29 March 2004
In the unceasing struggle for offshore business, the British Virgin Islands (BVI) appears to have stolen a march on its rivals with the coming into force of the Virgin Islands Special Trusts Act 2003 (Vista) on 1 March 2004. Vista seeks to address a dilemma thrown into sharp relief with the increasing use by entrepreneurs of offshore structures: how to settle assets in trust without surrendering practical control of those assets to third party trustees.
The principal difficulty with surrendering control to trustees is that they have different priorities and obligations. Trustees of ordinary trusts are obliged to manage trust assets as ‘ordinary prudent men of business’; this means monitoring their investment performance and intervening where necessary. This superficially laudable requirement can in practice cause a number of problems. First, prudential management is generally antipathetic to entrepreneurial risk-taking: professional trustees often have little relevant business experience, let alone the flair needed to take successful advantage of speculative investment opportunities. Second, rules place on trustees the obligation to exploit the trust assets to maximum financial advantage. Where the assets in question comprise the share capital of a family company, this may require the acceptance of a hostile takeover offer contrary to the wishes of the settlor. Third, prudence dictates that trustees should diversify their investments – a principle wholly unsuited to the myriad of trusts established, for succession planning reasons, to hold family businesses.
Some of these difficulties can be ameliorated by careful drafting. The trustees can be expressly relieved of certain of their obligations and be given the protection of exculpatory clauses if they fail to act. Yet if the draft goes too far, the trust is in danger of being challenged as a sham.
The radical solution introduced by Vista is to provide a trust structure, the Vista Trust, in which the ‘prudent man of business’ rule is abrogated almost entirely in relation to any shares in BVI international business companies (IBCs) held by the trust. This is because the trustee’s role in the underlying business is all but eliminated.
In broad terms, the Vista Trust provisions are engaged where there is a sole trustee licensed under the BVI Banks and Trust Companies Act 1990.
A trustee of a Vista Trust has a primary duty to retain the IBC shares and is absolved from liability for any losses which might thereby arise as a result of the activities of the IBC. No disposal can take place unless the trustee has obtained the consent of the directors of the IBC and any other consents required by the trust documentation, or a court determines that further retention of the shares is incompatible with the wishes of the settlor.
Furthermore, the extent to which a Vista Trust trustee can intervene in the management and operation of the IBC is extremely limited. In particular, it has no voting rights on the shares, which may interfere in the management or conduct of the IBC’s business. The prohibition is comprehensive. As a general rule the trustee should not: require the payment of dividends; take steps to instigate or support any action by the IBC against its directors; procure the appointment or removal of any of the directors; wind up the IBC; or apply to the court for any form of relief in relation to the IBC.
While the principal purpose of Vista is to disengage the trustee from the operation of the IBC, it does provide a limited control mechanism which can be activated by an ‘interested person’ if the trust documentation specifies permitted grounds of complaint (none need be specified) and the ‘interested person’ is able to rely on any such grounds.
An ‘interested person’ includes a beneficiary, the object of a discretionary power, any protector of the trust and any person specially appointed by the terms of the trust deed to monitor the running of the IBC. If the ‘interested person’ makes what is termed an ‘intervention call’, the trustee can, as an exception to the general rule and if satisfied that the complaint is substantiated, intervene in the running of the IBC. Such intervention may extend to replacing directors or procuring the IBC to recover losses caused by the conduct giving rise to the complaint. In deciding what action to take, the trustee is required to have regard to the interests of the settlor as well as to the efficient running of the company. The action must be limited to dealing with the specific matter of complaint. Once the complaint has been dealt with, Vista envisages that, in the ordinary course, the director appointed by the trustee will be removed.
In order to overcome the difficulty posed by preventing the trustee shareholder from appointing and removing directors, Vista introduces the concept of ‘office of director rules’ (OOD Rules), which may be included in the trust deed. OOD Rules, which, like a shareholders’ agreement, supplement the memorandum and articles of association of the IBC, may regulate the appointment, removal, number and remuneration of directors. In particular, they may require the trustee to ensure that a particular person becomes or remains a director, or obliges it to exercise its powers of appointment and removal at the direction of a third person. The trustee is obliged to exercise its powers to ensure, so far as it is able, that at all times the identity of the directors conforms to the OOD Rules. Where a trustee complies with the OOD Rules, it is absolved from liability for any loss arising out of any appointment. Where there are no OOD Rules, it receives a similar absolution only if it has both concluded in good faith that the appointment is consistent with the wishes of the settlor, and has not been motivated in its selection of director by a desire to reduce business risk.
The avowed purpose of the BVI government in promoting Vista was to facilitate succession planning for corporate family businesses. While Vista does contain provisions directed expressly towards this end (for instance an optional 20-year prohibition on beneficiaries winding up Vista trusts under the rule in Saunders v Vautier), it makes no attempt to limit the application of Vista to such situations. Indeed, IBC ‘business’ is expressly defined so as to include the holding of assets and non-commercial activities. The attraction of being able to place assets in a tax-efficient trust structure without surrendering day-to-day control over them is likely to make Vista trusts very popular with settlors.
Equally, being absolved of responsibility for businesses in which they have no expertise will make them very appealing for trustees. The Vista requirements of a BVI-licensed trustee and a BVI-incorporated IBC ensures that Vista trust business will remain in the BVI.
Elsewhere, only the Bahamas has sought to tackle the issue, and then only in a rudimentary way (see Section 90 of the Trustee Act 1998). The rest of the offshore industry, particularly the BVI’s principal rival the Cayman Islands, must be looking at these new developments with a certain amount of envy, if not concern.
Stephen Moverley Smith QC is a barrister at 24 Old Buildings