REDiscovering The Business Trust
Discovering The Business Trust
New Entrepreneurs and experienced Investors are all now faced with what was once a simple question?
“How do I organize the ownership and administration of my enterprise?”
Today, the world’s market and its players are all conscious to an unprecedented degree. Our respective Governments understand and have created elaborate Legal Frameworks to support the good administration of and to advance the popularized model of ‘The Company.’ Governments with encouragement from institutions like the OECD have adapted international tax policy to the widespread knowledge on Company Structure and Corporate Governance. This has resulted in the introduction and evolution of global exchange of information and monitoring systems that are designed to invade the veil of privacy of ‘Account Holding,’ through the Common Reporting Standard and Shareholding by creating Beneficial Ownership Registers with the aim of tracking flows of wealth and applying taxes,.
The Principles of Corporate Governance for all their glitter have given away to the grit of “Shareholder Primacy.” Between the Directors of Companies and Shareholders in a Capitalism driven world, that primacy has taken its toll,
‘shareholder primacy is the shareholder-centric form of corporate governance that focuses on maximizing the value of shareholder interests. Shareholder primacy has been called the most fundamental concept in corporate governance and corporate law.’
The world’s economy has seen the damage that short sighted decisions made by massive companies solely for immediate profits can cause. Concentrations of wealth in the Global Market held by Company Shareholders has become a controversial topic. Many local populations have diverged into Labor Forces who are increasingly becoming unwilling to trade their hours and labor for low value, short term compensation and large fractions of concerned citizens are tired of “large companies” shirking their Corporate Social Responsibilities. Shareholders of companies are increasingly viewed as a greedy dominating force that whose sole concern is the immediate ‘annual dividend’.
It was once thought that the very Principles of Corporate Governance were the path to sustainability.
The Organization for Economic Co-operation and Development (OECD) defines ‘Corporate Governance’ as
‘a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of a company are set and the means of attaining those objectives and monitoring performance are determined.
However, given the current global climate, a legitimate question that must be posed is whether those relationships in their current form are the best we can do.
On examination of the OECD’s Corporate Governance Factbook for 2019, the following is revealed;
A more nuanced picture of ownership patterns is emerging around the world, both with respect to the categories of owners and the degree of concentration of ownership in individual listed companies. While listed companies with concentrated ownership make up an increasing share of global market capitalisation, a range of different ownership structures and governance arrangements co-exist.
So the question then becomes, what are the other structures than can be used?
What are the alternatives to the typical Company Structure?
Introducing The Business Trust.
Business Trusts are actually not a new concept. It is argued that past they have even developed as tools to escape and circumvent overly-restrictive Company and Incorporation directed Statutes, Regulation Frameworks and bodies.
The first and almost immediate difference is the kind of relationships that good ‘Business Trust Administration’ by its structure alone evokes. The Trust Instrument itself presents a myriad of opportunities to tailor the roles and responsibilities of Trustees, even creating responsibilities that carry fiduciary weight that could not be expected from an ordinary company director.
Explain the business trust more and how it is not locked into the narrow confines of Shareholder primacy.
A Business Trust is founded on its Trust deed, the Trust Deed which is drafted and executed by the Settlors(Investors) and literally outlines the objectives of the enterprise and the aim of the administration of the articles ([property) of the Trust. There is a shift from “Shareholder Primacy” where in the Company the ‘Dividend’ of the Shareholder is the primary concern to ‘Sustainability’ in the Business Trust, where the Trustee is liable first to the good of the ‘enterprise’ or the articles of the trust and not to the payments made to the beneficiaries .
In other words, where the aim of a Corporation to create and increase dividends for its shareholders becomes the primary concern for Company Directors. Trustees in a Business Trust are primarily concerned with managing the Trust Property and the Enterprise in a way that the best choices for the enterprise are always made , before they worry about payments to beneficiaries.
Depending on the type of business, this type of administration where the interest of the Trust takes precedence to Beneficiary interest may be absolutely critical to the development of your product and our the longevity of the business. A Business Trust like any other trust will have Settlors, Beneficiaries and Trustees to administer them. Settlors who can virtually be anybody from Natural Persons, to Individuals.
While Business Trusts are not Incorporated, Trustees are not exposed to liability to creditors and the Ultimate Beneficial Owners and Settlors are still exempt from Personal Liability to persons and entities outside of the Trust. This means that should the Trust be the subject of legal action from a person or entity outside of the trust, the personal property Beneficial Owners and or the Settlors outside of the Trust are not t risk.
The US Business Trust
The United States remains a coveted economic space.
The Delaware study
States like Delaware especially due to their position in the Financial services industry Market have evolved legislation that not just supports the Business Trust but encourages these entities to thrive. The Delaware Statutory Trust Act 2002 (the “DST Act”) has been developed to facilitate Business Trusts undertaking long term and complex financial transactions often called ‘structured financial transactions.’ The liability of Trustees to the Trust, the Settlor and the Beneficiary are clearly outlined and developed.
The Delaware Statutory Trust
Under the DST Act, the Settlor’s idea of their Business Trust reigns supreme and despite the vast flexibility present a Business Trust is on par with any Incorporated Company’s ability to handle:
- Continuous Complex Investment (Structured Investment)
- Bankruptcy and
The Foundation and Management of the ‘Statutory Trust.’
Under Rule 3801 of the DST Act, the ‘Governing Instrument’ of the Business Trust would be any ‘written instrument’ which creates the Trust and provides for its affairs (Trust Deed or Trust Declaration). It can include one or more agreements otherwise written instruments and can even include by-laws that regulate the administration of the Trust and the rights, powers and roles of Trustees, beneficial owners, agents or employees. This is directly on par with that of the structure of that of any Company.
This ‘Governing Instrument’ is then left entirely up to the Investors or Entrepreneurs to decide. There is no limitation or loss on choosing a Business Trust over any model of a Company. In fact what you will find is simply freedom. Any manner of agreed financing and profit sharing can emerge. Where the various Companies infringe on Shareholder rights that primacy is removed at the very foundation of the Business trust entity. The DST Act at every stage always refers the resulting Trust as subject to its Governing Instrument rather than simply interjecting a series of rights. Duties and responsibility by Law and Common Law. Curiously the DST Act does stipulate that persons can become beneficial owners of a trust at any time as per the Trust Deed.
Contributions of Beneficial Owners and Capital
Section 3802 of the DSA Act, clarifies that a Trust like a Company can welcome Beneficial Owners and generate capital by any means a Company can, such as by prospective persons offering cash, property, services rendered ,promissory notes or other obligations to provide cash, property or services.
However, it also permits that a person may become a beneficial owner and may receive a beneficial interest in a trust without making a contribution or being obliged to make a contribution to the statutory trust.
Th approach of the business trust guarantees that family enterprises are not alienated in the slightest way and it provides a diverse path for growing and structuring multiple co-dependent enterprises at various stages of development.
In Section 3806 of the DSA Act, It is clarified that a Business Trust can have as many classes and types of Beneficial Owners as the Trust Deed provides for, and their rights can be varied to suit. This is on par with the Structure of any company. However unlike many Company Acts, there is no mandatory requirement that dictates one class of shares must embody a pre-determined set of rights.
The Veil of the Trust.
The Corporate Veil is invaluable, and it is sought out primarily because it is viewed as a unique creation. The DSA Act in a sweeping move makes the Trust Veil equivalent to the Corporate veil. Yet it also states,
“ 3803 Liability of beneficial owners and trustees.
- Except to the extent otherwise provided in the governing instrument of the statutory trust, the beneficial owners shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the general corporation law of the State.
The business Trust allows the trustees to pursue CSR as it is beneficial to the long term strategic objectives of the firm. CSR is often excluded from the narrow confines of Shareholder primacy and short term profits.
The Creators of a Trust are left to determine their own level of personal liability The ability to pursue Accountability in the branding of products and services could prove to be not just profitable but a distinguishing strategic factor for many international businesses and young entrepreneurs.
Trustees are also protected and are not capable of being held personally liable to persons outside of the trust for any act, omission or obligation while discharging their duties in pursuing ESG, or CSR for the long term strategic benefits of the business.
The Rights of the Beneficial Owners and Trustees in the Trust Property.
As expected this is determined by the Trust Deed, Beneficial owners all have an undivided beneficial interest in the property that is classified as personal property and allows him to share in the Trust’s profits and losses in a proportion expressed as a percentage of the entire beneficial interests of the trust. This interest is Transferable.
The Trust deed may permit Trustees to have beneficial ownership of any income earned on securities of the statutory trust issued by any business entities formed, organized, or existing under the laws of any jurisdiction, including the laws of any foreign country.
Creditors of Beneficial Owners do not have any right to take possession of or hold legal or equitable remedies over any property of the Business Trust.
Merger and Consolidation
Section 3815 of the DTA Act provides that any Statutory Trust can merge or consolidate into one or more Statutory Trusts or any other business interests, existing, formed or organized under the Laws or State of Delaware, the United States for Foreign country or jurisdiction. This means that in Delaware, the Business Trust is not stigmatized in any way and persons with existing business structures are free to consolidate them or Merge them with Business Trusts which will be critical in the near future to the climate of the World Markets.
While our case study, is a reflection of a State in the United States, Delaware, Delaware is a leader in this respect and as the Business Trust grows in popularity, it is easy to predict that other jurisdictions will follow the Delaware Approach.
Very wisely, policy makers have decided that Delaware Statutory Trusts are not to be alienated from business interests for their structure or place of incorporation. This means that the Delaware Statutory Trusts will be an invaluable tool to international business owners not just structured finance enterprises.
Traditional Corporate Structures are not obsolete by any means nor are the Principles of Corporate Governance failing, however the market was never a stagnant place and in light of the climate there truly is no harm in considering a Business Trust and in the United States, namely the State of Delaware.