WHAT INFORMATION DOES THE TRUSTEE NEED?
BY SAM GILLING
In my previous article (see ‘Is My Trust Valid?’), I reviewed the potential for a trust to be invalidated due to it being found to be a sham trust or nominee-type arrangement. One of the important considerations in that article is that a trustee must always have the freedom of independent discretion in their decision-making and cannot be seen to be merely a nominee on behalf of the settlor. In order to be able to exercise discretion in decision-making, a trustee must always have all of the relevant information available to inform their decision. However, where the trust fund holds an underlying company the trustee is not necessarily informed of the day-to-day running of the company. In this article I explore the requirements to ensure that the trustee has the information they require from underlying companies to make informed decisions, especially where the settlor is the manager of said company.
Having an asset protection structure which includes a trust with an underlying company has long been a standard practice. It allows for more overall flexibility in managing the assets within the trust fund. However, it should be noted that placing the assets of the trust fund into an underlying company does not serve to negate the trustee’s fiduciary duties in relation to those assets. Where the investment of a trustee in an underlying company does not result in a controlling interest, the trustee will still need to consider the exercise of their voting rights as the need arises and also to consider the suitability of the investment in the company from time to time. However, in the instance that the trustee of a trust holds a controlling interest in an underlying company, the trustee will have further obligations to keep itself informed as to how the company is being managed and what its financial position is. This means that the trustee will need to play an active role as shareholder.
The leading case concerning the duties of a trustee concerning underlying companies in which they hold a controlling interest is Bartlett v Barclays Bank Trust Company Ltd in which the judge, Brightman J, made the following finding:
‘The [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 enquiry, he will take appropriate action. Appropriate action will no doubt consist in the first instance of enquiry 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.’
Brighton J went on to state:
‘The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable… that the trustees … or one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset, namely the shareholding.’
The judgment in the case above shows that where a trust holds a controlling interest in a company, the trustee has the duties not only of voting and reviewing the annual records but also of monitoring the management of the company and participating where necessary in any momentous decisions. The trustee will have grounds to question the director/manager of the company as to whether a decision that is proposed is unsuitable or carries undue risk. To ensure that the trustee is adequately informed concerning a company in which they hold a controlling interest, it is important that the director/manager keep them regularly updated and let them know in advance of any particularly significant actions. Best practice suggests that the director/manager should seek prior approval from the trustee, as shareholder, prior to making such decisions.
One further important consideration that is worthy of mention in relation to companies underlying a trust that requires strict clarification is that the manager of such a company does not have the authority to distribute the assets of the company to the beneficiaries of the trust without informing the trustee. All beneficiary distributions originating from an underlying company must come through the trust and follow the correct procedure. A letter of request should be presented to the trustee by the settlor/grantor or beneficiary seeking a distribution. The trustee will subsequently review the request and, if approved, seek the consent of the trust protector where required. Once all necessary consents are received the trustee will then be in a position to request a distribution from the assets of the underlying company for the benefit of a beneficiary of the trust. Failing to follow this procedure will result in risk for the validity of the overall asset protection structure for the same or similar reasons as outlined in my previous article (see link above).
In summary, the trustee of a trust that holds an underlying company has duties which the manager of the company will often need to facilitate. It cannot be stressed enough how important it is to ensure that the trustee of your trust is adequately informed in relation to companies in which they hold an interest. This is yet another matter which could serve to bring the validity of the trust into question if not properly attended to (especially where the settlor of the trust is the manager of the underlying company) or put the trustee in a position where they will be forced to resign because of the risk presented by their lack of information concerning the underlying assets. The trustee of a trust that holds a non-controlling interest in an underlying company should be receiving, at a minimum, yearly financial reports for the company as well as being informed of any decisions that require them to exercise their voting rights. Where the trustee holds a controlling interest in the underlying company, they should in addition receive information concerning any momentous decisions for prior review. Finally, where a distribution is requested by a beneficiary, the request must always be directed to the trustee to ensure that the correct procedure is followed. The trustee must always act in the best interests of the beneficiaries of the trust and must receive a steady stream of appropriate information from those who manage any underlying company in order to do so.
In order to ensure the continued protection of assets placed into an asset protection structure involving a trust, it is therefore of utmost importance to ensure that the trustee is kept adequately informed through the provision of accounts and other information relating to underlying companies. Cook Islands and Nevis trustees are also required by law to hold information on trust assets, income and transactions which affect a trust’s assets and liabilities, and cannot continue to act as a trustee if this information is not made available by managers of underlying companies.
For more information on setting up or maintaining an asset protection trust structure, please contact us