TRUSTEE-DIRECTORS OF PRIVATELY HELD COMPANIES – Which hat rules?

Presented by:

Carmen S. Thériault, Q.C.

January 19, 2011

Duties Imposed Upon Directors:1. Must act honestly and in good faith with a

view to the best interests of the corporation.

2. Must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Duties Imposed Upon Trustees:1. Act personally

2. Avoid conflicts of interest

3. Duty of Care

4. Even hand principle

5. Duty to Account

Trustees Exercising Powers as Shareholders:

Power to buy and sell shares Power to vote shares Power to compel the disclosure of

corporate information Power to call shareholder meetings and

have resolutions/amendments put before them

Butt v. Kelson Butt v. Kelson [1952] 1 Ch. 197 [1952] 1 Ch. 197 (CA):(CA):

“The only rights that the beneficiaries have are rights to see that the trustees use their voting power attaching to the trust holding in the best interests of the beneficiaries themselves;”

Kordyban v. Kordyban Kordyban v. Kordyban [2003] 6 [2003] 6 WWR 606, 13 BCLR (4WWR 606, 13 BCLR (4thth) 50 (BCCA):) 50 (BCCA):“To determine whether the court should intervene, it must first determine what the intentions of the testator are. Where trustees fail to exercise a discretionary power and do not act one way or the other, the question is whether that failure, or its consequence, is consistent with or frustrates the testator’s intentions. If the failure of the trustees to act frustrates the testator’s intention, the court must then determine, considering the interests of the beneficiaries, on whose side to intervene (that is, whether to grant the relief sought on the application).”

Trustee as Director:Trustee as Director:

Must a Trustee act as a director in order to satisfy the standard of care imposed by law?

When exercising director powers, whose interests does he represent – those of the corporation or those of the beneficiaries?

Distribution of Funds from a Distribution of Funds from a privately held corporation:privately held corporation:

Form Rule Re Fleming [1973] 3 O.R. 588

(Ont.H.C.) Re Welsh (1980) 111 D.L.R. (3d) 390

(Ont.H.C.)

Form Rule:Form Rule:

A dividend that is in essence a cash payment out to shareholders is income, including a capital dividend.

A dividend that is a distribution of profits is capital, including stock dividends, proceeds of redemption, proceeds from a purchase for cancellation, options to subscribe for new shares, additions to paid up capital or property distributed when a corporation is wound up.

Disclosure of Corporate Disclosure of Corporate Information to Beneficiaries:Information to Beneficiaries:

Trustee has a duty to disclose

Director has a duty to keep corporate information confidential

Lindholm v. Lindholm Lindholm v. Lindholm (2000) 76 (2000) 76 BCLR (3d) 167:BCLR (3d) 167: Beneficiaries have right to all information available

to the trustees as shareholders, (i.e. shareholder resolutions, company’s financial statements, correspondence between the company and trustees relating to shareholder matters)

Information received by trustees as directors or officers would not necessarily be required to be disclosed

Corporate law duty of confidentiality takes priority over a beneficiary’s right to information

Other Corporate Management Other Corporate Management Issues:Issues: A Trustee must not personally benefit

from the trust

What if a Trustee-director is paid a director fee?

General Rule:General Rule:

Unless the trust instrument provides otherwise, if the opportunity for remuneration arose as a result of a discretion vested in the trustee, it should not be allowed – but this rule has been inconsistently applied.

Practical observations …Practical observations …