MAS Consults on Proposed Legislative Changes to Enhance Corporate Governance for BTs and Alignment with REITs and Companies

Executive Summary

On 17 September 2024, the Monetary Authority of Singapore (“MAS“) announced its Consultation (closing on 18 October 2024) on various proposed legislative changes to enhance: (i) corporate governance for registered business trusts (“BTs“); and (ii) alignment between the requirements for BTs and the requirements for Real Estate Investment Trusts (“REITs“) and companies. These developments will pave the way for the coming into force of Phase 2 of the Business Trusts (Amendment) Act 2022 (“Amendment Act“), which will amend the Business Trusts Act 2004 (“BTA“), the legislation governing the registration and regulation of BTs. In Phase 1, provisions of the Amendment Act that did not require supporting subsidiary legislation commenced operation on 12 March 2024.

Among other things, the key changes proposed in the Consultation include:

1. Requiring trustee-managers (“TMs“) of unlisted BTs to obtain and maintain information on the beneficial ownership of units.

2. Requiring listed BTs to provide public notifications of distributions in a mode compliant with the Listing Rules of Singapore Exchange Securities Trading Limited (“Listing Rules”), and for unlisted BTs to do so via publication in newspapers or on the BT’s website.

3. Requiring BTs to prepare financial statements in accordance with “Accounting Standards” to be prescribed. The MAS proposes to require adoption of the Singapore Financial Reporting Standards (International).

4. In view of the structural similarities between BTs and REITs, aligning the board composition and directors’ independence requirements for both TMs and REITs managers (“RMs“), and computing the tenure limits for their independent directors (“IDs“) on an aggregate basis instead of on a continuous basis.

5. For stapled structures, codifying the common exemptions from certain requirements, and aligning the approach for TMs and RMs in such structures.

6. Requiring TMs to disclose distributions declared for the financial year and total operating expenses in both absolute terms and as a percentage of net asset value in the BT’s financial statements, in line with requirements for REITs.

7. Allowing for electronic transmissions of notices and documents to BT unitholders with their consent in accordance with the trust deed, and with safeguards similar to those for companies.

8. Prescribing the circumstances to be considered in determining whether defunct BTs ought to be deregistered, which will be similar to those considered for companies.

This Update provides more information on the above changes, the key proposals by the MAS in the Consultation, and the implications for BTs and REITs.

Background

A BT is a hybrid structure embodying the features of both a company and a trust. Given a BT’s similarities with a company, many BTA provisions are based on the Companies Act 1967 (“CA“). Since the BTA came into effect, there have been various CA amendments to improve the regulatory regime for companies. As such, the Amendment Act introduces changes to amend the BTA to align with certain corresponding CA provisions to improve the regulatory regime for BTs, namely: (i) boost transparency and corporate governance; (ii) enhance the rights of unitholders; (iii) facilitate the conduct of business and ease compliance; (iv) strengthen regulatory safeguards for BTs; and (v) streamline and clarify regulatory requirements. For more information on the Amendment Act, please see our September 2022 Legal Update entitled “Business Trusts (Amendment) Bill Introduced to Align with Regulatory Regimes for Companies and REITs”. The provisions in the Amendment Act are implemented in phases.

In Phase 1, provisions of the Amendment Act that did not require supporting subsidiary legislation commenced operation on 12 March 2024. For more information on Phase 1, please see our March 2024 Legal Update entitled “Key Legislative Changes to Align Regulatory Regimes for BTs with Companies and REITs From 12 March 2024”.

The MAS is now consulting on the following subsidiary legislation in support of the upcoming Phase 2 implementation of the Amendment Act:

1. Proposed amendments to the: (i) Business Trusts Regulations 2005 (“BTR“) here; (ii) Securities and Futures (Licensing and Conduct of Business) Regulations (“SFR“) here; and (iii) Business Trusts (Summary Financial Statement) Regulations (“Summary FS Regulations“) here.

2. Proposed introductions of the new: (i) Business Trusts (Register of Controllers) Regulations (“ROC Regulations“) here; (ii) Securities and Futures (Offers of Investments) (Exemption for Stapled Groups) Regulations (“Stapled Groups Regulations“) here; and (iii) Business Trusts (Revision of Defective Financial Statements, or Consolidated Financial Statements or Balance Sheet) Regulations (“Defective FS Regulations“) here.

 Key Proposals

Enhancing corporate governance for BTs

1. Requirements relating to controllers for unlisted BTs: Part 8A of the BTA will be introduced to require TMs of unlisted BTs to obtain and maintain information on the beneficial ownership of units. The MAS proposes to introduce the new ROC Regulations to prescribe the various requirements relating to the BT’s controllers, the register of controllers, notices relating to their particulars, etc.

2. Safeguards for electronic transmissions: Section 93A of the BTA will be introduced to allow for electronic transmission of notices and documents to BT unitholders with their consent in accordance with the trust deed. The MAS proposes to amend the BTR to introduce safeguards for the use of such electronic communications, similar to those for companies.

3. Modes for notifications of distributions: Section 33(2) of the BTA will be amended to provide the MAS flexibility to prescribe the modes by which public notifications of a BT’s distributions must be made. The MAS proposes to amend the BTR to prescribe that: (i) for listed BTs, the mode of notice must be compliant with the Listing Rules; and (ii) for unlisted BTs, notice may be given via publication in newspapers or on the BT’s website.

4. Circumstances for deregistration of defunct BTs: Section 52(1A) of the BTA will be introduced to allow the MAS to prescribe the circumstances it may give regard to, in determining whether there is reasonable ground to believe that the TM is not managing or operating the BT’s business, for the purposes of deregistering defunct BTs. The MAS proposes to amend the BTR to prescribe such circumstances, similar to those for companies, e.g. failure to file annual returns, failure to respond to the MAS’ correspondence, local directors are uncontactable.

5. Financial reporting standards: The Amendment Act will amend the BTA to require BTs to prepare financial statements in accordance with “Accounting Standards“. The MAS proposes to amend the BTR to prescribe the adoption of the Singapore Financial Reporting Standards (International).

Greater alignment between the requirements for BTs and the requirements for REITs and companies

6. Board composition and independence: The MAS proposes to amend the BTR to align board composition and directors’ independence requirements for TMs with those for RMs, including:

• Requiring IDs of TMs to be independent from the management of, and from business relationships with, both the TM and the BT.
• Requiring a director’s relationships to the related corporations of the TM (instead of just to the subsidiaries of the TM) to be considered in determining independence.
• Requiring directors intending to qualify as IDs to be independent from: (i) substantial unitholders of the BT; in addition to (ii) substantial shareholders of the TM.
• Requiring: (i) at least half of the board to be IDs, if BT unitholders do not have voting rights on the appointment of directors to the TM’s board; and (ii) at least one third of the board to be IDs, if unitholders have such voting rights.
• Prohibiting TMs from having as their board chairman, a person who is an: (i) executive director of the TM; or (ii) immediate family member of its Chief Executive Officer.

7. Modifications to tenure limits for IDs: The MAS proposes to amend the BTR and the SFR to: (i) compute the nine-year tenure limit for IDs of RMs on an aggregate basis instead of on a continuous basis, to prevent circumvention (e.g. if the ID temporarily steps down after an eight-year continuous period and is reappointed for another nine-year period) and to align with the Listing Rules for listed companies (“listcos“); (ii) provide that IDs who exceed the tenure limit may continue to be considered independent until the conclusion of the next annual general meeting following expiry of the tenure limit, aligning with listcos; (iii) apply these changes to TMs due to structural similarities between REITs and BTs; and (iv) provide for an adjustment period to allow sufficient time for TMs and RMs to adjust their board composition as necessary.

8. Disclosure requirements for distributions: The MAS proposes to amend the BTR to require TMs to disclose distributions declared for the financial year and total operating expenses in both absolute terms and as a percentage of net asset value in the BT’s financial statements. This will enhance transparency, allow investors to compare across BTs, and align with requirements for REITs.

9. Streamline exemptions for stapled structures:A stapled trust structure involves one unit of a BT being stapled to one unit of a REIT, commonly seen in hospitality trusts, e.g. if: (i) the BT is dormant until activated as a master lessee of last resort; or (ii) there is an acquisition of assets not suitable to be held by the REIT (such as real estate assets still under development). Due to the unique nature of stapled structures (the TM and RM have the same board members, investors hold units in both the BT and REIT), TMs often apply for exemptions from certain requirements, e.g. to act in the best interests of the BT’s unitholders, to establish an audit committee. The MAS proposes amending the BTR and SFR, and introducing the new Stapled Groups Regulations, to codify these exemptions and to align the approach for TMs and RMs in stapled structures.

10. Alignment with requirements for companies: The MAS proposes to amend the Summary FS Regulations, and to introduce the new Defective FS Regulations, to align the requirements for BTs with that for companies.

Concluding Words

The MAS’ proposed legislative changes are a welcome development in enhancing corporate governance for BTs and alignment between the requirements for BTs and the requirements for REITs and companies, which will be essential in supporting Phase 2 of the Amendment Act. 

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