The Bartlett legacy
In the case of Bartlett v Barclays Bank Trust Co Ltd,1 the Court of Appeal of England and Wales set down the standard of care applicable to trustees with a majority shareholding in a private company.
Barclays Bank was the sole trustee of the Bartlett trust, and its only asset was the issued shares in the family company. On the company board were two surveyors, an accountant and a solicitor. The trustee appointed no board members. In an attempt to raise cash, the trust appointed merchant bankers to consider taking the company public. The bankers advised that a public offering would be much more successful if the company expanded its business from managing property to developing property as well.
In the offshore world, it may just not be practical to always follow the advice given in Bartlett
Barclays Bank, as trustee, agreed to this policy without taking very much trouble to inquire into the pros and cons of the proposed diversification and the specific projects that the board had in mind. The company borrowed considerable sums of money and the directors embarked on speculative developments, one of which ended in disaster when planning permission could not be obtained for a large development, and the trust suffered a significant loss. A second disaster ensued, which left the company utterly insolvent.
Brightman J held that the bank, in failing to supervise the new ventures, had not discharged its duty as trustee. He held that the bank should have obtained the fullest possible information on the conduct of the business, and it was not sufficient to rely merely on the supply of information that it received in the ordinary course as a shareholder. The bank’s defence, that it honestly and reasonably believed the board of directors to be competent and capable of running the business, was rejected.
‘The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable... that the trustees ... or one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset, namely the shareholding,’ held Brightman J. He added that it may not be always appropriate for the trustees to insist on a seat on the board. By receiving all notices, agendas and minutes of directors’ meetings and being provided with budgets, management accounts and other important reports and documents, they can put themselves in a perfectly satisfactory position so as to be aware of what is happening.
In the offshore world, it is a very regular feature of a trust structure that a large part (if not all) of the assets are held in an underlying trading company, the day-to-day operations of which are in the hands of the settlor of the trust as CEO. It may just not be practical to always follow the advice given in Bartlett. I can think of an actual situation where the business of the underlying company and its operations was on just about the other side of the world to the trustees; in a market sector into which no amount of mugging up by the trustees would have given them much insight; carried on entirely in another language; and where the settlor had no desire whatsoever to include the trustees, except for the provision of annual financial statements.
Thankfully, the ingenuity of many in the trust industry has found ways for the trustee and the settlor to both have their cakes and eat them. Carefully drafted exculpation clauses can provide a safety net for the trustees. Having two classes of shares in the subject company may also be of assistance. The trustees have the participating shares (receive the dividends) but they are non-voting; the settlor has non-participating but voting shares. In this way, the defence of the trustees in case of trouble at the company level would be that there was nothing they could have done to influence or control the activities of the company. They could not have replaced any directors even if they had wanted to. Another solution, but by no means the only one, is for the trust to be established under the BVI VISTA legislation. The predominant feature of VISTA trusts is that the trustees are generally not even allowed to inquire into the affairs of an underlying company.
By the way, in case you were wondering, Barclays had to make good all the trust’s losses and pay all of the costs.
- 1 1 Ch 515
The content displayed here is subject to our disclaimer. Read more