Carmen Theriault - Trustees - Directors of Private Companies: Which Hat Rules?

1. TRUSTEE-DIRECTORS OF PRIVATELY
HELD COMPANIES – Which hat rules?
Presented by:
Carmen S. Thériault, Q.C.
January 19, 2011

2. 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.

3. Duties Imposed Upon
Trustees :
1. Act personally
2. Avoid conflicts of interest
3. Duty of Care
4. Even hand principle
5. Duty to Account

4. 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

5. Butt v. Kelson [1952] 1 Ch. 197 (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;”

6. Kordyban v. Kordyban [2003] 6 WWR
606, 13 BCLR (4 th ) 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).”

7. 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?

8. Distribution of Funds from a 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.)

9. 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.

10. Disclosure of Corporate Information to
Beneficiaries:
 Trustee has a duty to disclose
 Director has a duty to keep corporate
information confidential

11. Lindholm v. Lindholm (2000) 76 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

12. Other Corporate Management
Issues:
 A Trustee must not personally benefit
from the trust
 What if a Trustee-director is paid a
director fee?

13. 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.

14. Practical observations …