Discretionary family trusts traditionally worked towards the dynastic preservation of broadly passive wealth like long-term investment portfolios, real estate or holdings in inactive companies – the ‘family silver’, so to speak. These were generally headed up by patriarch figures who had either inherited or generated the wealth themselves. Jennifer Le Chevalier and James Angus write
Yet the clientele establishing discretionary structures are now often much younger, entrepreneurial people with decades of commercial activity ahead of them. They are experts in their field, with strong views on the direction of the business and tend to reserve significant powers over it. The goal is no longer asset preservation – they focus on constant wealth creation and other, wider, life goals.
This shift means that the expectations of family trusts are now sky-high. Trusts are not just offering a safe pair of hands to ensure good corporate governance; it’s about having a seat at the board table and a deep understanding of the sectors that clients operate in. And while that creates a vibrant market, it also brings far greater scope for contention.
Corporate disputes roulette?
The cross-over between the trust and underlying corporate levels is creating a pressure cooker for full-blooded shareholder disputes, particularly in the context of trading entities held within a trust. We are seeing more allegations of unfairly prejudicial conduct thrown around by co-shareholder directors and misuse of fiduciary powers. This can leave the corporation in a deadlock situation. Shareholder litigation can be the most relentless and difficult type of all litigation, often tainted by partners falling out or having very conflicting views about how the business should operate.
Not signing a written agreement can be a recipe for deadlock and insoluble disputes. Yet many stakeholders proceed without one as they feel they will always be aligned, or they rely on the good offices of the respective shareholder fiduciaries to ensure any disputes are properly resolved. But unfortunately, this is corporate Russian roulette. Chances are, families fall out, and the fiduciaries can only do so much.
Having a trustee interposed in a dispute – usually as the ultimate shareholder – provides a safety net by offering sober judgement and advice to keep the dispute within sensible bounds. Fiduciaries are usually more amenable to early settlement too, over private litigants that often wish to take the most aggressive possible stance.
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The cost of shareholder litigation is almost always hefty. The ultimate relief may only be a court-ordered buy-out or a winding up in relation to the corporate entity. Yet while this may be the only remaining solution, it may cut directly against the settlor’s wishes to hold and grow a profitable business over a long period.
Passive vs active trustees?
The shift in clientele and rationale also means that much of the day-to-day activity for trustees is now at corporate subsidiary level. This means sitting on multiple boards, understanding the ins and outs of niche sectors, as well as fulfilling the traditional fiduciary service role. Modern professional trustees need to be acutely aware of the corporate operations of the structures they hold.
The overlap between director and trustee duties means that it is an increasingly common phenomenon for trustees to assume board seats. This could open them up to potential disparaging behaviour by co-directors in a contentious scenario if they are perceived to not have an in-depth knowledge of corporate procedures. With high potential for risk, ‘active’ trustees could consider a board observer role over a full board seat – enabling them to monitor the activity of investments without active interference.
Then again, the trustee may want to have some ‘teeth’ concerning the underlying operation of the structure. They could opt for a mutually complimentary role: being both an observer and having reserved powers around strategic shareholder matters. The observer role helps to provide context, while the reserved powers provide control informed by that context. However, what role the trustee holds ultimately depends on what the client wishes to achieve at the outset, whether that is passive or engaged with a real commercial added value.
Board roles also pose a significant risk to any anti-Barlett protection. As a safe rule of thumb, trustees should assume that they invalidate any pre-existing anti-Bartlett protection if they adopt a position on the board of a subsidiary company. This is because anti-Barlett protection absolves the trustee’s duty to interfere with the affairs of the underlying corporates the trust holds. Taking a board seat means they cannot avail of that absolution – the duty is engaged and must be exercised fully.
The private wealth landscape is not what it once was. The increase in active trustees, with their financial and legal interests as a shareholder, is creating more and more corporate disputes in a trust structure context. The polarisation is only likely to get wider, so laying the foundations with defined roles and procedures for family trusts will be critical.
Jennifer Le Chevalier is a private client director at IQ-EQ and James Angus is partner, dispute resolution & insolvency at Ogier.