Trustee as a Shareholder: Part 2 - STEP Caribbean … · Introduction: the Prudent Man of Business...

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Trustee as a Shareholder: Part 2

Tara E. Frater

Senior Associate

STEP Caribbean Conference, Bahamas

12 – 14 May 2014

Introduction: the Prudent Man of Business Rule

- Professional trustees frequently hold trust assets which are comprised of shares in companies, particularly shares in trading companies but difficulties are created as a result of the “Prudent Man of Business Rule”.

- The Rule is made clear in English case Bartlett v Barclays Bank Trust Co. Ltd [1980] Ch 515.

- The Rule requires trustees to monitor and intervene in the affairs of a company the shares of which are held by a trustee, and to exploit a shareholding to maximum advantage.

- Consequences of the Rule usually not desired by either settlor or professional trustee as professional trustee will typically lack expertise and business acumen required.

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Introduction: the Prudent Man of Business Rule

Bartlett v Barclays Bank Trust Co. Ltd per Brightman J: “The bank, as trustee, was bound to act in relation to the shares and to the controlling position which they conferred, in the same manner as a prudent man of business. The prudent man of business will act in such manner as is necessary to safeguard his investment. He will do this in two ways. If facts come to his knowledge which tell him that the company's affairs are not being conducted as they should be, or which put him on inquiry, he will take appropriate action. Appropriate action will no doubt consist in the first instance of inquiry of and consultation with the directors, and in the last but most unlikely resort, the convening of a general meeting to replace one or more directors. What the prudent man of business will not do is to content himself with the receipt of such information on the affairs of the company as a shareholder ordinarily receives at annual general meetings. Since he has the power to do so, he will go further and see that he has sufficient information to enable him to make a responsible decision from time to time either to let matters proceed as they are proceeding, or to intervene if he is dissatisfied.”


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Non–Statutory Approach: the anti-Bartlett Clause

“The Trustees shall not be required to interfere in the management or conduct of the business of any Company, securities of which comprise the whole or part of the Trust Fund. Where the Trustees’ holding of such securities is sufficient to confer voting control of the Company concerned, the Trustees shall nevertheless from time to time use reasonable endeavours to obtain such information from the Company as would be made available to a non-executive director in order to satisfy themselves (as far as may be possible from such information) that the affairs of the Company are being properly managed. In the absence of any notice to the contrary, the Trustees shall be at liberty to leave the conduct of the Company’s business, including the payment or non-payment of dividends, wholly to the Company’s directors.”


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• “The Trustees are under no duty to enquire into the conduct of, or obtain any information regarding, a company in which they are interested and, unless they have actual knowledge of circumstances which call for enquiry, they may assume at all times that the business of any such company is being conducted diligently in their best interests and that all information received is accurate and truthful.

• The Trustees shall not be bound to exercise any control they may have over or to become involved in the conduct of the business of any company. The Trustees may leave the conduct of such business to the persons authorised to take part in the conduct thereof and shall not be bound to supervise them as long as the Trustees have no actual knowledge of any dishonesty relating to such business.”


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• It is unclear whether the various forms of anti-Bartlett clause can be effective to exclude completely a positive duty to monitor and intervene in the affairs of a company in respect of which a trustee has a controlling shareholding.

• A trustee will still have the power to obtain information and interfere by virtue of its controlling shareholding and possesses such a power in the context of “…an overriding duty to exercise its powers so as to safeguard and further the beneficiaries’ interests as a whole. This duty at the core of the trust cannot be ousted.” (per Underhill and Hayton 18th ed)


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Non–Statutory Approach: Special Company Clause

- “Special Company” provisions typically involved the designation of companies the shares of which were held in the trust and in which the trustee held a controlling shareholding as a ‘special company’.

- The trust instrument then sought to exclude the liability of the trustee by virtue of an anti-Bartlett clause.

- Such provisions will generally be susceptible to the weaknesses attaching to anti-Bartlett clauses.


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Non–Statutory Approach: “Speculative Investments” Clause - A variant of the special company concept and expressly seek to authorize

a trustee to invest in shares in a ‘special company’ (i.e. a company whose activities were high risk) and to exonerate trustees from any loss arising from such investment.

- Such clauses may alter the test of prudence which would generally otherwise be applicable in order that a breach of trust would not automatically follow from such an investment.

- It is doubtful that such a clause will provide an effective excuse or exoneration where substantially all or the whole of the trust assets are invested in a speculative or high risk venture.


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Non–Statutory Approach: Reservation of Powers and Consents in Trust - Section 2 of the Barbados Trustee (Amendment) Act 2012 (not proclaimed

as at date of writing) states:

“A settlor may reserve the following powers to himself:-

…a power to give binding directions to the trustee in connection with the purchase, holding or sale of the trust property;

• … a power to restrict the exercise of any powers or discretions of the trustee by requiring that they shall only be exercisable with the consent of the settlor or any other person specified in the trust instrument; or

… a power to provide advice on investment of the trust fund or the selection of investment advisors who may be required to act together with the trustee or to act independently of the trustee

and this reservation shall not invalidate the trust or the trust instrument.”


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Non–Statutory Approach: Non-voting Shares - A settlor may settle a “pig in a poke” i.e. a flawed asset in respect of

which the trustee has no power to intervene, e.g. non-voting shares.

- A segregation between economic and political rights by having voting and non-voting shares is useful in this context.

- Would this approach affect the trustee’s right to dispose of non-voting shares?

- Can a trustee shareholder consent to a corporate restructuring which results in such trustee holding non-voting shares instead of voting shares?


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Non–Statutory Approach: Private Trust Company

• A private trust company may be described as a company which is incorporated specifically to act as a trustee of one or more trusts in a private context (usually that of a family), which does not offer its services a trustee to the general public and is exempted from licensing requirements.

• A private trust company can instead hold the controlling shareholding on trust and the professional trustee may provide various administrative services to such private trust company.

• A private trust company is not the ideal solution in all circumstances: cost and additional layers of complexity.


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Statutory Approach: The Cayman STAR

• A STAR trust might stipulate that the objects of the trust are to carry out “Purposes”, which could include “to provide a mechanism for the control of the Controlled Company through the holding and voting of the shares of the Controlled Company and in particular, but without prejudice to the generality of the foregoing, to carry out the Business Plan”.

• The scheduled Business Plan could then particularise various activities to be pursued by a trustee including:

“to sell or otherwise dispose of the Shares at the request or direction of the Enforcer, on such terms and subject to such conditions as the request or direction shall specify;”


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Statutory Approach: The Cayman STAR

“to hold all the shares or other ownership interests of each Controlled Company (the “Shares”) with a view to the Controlled Company continuing to make investments for profit or reward and to exercise the rights attaching to the Shares, inter alia, to procure that the day to day management of each Controlled Company is left to the Board of Directors or other managing board or committee of each Controlled Company or persons to whom the appropriate powers are delegated by the Board of Directors or other managing board or committee and the Trustees shall not be required to make any determination in relation to or take any action in respect of or be responsible for any transaction entered into by the Board of Directors or other managing board or committee of the Company even if not for the commercial benefit of a Controlled Company”

-The devil is in the detail and careful drafting is critical.


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Statutory Approach: The British Virgin Islands’ VISTA - It is a true statutory solution in that the legislation was deliberately crafted to

circumvent the difficulties flowing from the Prudent Man of Business rule.

- VISTA permits a trust to be created over shares in a company governed by the laws of the British Virgin Islands, which disengages the trustee from management responsibility of such company and pursuant to which the trustee has an express duty to retain the shares of such company for as long as the directors think fit.

- Recent amendments to VISTA will interest professional trustees seeking to navigate the challenges of holding a controlling shareholding in a company.


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Statutory Approach: The British Virgin Islands VISTA - It is a true statutory solution in that the legislation was deliberately crafted to

circumvent the difficulties flowing from the prudent man of business rule.

- Recent amendments to VISTA relevant in this context include:

- Ability of non-trustee to “activate” and “de-activate” VISTA trust;

- Ability to create a VISTA trust (i) by trustee of another trust adding shares to the proposed VISTA trust or (i) by exercise of powers conferred in another trust; provided ,in both instances, that that other trust is governed by BVI law and one of its trustees is a “designated trustee” i.e. a BVI private trust company or a BVI licensed trustee;

- Restriction of the scope of the section which prevents, inter alia, a trustee from making applications to the court to ensure that it does not prevent a trustee from exercising its rights as shareholder to obtain specified documents and accounts relating to the company; and

- Permitting co –trusteeship of a VISTA trust (where previously a sole trustee who was licensed under the laws of the British Virgin Islands was required) provided that one of the trustees is a “designated trustee”.


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Statutory Approach: The Bahamas’ Executive Entity -The legislation permits the creation of a separate legal entity of limited or perpetual duration that can perform executive functions. It has no shareholders or beneficiaries and therefore functions as an orphan entity.

-Executive functions include (i) carrying out any powers and duties of an executive, administrative, supervisory, fiduciary and office holding nature e.g. acting as enforcer, protector, trustee, investment advisor; and (ii) ownership, management and holding of “executive entity assets” or trust assets.

-A number of applications including, in context of Prudent Man of Business Rule: to hold the shares in a private trust company, thereby potentially completely removing a professional trustee from the ownership equation.


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Other Relevant Issues And Conclusion

A trustee should bear other issues in mind:

- a combination of tools and strategies may be necessary

- breaching anti-money laundering legislation

- exposure to reputational risk

- conflicts of interests arising from trustee sitting on board of directors

A trustee should therefore approach the issues with care, act reasonably and take specialist legal advice.


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Thank You!

Tara E. Frater

Senior Associate

E: [email protected]


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Trustee as a Shareholder: Part 2 - STEP Caribbean … · Introduction: the Prudent Man of Business...

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