Introduction

The Securities and Futures Commission (the “SFC”) published its quarterly Takeovers Bulletin (Issue No. 73) in June 2025 (the “Issue”). One of the major highlights is the guidance on treatment of right-of-use assets for Rule 11.1(f) of The Codes on Takeovers and Mergers and Share Buy-backs (the “Takeovers Code”), which is to be read together with the newly revised Practice Note 7 (PN7).

Rule 11.1(f) of the Takeovers Code

Under Rule 11.1(f) of the Takeovers Code (the “Rule”),a company has significant property interests if the book value of its consolidated property assets exceeds 15% of its consolidated total assets. The obligation to require a valuation of the property assets arises when the offeree company has significant property interests. When the relevant percentage is 50% or above, property assets held by the associated companies of the offeree company over which it exercises a significant degree of control should also be valued. The requirements apply similarly to the offeror when its shares are included in the offer consideration.

Clarifications by the SFC

What kind of property rights counts?

The Issue, among others, clarifies the application of the Rule. The valuation requirements under the Rule apply to both ownership of land and buildings and leasehold interests that effectively transfer the substantive risks and rewards of ownership to the lessee, otherwise known as “Relevant Property Interests”. These include lease arrangements granting unilateral rights to transfer, sublet, mortgage, or dispose of the asset without lessor consent, for instance, long-term leases granted by the HKSAR Government are regarded as relevant property interests for the purpose of the Rule. On the contrary, other leasehold interests such as short-term leases are not regarded as such, as property valuers often assign no commercial value to such interests. This is also consistent with Hong Kong Accounting Standard (“HKAS”)17 where such other leasehold interests are classified as operating leases and the leased assets are off-balance sheet and therefore do not form part of a company’s assets. 

Right-of-use assets

The SFC clarifies in the Issue that for calculating the percentage threshold under the Rule, right-of-use (“ROU”) assets are generally excluded unless the underlying leasehold interests function similarly to property ownership (e.g., long-term land leases). Pursuant to the operation of HKAS 16 and HKAS 17, companies with historically insignificant “Relevant Property Interests” but large operating leases would be obliged to obtain property valuations solely due to ROU asset recognition, even if those leases hold no material value in a valuation context. As such, this approach on ROU assets technically operates as a waiver of the Rule.

It is also noted by the SFC that while market practitioners may rightly exclude ROU assets when calculating the percentage threshold, they may have mistakenly excluded ROU assets only from “consolidated property assets” without corresponding adjustments to “consolidated total assets”. While the ROU assets involved were typically insignificant, this partial exclusion approach could potentially distort the assessment. The SFC emphasizes that when companies exclude ROU assets, they should consistently deduct in their equation both the consolidated property assets as numerator and consolidated total assets (i.e. the book value of ROU assets) as denominator in their percentage calculations. This balanced methodology ensures that companies with genuinely significant Relevant Property Interests remain subject to the Rule’s valuation requirements, preventing scenarios where the mere recognition of ROU assets could artificially keep a property-heavy company below the regulatory thresholds.

Takeaways

Unique to Hong Kong with a high concentration of property companies in the market, it is intended that the Rule can help shareholders make informed assessments of offers, particularly when the valuation of significant property interests is a key consideration. The specific treatment of ROU assets further refines this focus, requiring valuations only for property interests that are material to shareholder decision-making. This approach, in gist, minimizes unnecessary compliance burdens by prioritizing economically substantive property interests, while maintaining adequate safeguards for shareholders in commercial deals.