We specialise in Vista trusts, discretionary trust and provide expert advisement for succession planning solutions.

Background: why trusts have traditionally been inappropriate to hold shares in corporate businesses

Whilst the trust has been a succession vehicles since the Middle Ages, the use of the trust to cater for the succession of shares in companies has historically been impeded by a rule of English trust law which is designed to help preserve the value of trust investments. This rule, known as the “prudent man of business rule”, has traditionally made the trust an unattractive vehicle to hold assets which settlors intend trustees to retain. Another aspect of the rule effectively requires trustees to monitor and intervene in the affairs of underlying companies which creates difficulties both from the settlor’s standpoint and from that of the trustees.

The prudent man of business rule places on trustees the obligation to monitor the conduct of the directors and to intervene where necessary. It also places on them the obligation to exploit the shareholding to maximum financial advantage which may involve, eg, accepting a financially attractive takeover bid for the company irrespective of the wishes of the settlor and an obligation to look for opportunities of spreading the financial risk by diversification, which may involve a sale of the company or its underlying assets. These obligations conflict with the wishes of the typical owner of a family business and have hitherto raised significant difficulties for trustees holding shares in such a business.

There is an inherent conflict between the prudence required of trustees and the entrepreneurial flare and quick decision taking required to run a successful business and most settlors find equally unwelcome the prospect of a compulsory sale of shares merely to satisfy short-term financial considerations. Professional trustees rarely have, or can be expected to have, the skills relevant to the particular business, and the monitoring procedures necessary to ensure that trustees avoid exposure to claims against the trustees often adds substantially to the cost of trust administration. Furthermore professional indemnity insurance for trustees may be or become problematic or prohibitively expensive.

Family businesses typically carry a significantly greater degree of financial risk than a well spread investment portfolio and diversification, which may become a priority for the trustees, will often be in direct conflict with the settlor’s wishes. To many settlors and their families, on the other hand, the self-managed company represents much more than an impersonal investment; among the factors which may figure in their thinking when contemplating a trust are: family tradition, social concerns for employees or the environment, career opportunities for descendants, and business projections looking further ahead than the long or medium term.

Moreover the owner will often prefer to leave to the directors, rather than to the trustee/shareholders, the question of whether the company expands, contracts, or even goes out of business. Running the company to enhance the value of its shares will not necessarily be (and often is not) in its long term best interests, and economic commentators have pointed out that some of most successful companies are those whose owners have remained at the helm and which have not simply been run (and the shares of which have not been disposed of) purely for short term gain.

Thus trustees have faced the prospect of being squeezed between, on the one hand, exposure to potential liability for failure to dispose of shares and, on the other hand, settlor pressure to retain.

The Virgin Islands Special Trusts Act (VISTA trust)

The Virgin Islands Special Trusts Act, known as VISTA trust, was enacted to circumvent these difficulties.

The legislation enables a shareholder to establish a trust of his company that disengages the trustee from management responsibility and permits the company and its business to be retained as long as the directors think fit. This will be achieved in general terms by: first, authorizing the entire removal of the trustee’s monitoring and intervention obligations;

secondly, by permitting the settlor to confer on the trustee a role more suited to a trustee’s

abilities, namely a duty to intervene to resolve specific problems (eg a deadlocked board);

thirdly, by allowing trust instruments to lay down rules for the appointment and removal of

directors (so reducing the trustee’s ability to intervene in management by appointing directors of their own choice);

fourthly, by giving both beneficiaries and directors the right to apply to the court if trustees fail to comply with the requirements for non-intervention or the requirements for director appointment and removal; and, lastly, by prohibiting the sale of shares without directors’ approval.

Some of the features of VISTA are as follows:
The Act does not apply to BVI trusts generally: it will apply where there is a provision in the trust instrument directing the Act to apply.
Where the new Act applies, designated shares will be held on “trust to retain” and the trustee’s duty to retain the shares as part of the trust fund will have precedence over any duty to preserve or enhance their value. The trustee will not therefore be liable for the consequences of holding (rather than disposing of) the shares.
The trustee may not exercise its voting or other powers so as to interfere in the management or conduct of any business of the company; the management or conduct of the company’s business will be left to its directors, whose fiduciary duties to the company will remain intact.
The trust instrument may include “office of director rules” specifying how the trustee must exercise its voting powers in relation to appointment, removal and remuneration of directors, and the trustee will generally be required to follow these rules. Except in compliance with these rules, the trustee must generally take no steps to procure the appointment or removal of the company’s directors.
The trust instrument may include “office of director rules” specifying how the trustee must exercise its voting powers in relation to appointment, removal and remuneration of directors, and the trustee will generally be required to follow these rules. Except in compliance with these rules, the trustee must generally take no steps to procure the appointment or removal of the company’s directors.
The trust instrument may specify that the trustee may intervene in the affairs of the company in specified circumstances, ie when required to do so by an “intervention call” by a beneficiary, an object of a discretionary power of appointment, a parent or guardian of either of them, the Attorney General (in relation to charitable trusts), the enforcer (in relation to purpose trusts) or other specified persons.
The trustee is permitted to dispose of designated shares in the management or administration of the trust fund, but can only do so with the consent of the directors of the company (and that of such persons as are specified in the trust instrument).
There are provisions enabling beneficiaries, directors and others to apply to the court for enforcement of the terms of the Act and, on the application of a specified person, the court will be empowered to authorise the trustees to sell designated shares where retaining them is no longer compatible with the wishes of the settlor.
The rule in Saunders v Vautier will not apply (for a maximum of 20 years) to VISTA trusts where such rule has been expressly excluded by the trust instrument.
The Act is confined to shares in BVI Business Companies. It is also possible to add shares from an existing BVI trust to a VISTA trust, so that they become subject to VISTA legislation.
The trustee of a VISTA trust must be a company which holds a licence to undertake trust business under the Banks and Trust Companies Act, 1990, or a BVI Private Trust Company.
The company law duties of directors will remain unchanged and the new Act will not in any way alter the restraints placed on directors and others by criminal law. The Act leads the way in the development of trust law providing innovative measures which meet the legitimate needs of their international clientele. It provides opportunities for many individuals who would otherwise wish to set up trusts to hold shares in their companies, but who have hitherto felt disinclined to do so as a result of the rigidity of the “prudent man of business” rule. The comments above are not intended to be comprehensive and without any opinion. Should you be interested in establishing a VISTA Trust we recommend that you seek legal advice. We would be more than happy to refer to legal council in our network.
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