Trusts are created by a "declaration of trust" and are not subject to statutory corporate laws such as the Canadian Business Corporations Act (CBCA). Publicly traded trusts, however, are subject to the same provincial securities legislation, regulation and corporate governance standards as other Canadian public companies. Consequently, the trustees of income trusts have the same duty to ensure good governance. The pending tax changes will require them to carefully review options in each of four key governance areas when developing a strategic response:
Comparing trusts to corporations
Three areas where trusts often do not provide the CBCA equivalent rights and remedies are:
Trusts are required to disclose these differences by comparing the rights and obligations available to corporate shareholders under corporate statutes such as the CBCA with those provided by the declaration of trust. Recommended wording is as follows: "A unitholder in the income trust has all of the material protections, rights and remedies a shareholder would have under the CBCA, except the following...." The declaration of trust also specifies where unitholder approval is required (e.g. amalgamation, wind-up, takeover or material changes to the declaration of trust) and the level of approval required (e.g. majority or two-thirds).
All contracts made on behalf of a trust are made by the trustees. The trustees are personally liable, but most declarations of trust provide for full indemnity of the trustees out of property of the trust. Trustees can limit this liability through the use of limited recourse clauses. Trustees have no right of indemnity for breach of trust (e.g. fraud or gross negligence) and hence are personally liable on a joint and several basis for such acts. Trustees can delegate their responsibilities, but are unable to abdicate them.
Under common law, trustees are held to the highest fiduciary standards. They are obligated to act impartially and with good faith, and to exercise a duty of care to act reasonably and prudently. In theory, trustees owe the above obligations and duty of care to the unitholders of the trust, whereas directors owe their duties to the corporation, which includes a broader range of stakeholders. In most situations, however, trustees will generally be held to similar standards and will need to take into account a similar range of stakeholders and considerations as corporate directors.
Trustees, directors of a subsidiary of the trust, members of management, and selling shareholders have different interests and responsibilities. Where the same individual holds a number of different roles at the same trust, the potential for conflicts of interest needs to monitored, especially when the trust is underperforming or is in financial difficulty. For example, a conflict could occur for trustees who are also directors of a subsidiary of the trust if it is necessary to cease distributions due to a breach of the trust's banking covenants.
Where the operating subsidiary of a trust is a corporation, it is subject to corporate law. Where a limited partnership is used as the operating entity, the partnership is governed by a limited partnership agreement. Trusts with a limited partnership structure can lose limited partner liability protection if the trustees participate in the direct management of the operating business.
New guidance on governance for trusts
The CSA's proposed amendments to National Policy 41-201 include a separate section on governance covering CEO/CFO certification, audit committees, and effective corporate governance. Issuers are being asked to explain how they will satisfy their governance responsibilities. In addition, the Canadian Coalition for Good Governance has undertaken a project to consider governance issues for trusts. The Uniform Law Conference of Canada has also released a draft Uniform Income Trusts Act which provides a framework for governing trusts.
Bill 198 and civil liability
Trustees are at risk to statutory civil liability for misrepresentations and failure to make timely disclosure with respect to:
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Misleading continuous disclosure filings and any other documents released by issuer
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Public oral statements by a person with actual or apparent authority
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Omitted material disclosure in core documents such as prospectuses, MD&As, Annual Information Forms, and annual and interim financial statements
To avoid liability, trustees should ensure disclosure is timely and accurate. There should be strict controls on who may speak for the trust, and the trustees should also ensure the trust has appropriate procedures for disclosure and document preparation.
