1   The Minister, Prime Minister's Office and Second Minister for Finance, and Deputy Chairman of the Monetary Authority of Singapore ("MAS") today moved two Bills for first reading in Parliament, namely:

• The Business Trusts Bill ("BT Bill"); and
• The Securities and Futures (Amendment) Bill ("SF(A) Bill").

2   This explanatory brief is correspondingly divided into two parts.

3   MAS conducted a public consultation exercise on the proposals for the regulatory framework for business trusts ("BTs") and drafts of the BT Bill and SF(A) Bill.  MAS has considered the comments received and incorporated these into the Bills, where appropriate.

(I) THE BUSINESS TRUSTS BILL

OVERVIEW

4   The BT Bill is a new piece of legislation which regulates the governance of BTs.  BTs are business enterprises set up as a trust structure, as opposed to a corporate structure.  They are essentially hybrid structures with elements of both companies and trusts.  A BT differs from a company as it is not a legal entity.  It is created by a trust deed under which the trustee has legal ownership of the assets of the business enterprise and manages the business for the benefit of the beneficiaries of the trust.  Purchasers of units in the BTs, being beneficiaries of the trust, hold beneficial interest in assets of the BT.  BTs also differ from other traditional trusts - such as a private family trust or a unit trust - as they actively undertake business operations.  These unique characteristics of BTs call for a new regulatory framework that is set out in the BT Bill.

5   The BT structure is more suited for businesses with stable growth and cash flow, such as infrastructure businesses, and is in use in jurisdictions such as Australia, Canada and the US.  There is industry interest in offering units of BTs to the public in Singapore.  Introducing the BT structure in Singapore will create a new asset class for investors and add more depth and sophistication to Singapore's capital markets. 

6   The main objectives of the governance framework under the BT Bill are to:

a) safeguard the rights of investors (or unitholders in the BT); and
b) clearly establish the duties and accountability of trustees and their directors and address potential conflict of interest situations.

7   The following is a summary of the key measures of the regulatory framework under the BT Bill:

REQUIRING A SINGLE RESPONSIBLE ENTITY

Trustee-Manager (Part III, Div 1)

8   The BT Bill requires that the business of a BT be run by a single responsible entity - the trustee-manager ("TM").  The TM will have the dual responsibility of safeguarding the interests of unitholders and managing the BT.  Combining the roles of the trustee and the manager under the TM addresses the difficulty of apportioning fiduciary responsibility between these two roles.  Liability is now clearly placed on a single entity.

9   Also, given the nature of BTs as active business enterprises, it is improbable that an independent person - who is unconnected to operating the business of the BT - would possess sufficient knowledge of the business to supervise the manager's business decisions, or be willing to take up such responsibilities with the potential liabilities.

ADDRESSING THE CONFLICT OF DUTIES OF THE TRUSTEE-MANAGER

10   With the requirement to have a single TM, the board of directors of the TM has two potentially conflicting sets of duties - to the shareholders of the TM to manage the affairs of the TM in the best interests of the company; and to unitholders of the BT to manage the assets of the BT in the best interests of the unitholders.  These interests may not always converge¹.  The following provisions in the BT Bill are intended to mitigate this potential conflict of duties.

Responsibilities and Powers of the Trustee-Manager (Part III, Div 1)

11   The BT Bill imposes a statutory duty on the TM to act in the best interests of unitholders and give priority to the interests of unitholders where these conflict with the TM's own interests. This duty emphasises the duty owed to unitholders of the BT and makes it clear that unitholder interests are paramount.

12   In addition, the BT Bill imposes a statutory duty upon the directors of a TM to act honestly and exercise reasonable diligence in the discharge of the duties of his office, and in particular, to take all reasonable steps to ensure that the TM discharges its duties towards unitholders.  Directors of a TM will also have a statutory duty to give priority to the interests of unitholders where these conflict with the TM's own interests.  These provisions are a fundamental measure to safeguard the interests of unitholders, by piercing the corporate veil of the TM and pinning fiduciary responsibility towards unitholders on the TM's directors.

13   It is necessary to have an independent element on the board of directors of the TM to ensure that the interests of unitholders are objectively considered. The BT Bill provides MAS with the power to prescribe requirements on the composition of the board of the TM.

14   The BT Bill requires the TM to establish an audit committee and provides MAS with the power to prescribe requirements relating to the composition, duties and functions of the audit committee.  The audit committee provides a further mechanism to ensure that the interests of unitholders are objectively considered by the board.

Annual Certification by the Board and the Chief Executive Officer of the TM (Part X, Div 3)

15   Section 86 of the BT Bill requires that the board of directors and the Chief Executive Officer ("CEO") of the TM each provide an annual certification on specific issues relating to the governance of the TM, in particular, whether they are aware of any violation of duties of the TM which would have a materially adverse effect on the business of the BT and the interests of unitholders.  Where the board or the CEO is unable to make such a certification, they are required to disclose the reasons to unitholders.

16   This certification requirement is intended to make the board and CEO of the TM more acutely aware, on a periodic basis, of their responsibility to safeguard the interests of unitholders of the BT.

SETTING OUT THE RIGHTS OF UNITHOLDERS

Unitholders (Part V)

17   Under common law, unitholders, being beneficial owners of the trust property, may be exposed to unlimited liability for the obligations of the trust.  The BT Bill provides certainty and protection to unitholders by limiting their liability.  This is similar to the position in relation to shareholders of companies.

Change of Trustee-Manager (Part III, Div 2); Trust Deed (Part IV)

18   The BT Bill provides for the rights of unitholders, particularly voting rights on matters of fundamental importance.  These include the right to vote to remove the TM and to amend the trust deed.

19   While the right to remove the TM is a fundamental right of unitholders, this must be balanced against the potentially adverse impact that the removal of the TM may have on the continuity of the BT.  The BT Bill requires that the removal of the TM be subject to a special resolution of unitholders - i.e. 75% of votes of unitholders voting in presence or by proxy.  This 75% threshold should adequately balance the need to guard against the frivolous removal of a TM with the need to provide sufficient rights to unitholders to remove the TM. 

20   The BT Bill also requires that any amendment to the trust deed be approved by special resolution of the unitholders.  An exception is provided for the TM to amend the trust deed without unitholder approval where such amendments to the trust deed are necessary to comply with any laws or changes in law in Singapore.
 
Civil Liability (Part VI)

21   The BT Bill provides further rights to unitholders by setting out the circumstances under which unitholders may take civil action against the TM and its directors.  Any unitholder who suffers loss or damage because of any conduct of the TM may take civil action against the TM.  Also, any unitholder may apply to the court for an order in the case of oppression arising from the conduct of affairs of the BT or for leave to bring a derivative or representative action on behalf of all unitholders of the BT.  This provision is similar to the protection afforded to shareholders of companies under the Companies Act.

(II) THE SECURITIES AND FUTURES (AMENDMENT) BILL

OVERVIEW

22   The SF(A) Bill will be amended to provide for the regulation of offers of units and derivatives of units in BTs and take-over proceedings in relation to BTs, and to deal with the treatment of property trusts.

REGULATION OF OFFERS OF UNITS AND DERIVATIVES OF UNITS IN BUSINESS TRUSTS

23. As a BT is essentially a business enterprise akin to a company, the offers of units and derivatives of units in BTs will be regulated in the same way as offers of shares in corporations.  The SF(A) Bill introduces a new Division 1A in Part XIII of the Securities and Futures Act ("SFA") that regulates the public offers of units and derivatives of units in BTs by way of disclosure requirements for prospectuses.  BTs offered to the retail public will be required to be registered under the BT Bill.

AMENDMENT TO THE DEFINITION OF SECURITIES

24. The definition of "securities" in the SFA will be amended to include units and derivatives of units in a BT so that the provisions under the SFA relating to dealing in securities and market conduct will apply. 

REGULATION OF TAKE-OVER PROCEEDINGS FOR BUSINESS TRUSTS

25. The definition of "take-over offer" in the SFA will be amended so that take-over offers for units in BTs will be subject to the provisions under the SFA and the Singapore Code on Take-overs and Mergers.  This is to ensure a fair and orderly market for take-overs of BTs.

REGULATORY TREATMENT OF PROPERTY TRUSTS

26. Property trusts or Real Estate Investment Trusts ("REITs"), as they are more commonly known, are currently regulated under the collective investment scheme ("CIS") regime in the SFA.  The SF(A) Bill will allow trusts which invest only in real estate assets specified in the Code on CIS and which are listed on a securities exchange to be regulated as either a CIS or a BT.  Property trusts that opt to be regulated as CIS will need to comply with the requirements under the CIS regime such as the borrowing limit and the operational restrictions.  Property trusts that opt to be regulated as BTs will not be subject to any borrowing limits or operational restrictions but will be required to adhere to the regulatory framework for BTs.  To avoid confusion to investors, any property trust regulated as a BT will be prohibited from being referred to as a "Real Estate Investment Trust".

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