The trust has always been regarded as one of the best succession vehicles, but using a trust to cater for the succession of shares in companies has historically been impeded by a rule of English trust law that is designed to help preserve the value of trust investments. This rule, which is known as the prudent-man-of-business rule, has traditionally made the trust an unattractive vehicle to hold assets that settlors intend trustees to retain. Another aspect of the rule effectively requires trustees to monitor and intervene in the affairs of underlying companies. This also creates difficulties both from the settlor's standpoint and from that of the trustees.
The prudent-man-of-business rule places an obligation on trustees to monitor the conduct of the directors and intervene where necessary (for example, to prevent the company entering into an unduly speculative venture). It also places an obligation on them to exploit the shareholding to maximum financial advantage, which may involve accepting a financially attractive takeover bid for the company irrespective of the wishes of the settlor, and an obligation to seek opportunities for spreading financial risk by diversification, which may involve a sale of the company or its underlying assets.
Family businesses typically carry a 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. 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.
The Virgin Islands Special Trusts Act 2003
A number of possible non-legislative solutions to these difficulties, such as the non-intervention clause in trust instruments, requirements for consent and complex structuring, such as voting and non-voting shares, have been put forward, but all of these suffer from significant drawbacks.
The Virgin Islands Special Trusts Act, which is scheduled to become effective on March 1 2004, enables special new trusts, known as Vista trusts, to be created that circumvent these difficulties.
The Act enables a shareholder to set up a trust of his BVI company, which disengages the trustee from management responsibility and permits the company and its business to be retained as long as the directors think fit. This is achieved in general terms by:
- authorizing the entire removal of the trustee's monitoring and intervention obligations (except to the extent that the settlor otherwise requires);
- permitting the settlor to confer on the trustee a role more suited to a trustee's abilities, that is, a duty to intervene to resolve specific problems (for example, a deadlocked board);
- 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 its own choice);
- 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
- giving to the trustee, if required, the power to sell the shares with the consent of the directors.
Because the role of the trustee of a Vista trust is essentially that of a stakeholder, with management of the underlying company being left almost exclusively with the directors, it is the view of practitioners that the Vista trust will be suitable for holding shares in special purpose vehicles set up for commercial purposes.