which different securities, such as units of a business trust and shares of a holding company/operating company, are listed on the basis that they are legally bound together and cannot be transferred or traded separately. This arrangement can be structured to satisfy the requirements mentioned in paragraph 11.
30. Once the applicant satisfies the SFC on the applicability of the SFO requirements to its stapled securities structure, our approach is to treat the stapled securities as a "combined security" for the purposes of the Listing Rules. The issuer's constitutive documents must contain adequate arrangements to maintain the stapled structure after listing. It will be a condition of listing that the securities remain "stapled" at all times.
31. When securities of different issuers are stapled together, we may treat the issuers as a "combined entity" on the basis that they have identical investors and operate in a coordinated manner. In this situation the Listing Rules will apply to them as if they were one issuer.
32. In the stapled securities scenario, it is possible for units of the business trust to be stapled to shares of the trustee manager, or shares of the holding company of the trustee manager. This approach is illustrated in Appendix 1.
33. Appendix 3 sets out the principles that we apply to listing of stapled securities.
Implementation of the Listing Rules
34. We will invoke Rule 2.04
to impose additional requirements and modifications to the Listing Rules on a case-by-case basis to address the issues arising from listing of business trusts and stapled securities.
1. This note sets out the principles that the Exchange applies to listing stapled securities.
2. Stapling is an arrangement under which different securities are listed on the basis that they are legally bound together and cannot be transferred or traded separately. Stapled securities may involve different classes of securities issued by an issuer or securities issued by different issuers. Typical stapling structures include (a) a "twin" structure where an issuer's ordinary securities are stapled to another issuer's ordinary securities; and (b) a "parent/ child" structure where an issuer's ordinary securities are stapled to a special class of securities of its subsidiary.
3. When issuers apply for listing on the basis that their securities will be stapled, any listing approval, if granted, will be subject to the condition that the securities remain stapled at all times after listing. The Exchange may cancel the listing of all or any of these securities if they become unstapled.
5. The issuers must disclose the stapled structure in their listing documents and annual reports, and any proposed changes by way of announcements.
6. The issuers must address any material issues that may arise from the use of the stapled structure if the underlying securities are governed by different regulatory regimes.
7. Stapled securities are generally regarded as a "combined security" for the purposes of the Listing Rules.
8. When securities of different issuers are stapled together, the issuers must cooperate with each other to ensure compliance with the stapling provisions and the Listing Rules.