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Stapled securities - listing a business enterprise involving a trust structure

Key messages:

  • Business enterprises can be set up as a trust instead of a company. Most overseas markets do not have specific legislation to regulate business trusts, except Singapore.
  • Stapled securities structures involving trusts have evolved. Whilst in some jurisdictions, such kind of structures may be for tax or other purposes, in Hong Kong it enables the application of the same standards of regulation as listed companies.
  • Stapling means that two different securities are "stapled" together for trading or transfer. Stapled securities are traded like a stock but generally speaking its components cannot be traded separately.
  • You should evaluate carefully the fundamentals and the value of the underlying business before investing in any listed securities, be it a stock, or a stapled security.

Business enterprises can be set up in the form of a trust instead of a company. The term "business trust" is used loosely to refer to trusts that have active business operations.

Broadly speaking, a trust is a legal relationship where one party (the trustee) holds the right to the trust asset and deals with that asset for another party (the beneficiary) under circumstances specified in a trust deed.

In substance, there should be little difference in the operations of a business that is set up as a trust or a company. For instance, both can be traded on an exchange and profits can be distributed.

Hong Kong's rules and regulations do not prohibit listing of trusts. In fact, there are a number of trusts that are listed on the Stock Exchange of Hong Kong (SEHK), e.g. some exchange-traded funds are set up in the form of unit trust, but these types of trusts are different from business trusts.

Laws governing trusts and companies

The main difference between a trust/business trust and a company arises from different rules and regulations that apply to trusts and companies. For example, in most major markets, companies are subject to companies legislation whereas trusts may be subject to common law principles that apply to trusts, and/or trust legislation. Different taxation rules may also apply to trusts and companies. In a number of overseas markets, businesses have sought to list in the form of a trust primarily to take advantage of tax breaks.

With the exception of Singapore, most major markets do not have specific legislation to regulate business trusts.

In Hong Kong, the regulatory philosophy is that since business trusts are akin to listed companies in that they undertake active business operations, they should be subject to the same regulatory standards as listed companies, i.e. the Securities and Futures Ordinance (SFO), the Listing Rules, the Takeovers Code etc. The standards include, among others, those in respect of shareholders' rights and obligations, corporate governance and market abuse.

In some overseas markets such as Australia and Canada, stapled securities structures that involve trusts have evolved. Whilst such kind of structures may serve a different purpose (e.g. for tax benefits) in some jurisdictions, in Hong Kong, it enables the application of the SFO and other regulatory requirements.

What is stapling?

Stapling simply means that two different securities are "stapled" together for the purposes of trading or transfers. Stapled security could comprise two or more of the same or legally different instruments, for example, a share in a company and a unit in a trust.

Once stapled, the securities, whether they are units or shares only or both, cannot be traded or transferred separately.

The trust(s) and the company(ies) can hold assets and operate businesses, but active business, such as asset management and development are typically conducted by the company while passive investments in property or funds are undertaken by the trust. In practice, the trust and the company effectively operate as one entity although the company continues to be a separate legal entity from the trust.

Possible stapled securities structures in Hong Kong

In markets with a separate regulatory regime for business trusts, e.g. Singapore, business enterprises that are set up as business trusts are subject to laws that govern the constitution, termination and governance of the business trusts.

In Hong Kong, the purpose of stapling is to facilitate the application of the SFO so that the regulatory standards that apply to listed companies will also apply to the stapled securities.

Also, there could be different stapled securities structures involving a trust to list on the SEHK. It is because the SEHK platform is sufficiently flexible to accommodate different structures as long as the regulatory standards that the structure is subject to are commensurate with those of listed companies.

The available listed stapled securities structure in Hong Kong has the following key features: -

  • The trust invests in the company which holds the assets. Unlike business trusts or the trusts under a stapled structure in overseas markets, it has a passive role and does not participate in active business operations. Instead the business activities are conducted by the company that the trust owns.
  • The number of units in the trust must always be the same as the number of shares of the company. The trust units and company shares can only be traded or transferred together, i.e., as a stapled security.

Differences and similarities between stapled securities and stocks

Stapled securities Stocks
Differences
Trading
  • Stapled securities comprise different components, for example, units in a trust and shares, and such components should together be traded with a single stock code
  • Stocks contain no components
Dividends/ distributions
  • Have express distribution policy to investors
  • Percentage of distribution is normally set out in the trust deed and should be disclosed in the prospectus
  • Do not necessarily receive dividends
  • Whether there is any dividend and the amount of dividend received are subject to the dividend policy determined by the board of directors
Similarities
Share registration
  • A certificate issued as evidence of ownership of stocks or components of stapled securities
  • Both stapled securities and stocks can be held under the investor's own name or via an account with an intermediary (e.g. bank, brokerage)
Trading and settlement
  • Traded, cleared and settled on the SEHK and quoted on a single price
Shareholders' rights
  • Receive notices, circulars and financial statements relating to a trust or a stock
  • Investors of stocks and stapled securities enjoy similar voting rights

Back to basics

In sum, the purpose of the stapling arrangement in Hong Kong allows a trust to be subject to the same standards of regulation, investor protection and corporate governance as listed companies. Nevertheless, before investing in any listed securities, be it a stock or stapled security, you should examine carefully the fundamentals and the value of the underlying business and assets, including the prospect of its business activities and associated risks.