Senate Bill 243, introduced on May 3, 2016, proposes a number of amendments to the Delaware Statutory Trust Act. If the proposed amendments are passed by the Delaware General Assembly, Governor Jack Markell will likely sign them into law this summer.
The following is a summary of the most important amendments impacting the creation, regulation, operation and dissolution of domestic statutory trusts. These amendments modify statutory provisions to make changes to (i) the definition and certificate of trust, (ii) legal proceedings regarding statutory trusts, (iii) the management of the statutory trusts, (iv) existence of statutory trusts, (v) execution of statutory trusts, and (vi) the public record’s form and records requests.
Definition and Certificate of Trust
The proposed amendments add more options for statutory trusts to include in their certificate of trust and governing instruments by letting the trusts decide whether or not to be created as separate legal entity. Before this proposed amendment, statutory trusts had no option but to be created as a separate legal entity. This additional option when creating the trust is the only amendment to the definition section. The entity may exercise this opt-out of by making an appropriate notation in its Certificate of Trust.
The section is further amended to clarify that the formation of the statutory trust is valid regardless of the sequence in which the certificate of trust is filed and the governing instrument is adopted by the statutory trust. The existence of the statutory trust will continue until the certification of trust is cancelled. This is significant because Delaware trust law, unlike its alternative entity statutes, does not generally recognize the legality of oral or implied governing instruments. Accordingly, it was long held by most practitioners that, unlike a limited liability company or partnership, a statutory trust had to have a written trust instrument in place prior to the filing of its Certificate of Trust, and many were concerned that a Certificate of Trust filed before the execution of the trust instrument could be held void as a matter of law.
It is important to note that these amendments are optional to the statutory trust and may be invoked when amending the governing instrument or forming the statutory trust.
The proposed amendment regarding legal proceedings serves to confirm and clarify propositions regarding a statutory trust on behalf of a series. First, the amendment states that language in a certificate of trust or a governing instrument shall not be construed as restricting a statutory trust on behalf of a series from agreeing to be liable for any debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a statutory trust generally. Further, the amendment clarifies that this section shall not restrict a statutory trust from agreeing to be liable for any or all of the debts, liabilities, obligations or expenses incurred, contracted for or otherwise existing with respect to a series.
The proposed amendment also clarifies that assets of a series include, but are not limited to, assets associated with a series and any reference to assets associated to a series. This confirms and clarifies that a statutory trust may take specific actions on behalf of such series, unless restricted by the governing document.
The Estates and Trusts Section proposed two important amendments to the management of statutory trusts. The first proposed amendment confirms that the trustee has irrevocable power and authority to delegate a trustee’s rights and powers in managing and controlling the business and affairs of the statutory trust, unless provided otherwise in the governing instrument (emphasis added). The trustee would have additional power, and legislative backing, to assign tasks and duties of the trust to third persons without the worry of it being revoked or rebutted.
The second proposed amendment to the management of statutory trusts provides for an additional section. This section sets a default rule that states that unless provided in the governing instrument, trustees of a statutory trust registered under the 1940 Act, have the same fiduciary duties as directors of private corporations under the Delaware General Corporation Law (DE GCL). This proposed amendment gives the statutory trust the ability to contract around the fiduciary duties of a private corporate director.
It is worth noting that the second amendment in this section does not bar trustees from the protection of the Delaware Business Judgment rule, which protects directors from personal liability for their conduct and decisions while acting in their director capacity, as long as the actions do not violate the director’s duty of loyalty. Further, this proposed amendment does not implicate that the same protection is not applied to statutory trusts not registered as investment companies under the 1940 Act. This proposed amendment gives trustees more protection in their ability to act in their fiduciary capacity on behalf of the trust.
The proposed amendment to the existence of statutory trusts section purports to modify and provide additional means by which a dissolution of a statutory trust may be invoked. Specifically, the amendment states that dissolution will be invoked by either (i) the beneficial owners through vote or written consent, contingent upon the approval of any beneficial owner whose approval is required to revoke dissolution, or (ii) at the time or happening of events as specified in the governing instrument, pursuant to the governing instrument.
Although the amendments specify these two alternatives, the trust still has a lot of influence over dissolution conditions through their ability to change the dissolution specifics in the governing instrument.
The proposed amendment to the execution section provides for a manner in which a proxy relating to a statutory trust may be made irrevocable. This amendment gives a proxy or any person, with respect to a statutory trust, the same control over manners relating to a statutory trust that a power of attorney contains, and this power shall be irrevocable. This irrevocable power shall not be affected by death, disability, incapacity, dissolution, bankruptcy, or any other event concerning the principal.
As similar to the other amendments, this does not apply if something in the governing instrument conflicts with the irrevocable power. It is important to note the emphasis by this amendment, as well as all the other amendments, on the governing instrument.
In addition to the above-described legislative proposals, the Estates and Trusts Section proposed some additional amendments aimed at the form of copies of public records and the means in which a person, attorney, or agent may make a books and records request.
Amendments to the Delaware Statutory Trust Act are drafted annually by the Statutory Trust Subcommittee of the Estates and Trusts Section of the Delaware State Bar Association, and proposed to the legislature for consideration.
Berger Harris attorney Brian Gottesman has served on the Statutory Trust Subcommittee since 2010.