A VISTA Trust is a special trust recently incorporated into BVI law, when adopted by the Legislative Council of the Territory of the British Virgin Islands in late 2003. The long title of the legislation provides that the Virgin Islands Special Trusts Act, 2003 (from which the name VISTA Trusts is derived) is "An Act to make special provision for trusts of shares in companies and for related matters, including provision for the retention by trustees of shares in a company irrespective of the financial advantages of disposal, for prohibiting trustees from intervening in the management of the company except in certain circumstances, and for the appointment and removal of directors of the company in accordance with the terms of the trust instrument."
As is readily noticeable from this title, the purpose of the legislation is to enable trustees to retain shares in BVI international business companies (IBCs) and local companies, irrespective of the financial benefits of holding them. This will enable special trusts to be established to cater to a settlor's intention for the company shares to be held for his children, rather than simply sold for a profit or to reduce risk.
Traditionally, trusts have been an inappropriate vehicle for holding company shares, because of a rule of English trust law which 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 which settlors intend trustees to retain. Furthermore, where a trust holds a business interest, the trustee is usually required by law to monitor (and where necessary intervene in) the management of the company.
The following extracts from two cases provide a good explanation of the trustee's duties:
Re Lucking's Will Trusts (1967) ALL ER 726, Cross J. stated:
"What steps, if any, does a reasonably prudent man who finds himself a majority shareholder in a private company take with regard to the management of the company's affairs? He does not content himself with such information as to the management of the company's affairs as he is entitled to as shareholder, but ensures that he is represented on the board. He may be prepared to run the business himself as managing director or, at least, to become a non-executive director while having the business managed by someone else. Alternatively, he may find someone who will act as his nominee on the board and report to him from time to time as to the company's affairs. In the same way trustees holding a controlling interest ought to ensure so far as they can that they have such information as to the progress of the company's affairs as directors would have. If they sit back and allow the company to be run by the minority shareholder and receive no more information than shareholders are entitled to, they do so at their risk if things go wrong."
In the later case of Bartlett v Barclays Bank Trust Co Ltd (1980) Ch 515. Brightman J explained that it might be possible for a trustee to comply with his duty in this regard without actually appointing a representative to the board:
"[Cross J] was merely outlining convenient methods by which a prudent man of business (as also a trustee) with a controlling interest in a private company, can place himself in a position to make an informed decision whether any action is appropriate to be taken for the protection of his asset... Alternatives which spring to mind are the receipt of copies of the agenda and minutes of board meetings, if regularly held, the receipt of monthly management accounts in the case of a trading concern, or quarterly reports. Every case will depend on its own facts... The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable, so far as circumstances permit, that the trustee or (as in the Lucking case) one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset, namely, the shareholding... It was not proper for the bank to confine itself to the receipt of the annual balance sheet and profit and loss account, detailed annual financial statements and the chairman's report and statement, and to attendance at the annual general meetings and the luncheons that followed, which were the limits of the bank's regular sources of information. Had the bank been in receipt of more frequent information it would have been able to step in and stop, and ought to have stopped, Mr. Roberts and the board embarking on the Old Bailey project."
Because of case law of this nature, trustees are hesitant to hold IBC shares in trust, especially where the interest of the client is for the shares to be maintained, irrespectively of the profitability of the business, with little or no diversification of risk.
The VISTA Act 2003, however, limits the liability of the trustee and removes the trustees duties of monitoring and intervention.
This change in legislation will encourage licensed trust companies to act as trustees for special trusts for designated shares, and in part may be a reaction to the recent adoption of the International Business Companies (Amendment) Act 2003, which immobilises bearer shares and makes significant amendments to the BVI corporate legislation. Although the VISTA trusts are not for holding the bearer shares as "authorised custodians", they will enable BVI licensed Trust Companies to hold the designated shares as trustees on behalf of clients.
Often, an IBC represents a self-managed company where the affairs are managed by the directors. These business undertakings may sometimes be of a speculative nature, especially where the company is used simply for investments through a brokerage house or runs a family business. Family businesses typically carry a significantly greater degree of financial risk than a well diversified investment portfolio. In the latter case, a trustee may be obliged for the benefit of the trust to sell shares in a non-income producing company or in a company whose business is deemed economically to be risky. The trustee's duty to diversify the risk, which may become a priority for the trustees, will often be in direct conflict with the settlor’s wishes to continue the operations of the company.
As is clearly apparent from the Act's title, the VISTA trusts will enable a shareholder to establish a trust of his company that disengages the trustee from management responsibility and permits the company and its business to be retained as long as the directors think fit.
Section 3 of the VISTA Act 2003 clearly states: "The primary purpose of this Act is to enable a trust of company shares to be established under which
the shares may be retained indefinitely; and
the management of the company may be carried out by its directors without any power of intervention being exercised by the trustee."
In order to establish a VISTA trust, it is necessary to meet the conditions set forth in Section 4:
the trust is created by or on the terms of a written testamentary or inter vivos instrument;
a designated trustee is sole trustee of the trust (a designated trustee is a licensed Trust Company under the Banks and Trust Companies Act 1990);
the terms of the trust require that any successor trustee (mediate or immediate) is a designated trustee acting as sole trustee;
the trust is not created in the exercise of a power conferred by another trust.
It is necessary for the trust instrument to specifically state that it applies to the shares ("designated shares"), and these should be identified either specifically or generally.
Section 5 of the VISTA Act 2003 briefly sets out the duties of the trustee with respect to the designated shares. The principal duty of the trustee is to retain the shares. This duty has precedence over any duty to preserve or enhance the value of the trust fund. This section specifically exempts the trustee from losses arising directly or indirectly from holding, rather than disposing of, designated shares.
Nevertheless, the legislation does establish certain provisions, such as for the existence of an enquirer or protected, as interested persons who can request the intervention of the trustee in the company. The trust instrument may contain special provisions regarding how the directors are to be appointed, removed and remunerated - known as the "office of director rules". These rules may govern:
- tenure of office of a particular person
- appointment of a director at a future date or event
- removal of a director in specified circumstances
- the number of directors holding office
- trustee acting on the direction of a committee or third party, who might also have fiduciary duties
This legislation provides only a limited number of grounds on which it is possible to complain about the lack of intervention by the trustee into the corporate management. Nevertheless, an interested person or a director or possible future director may apply to the court in the case of a breach of the fiduciary duty.
The VISTA Act 2003 also modifies the rule in Saunders v. Vautier. This prevents a sole or sui juris beneficiary(s) from requesting a transfer of the trusts assets of designated shares. Section 12 of the Act establishes that notwithstanding any rule of equity or practice of the court to the contrary, but subject to subsection (2), neither a beneficiary who is solely interested in any designated shares, nor all the beneficiaries who together are the persons interested in any designated shares, are entitled to call for or direct a transfer of those shares or to terminate or modify the trust if this right has been excluded by the trust instrument.
The Virgin Islands Special Trusts Act 2003 is a short document, which is relatively self explanatory.
Suggested sites to look at for more information regarding the "Prudent Man Rule":
