The Hong Kong Exchanges and Clearing Limited (HKEx) recently published a guidance letter (HKEx-GL19-10) to further outline HKEx's requirement for land use right certificates and/or building ownership certificates for Mainland properties.
The 1998 Announcement and related listing decisions
The 1998 Announcement
On 25 March 1998, HKEx published a "Clarification on Requirements for Land Use Title of properties situated in the Mainland of the People's Republic of China" (1998 Announcement) which laid down the requirements as to when a new listing applicant should obtain land use right certificates and/or building ownership certificates (Title Certificates) in relation to their property interests situated in Mainland China.
According to the 1998 Announcement, in order for HKEx to approve a listing application:
- infrastructure project companies had to obtain long-term land use right certificates for all Mainland properties used in infrastructure projects;
- property companies which did not have long-term Title Certificates in respect of properties situated in the Mainland, had to provide other appropriate evidence of title, which together, covered a major portion of their property assets in terms of either asset value or profit contribution, regardless of whether such properties were completed or still under development. In any event, long-term Title Certificates had to be obtained if such Mainland property (i) represented a substantial portion of the listing applicant's property assets in terms of either asset value or profit contribution; or (ii) in the opinion of HKEx, was crucial to the listing applicant's activities; and
- other companies, which did not fall within the two paragraphs above, were required to obtain long-term Title Certificates for those Mainland properties that were crucial to its operations, unless otherwise permitted by HKEx.
Since the 1998 Announcement, HKEx published two listing decisions, namely, HKEx-LD10-3 and HKEx-LD52-1, in relation to Title Certificates for Mainland properties. These listing decisions reiterated the requirements set out in the 1998 Announcement and confirmed the principle that the decision on whether a property was "crucial" to the listing applicant's operations was made on a case-by-case basis.
HKEx further accepted that the requirements under the 1998 Announcement would be complied with if:
- the lessor was the owner of the leased properties in the Mainland and had obtained valid long-term land use right certificates for the leased properties;
- the leases, with the support of a PRC legal opinion, were legal, valid and enforceable;
- the leases had been duly registered with relevant PRC authorities; and
- the terms of the leases were considered to be of a meaningful duration, in light of the nature and use of the leased properties.
A new disclosure-based approach - the 2010 Guidance Letter
Since the 1998 Announcement, the administrative procedures for obtaining Title Certificates from the relevant Mainland registration authorities have eased. Further, it is noted that in other international markets, listing applicants are permitted to disclose in the listing document the failure to obtain long-term Title Certificates as a risk factor. HKEx is now moving towards a more disclosure-based approach in line with international market standards and published a guidance letter titled "Land Use Title for Properties Situated in Mainland China" (HKEx-GL19-10) (2010 Guidance Letter).
According to the 2010 Guidance Letter, the requirements set out in the 1998 Announcement remain effective for infrastructure project and property companies. Mineral and exploration companies are expected to comply with the requirements set out in the new Chapter 18, which came into effect on 3 June 2010.
For all other new listing applicants, HKEx no longer requires them to obtain Title Certificates for their Mainland properties. They are required to disclose, in listing documents, the risks associated with their operations for failure to obtain such Title Certificates. As a result, the two listing decisions, HKEx-LD10-3 and HKEx-LD52-1, were superseded by the 2010 Guidance Letter.
The 2010 Guidance Letter illustrates that HKEx is aligning its policy with other international markets in relation to land title issues. Failure to obtain Title Certificates is sometimes beyond the control of listing applicants, due to historical reasons or local conditions. The requirements for disclosing the relevant risks in listing documents will also ensure Hong Kong is moving in line with all other major stock markets. Having said that, we would recommend listing applicants should, as a matter of good corporate governance, prepare for contingencies in case the failure to obtain Title Certificates will seriously affect their operations. We also recommend that these contingency plans are disclosed in listing documents. This will ensure investors have full knowledge of the risks involved and that the listing applicants have prepared plans to cover those risks.
The 2010 Guidance Letter provides clearer guidance to new listing applicants on this issue. HKEx will consider each listing application based on the relevant circumstances and if in doubt, prior consultation with HKEx is recommended.
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