Frequently asked questions – Corporate Trustee Update

Professional views are divided regarding how assets are measured for the purposes of determining a major transaction in the context of corporate trustees.

If a company has no assets on its own account, every transaction could be considered a major transaction. Alternatively, another approach is to value the company’s assets by reference to its indemnity from the trust for which it acts by reference to the net value of that trust’s assets. Regardless of the view adopted when a trust is borrowing money from a bank, providing trust property as security for bank borrowings or guaranteeing bank borrowings, commonly the bank will require confirmation of shareholder approval.

As a practical observation, this is a matter that could be addressed in a trustee company’s constitution by defining how assets are to be measured in the context of a major transaction.

Depending on the approach taken consideration will need to be given to sole corporate trustees and corporate trustees that take on multiple appointments.

To answer this it is helpful to consider what rights and powers attach to share ownership. These are set out in section 36 of the Companies Act 1993, which provides as follows:

36 Rights and powers attaching to shares

(1) Subject to subsection (2), a share in a company confers on the holder—

• (a) the right to 1 vote on a poll at a meeting of the company on any resolution, including any resolution to
  • (i) appoint or remove a director or auditor:
  • (ii) adopt a constitution:
  • (iii) alter the company's constitution, if it has one:
  • (iv) approve a major transaction:
  • (v) approve an amalgamation of the company under section 221:
  • (vi) put the company into liquidation:
• (b) the right to an equal share in dividends authorised by the board:
• (c) the right to an equal share in the distribution of the surplus assets of the company.

(2) Subject to section 53, the rights specified in subsection (1) may be negated, altered, or added to by the constitution of the company or in accordance with the terms on which the share is issued under section 41(b) or section 42 or section 44 or section 107(2), as the case may be.

Given that shareholders can appoint and remove directors, alignment with the powers of appointment under the terms of the relevant trust can be an important consideration.

Approval of major transactions is another relevant consideration, as are the terms of the trustee’s constitution (if one has been adopted).

This question is answered on the basis that the trustee in question is a corporate trustee of which the beneficiary is a director and that the corporate trustee has been properly appointed and the trust terms do not constrain distributions to a beneficiary where a beneficiary is a director of a trustee. On that basis, self-benefit considerations do not arise as these apply to the trustee, not the trustee’s director.

For the contrary view, consider the dissenting judgment of the Chief Justice in Legler v Formannoij [2024] NZSC at [186] and [187]:

[186] My second reason for rejecting an interpretation which treats such an appointment as authorised relates more directly to the provisions dealing with the appointment of trustees. It is significant that the Trust Deed does not expressly authorise such an appointment, contrary to what the High Court held. The best that the respondents can point to in this regard is cl 27.2(c), which contemplates that a beneficiary might have an interest in a corporate trustee as a shareholder, director or otherwise, and that the corporate trustee may exercise a power or discretion to benefit that beneficiary. But that does not authorise a corporation exclusively controlled by a beneficiary to act as sole trustee.

[187] On the other side of the interpretive ledger, the intention to prevent a trustee/beneficiary from gaining and using control of the trust to prefer themselves is apparent from several other provisions within the Trust Deed. It is apparent from the requirement of unanimity in trustee decision-making in cl 8.3, from the prohibition on a trustee/beneficiary exercising a power in favour of themselves in cl 18.1, and from much of the text of cl 26.1. As noted, cl 26.1 (which is one of only two clauses from which there may be no derogation should the trust be varied) achieves two things: it prevents a trustee who finds themselves as the sole remaining trustee from dealing with the trust assets, allowing them only to act to appoint an additional trustee (para (a)); and it requires there to be at least one trustee who is not a beneficiary nor in a specified category of relationship with a beneficiary or other trustee (para (b)). Read as a whole, these provisions are clearly intended to ensure that independent judgement (in the sense of judgement which is not tainted by self- dealing or self-interest) is brought to bear when a discretion or power is exercised to deal with trust assets.

As a general observation, lawyers and accountants are less willing to take on trusteeships. That said there are many who do. In addition to the statutory trustees there are also a number of firms offering bespoke trustee services.

As noted by the Chief Justice in her dissenting judgment in Legler v Formannoij at [235]:

“First, Marina made only modest efforts to find an independent trustee. There can be no suggestion that she was compelled by necessity to the course of action she took. There was an option available to her — Perpetual Guardian. There is no suggestion that their costs were prohibitive in the context of a trust of this value. Marina said that she also took into account whether they were a good fit for the role, but, as she should have realised, a body corporate controlled by her was a still worse fit. As WRMK said in their letter to her, it was expected that it would cause the adverse reaction that it did in fact elicit from the appellants.”

A transfer of shares requires a share transfer. See section 87 of the Companies Act 1993. Where a person is (amongst other things) wrongly omitted from a company’s share register the person can apply to the court for rectification of the share register and / or compensation.

That said, unless there is value in the corporate trustee your enquiry might be targeted at who has the power to appoint and remove trustees.

The form of a constitution for a special purpose corporate trustee should align with the terms of the trust. For example, if the trustees must act unanimously, it may be appropriate for directors to act unanimously where there is more than one. Although that said the position might be different where the directors are independent.

Features of a constitution for a corporate trustee might include:

• (a) A statement regarding the company’s purpose, eg to act as a trustee of a specific trust
• (b) Provision to permit insurance, which is not otherwise permissible. See section 162 of the Companies Act 1993
• (c) A definition of entitled persons that includes, for example, the trust’s appointors
• (d) Modification of the major transaction provisions to align with appropriate trust governance
• (e) Different classes of voting rights with respect to the appointment and removal of directors
• (f) Modifications regarding director decision making to allow appropriate alignment with the term of the trust for which the corporate trustee acts

Professional views are divided regarding how assets are measured for the purposes of determining a major transaction in the context of corporate trustees.

At a minimum the company’s assets include its indemnity from the trust. The corporate trustee’s assets will also include the assets held on trust. That said some corporate trustee constitutions specify that the trustee company’s assets are limited to assets held on its own account.

Professional views are divided regarding how assets are measured for the purposes of determining a major transaction in the context of corporate trustees.

If a company has no assets on its own account, every transaction could be considered a major transaction. Alternatively, another approach is to value the company’s assets by reference to its indemnity from the trust for which it acts by reference to the net value of that trust’s assets.

The general theme in questions has been directed at avoiding shareholder resolutions. The counter-factual is to consider the advantage of shareholder oversight, which can be of considerable benefit to the trustee’s director or directors as well as potentially establishing an appropriate alignment with the trust for which the corporate trustee acts.

Given the strength of the Chief Justice’s dissent, a different outcome must be considered as a possible outcome, as is suggested by [232] to [239] of the dissenting judgment:

[232] On the face of the pleading, the appellants did allege that Marina wished to gain control of the trust and that this was an improper purpose. As set out above, gaining control of the trust in this way was to exercise the power of appointment in her own favour (in other words to benefit herself). In any case, to exclude the argument on this pleading point is, in my view, to take an overly technical approach given that the trust is a creature of equity and given the importance of the matters at issue in this proceeding.

Was Marina's purpose to benefit herself at the expense of the children?

[233] I record that I would also have found in favour of the appellants on the argument the majority rejected. I would have found it had been proved that Marina appointed a corporate trustee so that she could use the trustee's powers as she wished and benefit herself at the expense of the children. In my view the factual narrative set out above presents an overwhelming case that Marina did take control in order to do just this.

[234] I recognise that this is to reach a different view to that of the High Court Judge, who found that Marina acted as she did because she encountered difficulties in appointing an independent trustee and was advised this other path was permissible.¹ The Judge found her to be a careful, fair-minded and sincere witness.² I acknowledge the benefits that the High Court Judge had in that regard in seeing her give evidence. Nevertheless, I consider that there is such clear evidence of her subjective intention available that I would have been prepared to take a different view of the facts on appeal.³

[235] First, Marina made only modest efforts to find an independent trustee. There can be no suggestion that she was compelled by necessity to the course of action she took. There was an option available to her - Perpetual Guardian. There is no suggestion that their costs were prohibitive in the context of a trust of this value. Marina said that she also took into account whether they were a good fit for the role, but, as she should have realised, a body corporate controlled by her was a still worse fit. As WRMK said in their letter to her, it was expected that it would cause the adverse reaction that it did in fact elicit from the appellants.

[236] Secondly, Marina instructed WRMK that the Kaahu Trust was set up for her and Ricco a position that the lawyers acting for Marina in these proceedings maintained at the hearing in this Court, notwithstanding that the words of the Trust Deed contradict that position. On Marina's own evidence, when she instructed WRMK she was pleased because she felt they would look after her interests.

[237] Thirdly, the advice that Marina received and acted upon from WRMK — who acted not just for the Kaahu Trust, but also for Marina personally - placed Marina's interests front and centre.⁴ Although Marina was advised of the obligation to have regard to the interests of other beneficiaries, the possible courses of action mapped out in those letters of advice revolved around Marina gaining not just control of the Kaahu Trust but also the benefit of its assets, eliminating or minimising the interests of the children.

[238] Fourthly, and most significantly, Marina moved very promptly to use her control to benefit herself. Her actions are the best evidence of her intention. She caused the body corporate she controlled to become the sole trustee on 27 November 2019. She caused the removal of the children as beneficiaries and caused the assets to be appointed to herself on 12 March 2020. As the appellants argue, the inference that she appointed a company she controlled as sole trustee in order that she could benefit herself through the distribution of the assets seems to me to be irresistible.

[239] Finally, in my view it should not be overlooked that Marina has argued throughout that, because her benefit was the primary (or sole) purpose of the Kaahu Trust, the power to appoint a trustee would only be improperly exercised if exercised to benefit a foreign object (not a beneficiary), and would not be improperly exercised by her for the purpose of preferring her interest. This position is consistent with the appellants' case against her, and seems to me to provide support for it.

In Cooper v Pinney the Supreme Court did not accept that the two-trustee requirement was “… capable of being lawfully subverted by the appointment of a corporate trustee controlled by Mr Pinney. Equity would look behind the corporate veil if confronted with an attempt to undermine the constraints imposed by the settlors in providing for two trustees who are able to act only where of unanimous view.”

Separately, the Supreme Court was of the view that the powers reserved to Mr Pinney were insufficient for these to constitute a property right. As stated at [125]:

"It will be clear by now that we consider the combination of powers reserved to Mr Pinney under the MRWT deed to be significantly different to those powers reserved to Mr Clayton in Clayton v Clayton. A power analogous to a general power of appointment is not created. Rather, the core power in cl 15 to appoint and remove trustees remains limited by the proper purpose rule and bound by the fiduciary obligations that it be exercised in good faith and in the interests of the beneficiaries. So too are the dispositive powers in cls 4, 6 and 7-powers which are moreover constrained by the two-trustee requirement and the requirement of unanimity. The general discretion provision in cl 13 does not alter this analysis, and nor does the limited variation power in cl 12. The distinctions between the VRPT deed in Clayton and the MRWT deed are therefore sufficiently material to warrant different classification in terms of the PRA definition of "property". The two cases are not alike."

In Legler v Formannoij the proceedings were premised on the basis that “… the appointment of a corporate trustee, including where a beneficiary is the sole director and a shareholder, is consistent with the terms of the [Trust].”

Throughout the proceedings the relevant consideration was that Marina was also a shareholder. The practical aspects of the joint shareholding were not explored.

The Chief Justice’s dissent related to both the terms of the trust and what these meant with respect to settlor intention. As noted at [125] and [189] (foot notes removed):

[125] It will be clear by now that we consider the combination of powers reserved to Mr Pinney under the MRWT deed to be significantly different to those powers reserved to Mr Clayton in Clayton v Clayton. A power analogous to a general power of appointment is not created. Rather, the core power in cl 15 to appoint and remove trustees remains limited by the proper purpose rule and bound by the fiduciary obligations that it be exercised in good faith and in the interests of the beneficiaries. So too are the dispositive powers in cls 4, 6 and 7-powers which are moreover constrained by the two-trustee requirement and the requirement of unanimity. The general discretion provision in cl 13 does not alter this analysis, and nor does the limited variation power in cl 12. The distinctions between the VRPT deed in Clayton and the MRWT deed are therefore sufficiently material to warrant different classification in terms of the PRA definition of "property". The two cases are not alike.

[189] Thirdly, logic compels such an interpretation. There is no logic in providing for independence, but allowing that requirement to be bypassed by the appointment of a company owned and controlled by a beneficiary as sole trustee. In particular, it is illogical to construe cls 26.1 and 27 as permitting a beneficiary-controlled body corporate to be sole trustee why would the settlors intend to preclude individual trustees from appointment, or from acting in certain circumstances, but allow companies controlled by those same individuals to be appointed and to so act?