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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.