Trustee Shareholders - Conducting Prudent Business

A trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own; with professional trustees held to a higher standard of care.

Trustees as prudent persons of business are to invest the capital.  If trustees fail to invest, they will be liable to beneficiaries for capital losses. The prudent person rule is based on behaviour rather than outcome.  Trustees will be assessed on how diligently they perform their obligations and how they reach investment decisions, rather than whether their investment decision succeeds or fails. Simply because an investment fails does not necessarily mean there has been a breach of trust.  Prudence is assessed by considering the process by which investment strategies are developed, implemented and monitored.[1]

In addition, the Trustee Act 1956 authorises trustees to invest in any property and to vary such investments from time to time.   Modern trustees should consider investment options and continue to review the decisions they make, in order to ensure they are minimising risk and preserving capital.  Trustees may follow direction set out in the deed.   

How does a trustee comply with the prudent man of business test?

It is common, in closely held companies, for trustees to hold a majority shareholding. In such cases, it would usually be against the settlor’s intention that the trustees sell the shares in order to diversify the trust investments.  Holding a majority of shares in a company means that a large portion or often all of the trust’s assets are tied up in the company – meaning all the trust’s investment eggs are in one basket.  Because this works against the trustees’ general duty to ensure diversification of investments, that duty will often be expressly excluded from the trust deed.  Therefore, the courts have responded by imposing particular duties on trustees who hold majority shareholdings.[2] For example, trustees should obtain information about the companies in which they have such a shareholding over and above the information that would be available to an ordinary shareholder.[3]

In order to ensure the prudent man of business test is met, trustees must remain informed of all company information and investigate facts.  In addition, trustees must monitor the conduct of directors and, where necessary, take steps to interfere in the management of the company.  Interference is likely to be regarded as necessary when trustees receive information which indicates the company is not being managed prudently.[4]

Furthermore, the due diligence requirements for trustee shareholders include collecting information about the settlor and beneficiaries, maintaining sufficient accounting records and implementing appropriate internal reporting procedures.  The economic climate is described as a testing environment for trustees who are majority shareholders in trading companies.  It is essential for trustees to be fully informed about the company’s financial position, and to be in a position to make their views known, and acted upon promptly.[5]

 

If you would like further information on any issue raised in this update please contact:

Natasha Sutcliffe, Solicitor

DDI: 09 965 2663

Email: natasha.sutcliffe@clendons-ns.co.nz


Disclaimer

Further advice should be taken before relying on the contents of this summary.  Clendons North Shore accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material in this summary.



[1] Longstreth, B “Modern Investment Management Theory and Prudent Man Rule” (1986) at p. 7.

[2] Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515.

[3] Webb, Charlie and Akkouh, Tim “Palgrave law Masters: Trusts Law” Fourth edition, 2015.

[4] Heather, L Trustees as Shareholders Part One.

[5] Moses, Juliet and Ormsby, Jared ‘Trusts for Company and Commercial Lawyers’ 2015.