British Virgin Islands: VISTA Trusts

The Problem Which VISTA Addresses

The trust has always been regarded as one of the best succession vehicles, but its use to cater for the succession of shares in companies has historically been impeded by a rule of English trust law (the prudent man of business rule) which is designed to help preserve the value of trust investments.

This rule has traditionally made the trust an unattractive vehicle to hold assets which settlors intend trustees to retain. Another aspect of the rule effectively requires trustees to monitor and intervene in the affairs of underlying companies (as the English decisions Re: Lucking’s Will Trusts and Bartlett v Barclays Bank Trust Co Ltd made clear); this also creates difficulties both from the settlor’s standpoint and from that of the trustees.

The prudent man of business rule imposes on trustees the obligation to monitor the conduct of the directors and to intervene where necessary (e.g. to prevent the company entering in to an unduly speculative venture). It also places on them the requirement to exploit the shareholding to maximum financial advantage which may involve, e.g., accepting a financially attractive takeover bid for the company irrespective of the wishes of the settlor and an obligation to look for opportunities of spreading the financial risk by diversification, which may involve a sale of the company or its underlying assets. These obligations conflict with the wishes of the typical owner of a family business and have hitherto raised significant difficulties for trustees holding shares in such a business.

There is an inherent conflict between the prudence required of trustees and the entrepreneurial flare and quick decision taking required to run a successful business and most settlors find equally unwelcome the prospect of a compulsory sale of shares merely to satisfy short-term financial considerations. Professional trustees rarely have, or can be expected to have, the skills relevant to the particular business, and the monitoring procedures necessary to ensure that trustees avoid exposure to claims against the trustees often adds substantially to the cost of trust administration. Furthermore professional indemnity insurance for trustees may be or become problematic or prohibitively expensive.

Family businesses typically carry a significantly greater degree of financial risk than a well spread investment portfolio and diversification, which may become a priority for the trustees, will often be in direct conflict with the settlor’s wishes. To many settlors and their families, on the other hand, the self-managed company represents much more than an impersonal investment; among the factors which may figure in their thinking when contemplating a trust are: family tradition, social concerns for employees or the environment, career opportunities for descendants, and business projections looking further ahead than the long or medium term. Moreover the owner will often prefer to leave to the directors, rather than to the trustee/shareholders, the question of whether the company expands, contracts, or even goes out of business. Running the company to enhance the value of its shares will not necessarily be (and often is not) in its long term best interests, and economic commentators have pointed out that some of most successful companies are those whose owners have remained at the helm and which have not simply been run (and the shares of which have not been disposed of) purely for short term gain.

Thus trustees have faced the prospect of being squeezed between, on the one hand, exposure to potential liability for failure to dispose of shares and, on the other hand, settlor pressure to retain.

A number of possible non-legislative solutions to these difficulties, such as the non intervention clause in trust instruments, requirements for consent and complex structuring (e.g. involving voting and non-voting shares), have been put forward, but all of these suffer from significant drawbacks.

The Virgin Islands Special Trusts Act, which came into force on 1 March 2004, now enables special new trusts, which are known as VISTA trusts, to be created which circumvent these difficulties.

The Act enables 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. This is achieved in general terms by: first, authorising the entire removal of the trustee’s monitoring and intervention obligations (except to the extent that the settlor otherwise requires); secondly, by permitting the settlor to confer on the trustee a role more suited to a trustee’s abilities, namely a duty to intervene to resolve specific problems; thirdly, by allowing trust instruments to lay down rules for the appointment and removal of directors (so reducing the trustee’s ability to intervene in management by appointing directors of its own choice); fourthly, by giving both beneficiaries and directors the right to apply to the court if trustee fails to comply with the requirements for non-intervention or the requirements for director appointment and removal; and, lastly, by giving to the trustee, if required, the power to sell the shares with the consent of the directors.

Some of the features of the Act are as follows:

• The Act does not apply to BVI trusts generally: it applies only where there is a provision in the trust instrument directing the Act to apply.
• Where the Act applies, designated shares will be held on trust to retain and the trustee’s duty to retain the shares as part of the trust fund will have precedence over any duty to preserve or enhance their value. The trustee will not therefore be liable for the consequences of holding (rather than disposing of) the shares.
• The Act specifies that (unless the trust instrument provides otherwise) the trustee is permitted to dispose of designated shares in the management or administration of the trust fund, but can only do so with the consent of the sloe director or directors of the company (and/or that of such persons as are specified in the trust instrument).
• The Act specifies that, subject to any contrary provisions in the trust instrument, unless the trustee is acting on an intervention call (as defined in the Act), the trustee may not exercise its voting or other powers so as to interfere in the management or conduct of any business of the company; the management or conduct of the company’s business will be left to those appropriate to deal with it, namely its director or directors, whose fiduciary duties to the company will remain intact, except to the extent that the trustee/shareholder is refrained qua trustee from exercising some of the powers of a shareholder.
• The statute also provides that the trust instrument may include office of director rules specifying how the trustee must exercise its voting powers in relation to appointment, removal and remuneration of directors, and the trustee is generally required to follow these rules. Except in compliance with these rules, the trustee must generally take no steps to procure the appointment or removal of the company’s directors. The rules effectively enable settlors to create a succession mechanism for directorships.
• The Act further provides that the trust instrument may specify that the trustee may intervene in the affairs of the company in specified circumstances, i.e. when required to do so by an "intervention call" by a beneficiary, an object of a discretionary power of appointment, a parent or guardian of either of them, the Attorney General (in relation to charitable trusts), the enforcer (in relation to purpose trusts) or other specified persons.
• The statute contains provisions enabling beneficiaries, directors and others to apply to the court for enforcement of the terms of the Act and, on the application of a specified person, the court is empowered to authorise the trustees to sell designated shares where retaining them is no longer compatible with the wishes of the settlor.
• The rule in Saunders v Vautier will not apply (for a maximum of 20 years) to VISTA trusts where such rule has been expressly excluded by the trust instrument.
• The Act is confined to shares in BVI companies, but there should be no reason why shares in non-BVI companies (or other assets) should not be held by a BVI company to which VISTA applies if it is the intention that those assets should (effectively) be held subject to a VISTA trust.
• The trustee of a VISTA trust must be a company which holds a licence to undertake trust business under the Banks and Trust Companies Act, 1990. Such a licence is not too difficult to obtain and there is no requirement that such a company must be a BVI company (although, in general, it will be) or for it to administer trusts from, or have a physical presence in, the BVI.
• The company law duties of directors remain unchanged and the Act does not in any way alter the restraints placed on directors and others by criminal law. (BVI companies which are incorporated under the International Business Companies Act or which are incorporated or re-registered under the BVI Business Companies Act, 2004 may have a sole director.)

Serious consideration should be given to the establishment of a VISTA trust in the following circumstances:

• When the settlor wishes to retain control, since matters can, if appropriate, generally be structured so that settlor–control can be retained at the director (company) level.
• When the settlor intends the shares which he wishes to settle on trust and/or the underlying assets of the company to be retained.
• When trustee involvement in the underlying company’s affairs is undesirable or inappropriate.
• Where charitable or non-charitable purpose trusts are needed for securitisations and off-balance sheet transactions.
• Where the underlying assets of the trust are to comprise of speculative investments or investments which involve a degree of risk which would otherwise be regarded as inappropriate for the trustees of a non-VISTA trust.

Typically shares in non-BVI companies and/or other assets are held by a BVI company, the shares of which are held by the trustee of the VISTA trust. VISTA then prevents the trustee from being able to procure a disposal of underlying assets, or from being able to engineer an intervention in the affairs of controlled subsidiaries.

The enactment of this new statute, which is consistent with the historical development of the trust, and which was developed in close collaboration between the BVI government and the private sector,, demonstrates that the BVI is in the forefront of those jurisdictions which are able to introduce innovative measures which meet the legitimate needs of their international clientele. It provides opportunities for many individuals who would otherwise wish to set up trusts to hold shares in their companies,but who have hitherto felt disinclined to do so as a result of the rigidity of the prudent man of business rule. It also provides opportunities for settlors who wish to retain control over investment and managerial aspects of a structure involving a trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.