Hong Kong: The Emergence Of Stapled Securities And Business Trusts In Hong Kong

Last Updated: 10 June 2011
Article by Phill Smith and Jeckle Chiu
Most Read Contributor in Hong Kong, October 2018

Originally published on 8th June 2011

Keywords: stapled securities, business trusts, Hong Kong

On 2 June 2011, PCCW Limited (stock code 8) announced that the Hong Kong Stock Exchange has confirmed it may proceed, subject to certain conditions, with a proposed spin-off which is expected to involve stapled securities. This update provides a brief overview of stapled securities in the context of Hong Kong's regulatory regime.

A stapled security in other stock markets, such as Australia, typically comprises two components:

  1. a share in a company - the company undertakes development activity requiring capital expenditure resulting in a low dividend payout ratio but with the potential for capital appreciation; and
  2. a unit in a unit trust - the trust holds income generating assets which produce recurrent income nearly all of which flows through to unit holders i.e. a high dividend payout ratio, close to 100% after funding asset enhancement and other expenses, similar to a REIT in Hong Kong.

If the two components of a stapled security are subject to differing laws and regulations, then both sets of laws and regulations must be considered. Where one of those sets of laws and regulations is more demanding than the other, the "highest common standard" is applied for the benefit of investors.

The appeal of a stapled security is that from an existing listed entity's perspective a capital restructuring which involves the issuance of stapled securities can enable value to be unlocked to tap capital from retail and institutional investors alike.

From a shareholder's perspective, stapled securities appeal because existing investors stand to benefit from separately managed, ring fenced entities each with a distinct business focus, operations and management incentives.

Composite dividend flows can help to facilitate an appraisal and evaluation of the investment held as well as enabling existing and new investors to lock into a combination of a static recurrent income model and a dynamic growth story.

The two components of a stapled security are not traded separately on the stock exchange on which the stapled security is listed.

From an investor's perspective in Australia, stapled securities can be tax efficient because the trust's pass through distributions may give the investor the benefit of tax free or tax reduced distributions (due to depreciation allowances) as well as taxed income via dividends on the shares (which may have franking credits). From the company's perspective, additional capital can be raised from the issuance of stapled securities which can be deployed in expanding the business of the entity undertaking development activity. One set of financial statements is available which consolidates the results of the operations of the two entities and contains a certain amount of segment information on the respective business operations of the two entities. The total distribution to investors is apportioned between the two components.

However, Hong Kong's tax laws are unlikely be the driver for the development of a market for stapled securities in Hong Kong. Instead, the stapled security structure is likely to take hold to overcome regulatory concerns which may arise if a business trust were to be spun off as a separately listed entity in the form of a trust alone.

By way of background, after a spin off, the existing listed entity must satisfy the minimum profit requirement of a listing applicant and retain a sufficient level of operations and sufficient assets to support its separate listing status. There should be no adverse impact on the interests of shareholders of the existing listed entity resulting from the spin-off and clear commercial benefits. All of these Hong Kong listing rules issues arise when a listed entity seeks regulatory approval for a spin off.

The main Hong Kong regulatory concern with a business trust arises from the fact that the Securities and Futures Ordinance came into force in 2003, well before the emergence of a market for listed collective investment schemes on the Hong Kong Stock Exchange. Dealings in the shares of a company listed on the Hong Kong Stock Exchange are subject to various investor protection provisions contained in the Securities and Futures Ordinance such as those addressing insider dealing and the disclosure of interests regime. However, dealing in the units of a collective investment scheme such as a business trust listed on the Hong Kong Stock Exchange would not be subject to those provisions. A similar issue arises in relation to dealings in units of REITs in Hong Kong pending the adoption of legislative changes envisaged in the SFC's Consultation Conclusions on the extension of Parts XIII to XV of the Securities and Futures Ordinance to listed collective investment schemes.

Parts XIII and XIV of the Securities and Futures Ordinance relate to market misconduct. In addition to the prohibition of insider dealing, Parts XIII and XIV address false trading, price rigging, market manipulation and the disclosure of false and misleading information and allow market misconduct victims to seek compensation. In view of the growth of Hong Kong listed collective investment schemes in recent years, the SFC announced in June 2010 that it would propose amendments to Parts XIII and XIV to make it explicit that those provisions are equally applicable to all Hong Kong stock exchange listed collective investment schemes, in whatever form they take. This would eliminate doubts in the legislation and be consistent with the regulatory approach adopted in the UK, Australia and Singapore. Part XV relates to the disclosure to the market of interests held by directors and investors who accumulate a significant shareholding. Part XV explicitly refers to shares and debentures of a listed corporation and therefore does not apply to collective investment schemes which are constituted in the form of business trusts or other non-corporate forms, even if they are listed.

It is therefore expected that, at least until those legislative changes are made, business trusts in Hong Kong will only be approved as a component of a stapled security on the basis that dealings in stapled securities are subject to the insider dealing/market misconduct provisions and the disclosure of interests regime contained in the Securities and Futures Ordinance. In this sense, the above mentioned "highest common standard" of regulation could be applied to the two components of the stapled security to bring the provisions of the Securities and Futures Ordinance into play. While stapled securities appear to provide a new approach, it remains to be seen how the business trust regulatory regime will take shape in Hong Kong.

Learn more about our , Corporate & Securities, Financial Services Regulatory & Enforcement and Private Investment Funds practices.

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2011. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions