The Business Trusts Bill
Second Reading Speech by Mr Tharman Shanmugaratnam, Minister for Education and Deputy Chairman, Monetary Authority of Singapore
2 The purpose of the Business Trusts Bill is to introduce a framework for the governance of business trusts. Business trusts are business enterprises structured as trusts. They are an alternative to companies as a business structure. This structure is already used in other jurisdictions such as Australia, Canada and the US.
3 Business trusts are distinct from both companies and traditional trusts - with similarities and differences from both. Like a company, a business trust operates and runs a business enterprise. But unlike a company, a business trust is not a separate legal entity. It is created by a trust deed under which the trustee has legal ownership of the trust assets and manages the assets for the benefit of the beneficiaries of the trust. However, a business trust differs from traditional trusts - such as private trusts and unit trusts - in that it is running and operating a business enterprise.
4 There have been indications of interest on the part of the industry in setting up business trusts. Whereas companies are restricted to paying dividends out of accounting profits , there are no such restrictions on trusts. Business trusts can therefore pay distributions to investors out of operating cash flows. The structure is thus suited to businesses involving high initial capital expenditure with stable operating cash flows, such as infrastructure businesses.
5 Investors can invest in the underlying business by subscribing for units in the business trust, in a manner similar to investing in shares in a company. The units can be listed on a securities exchange. Introducing the business trust structure in Singapore will therefore create a new asset class for investors, and potentially add depth and sophistication to Singapore's capital markets.
6 To allow business trusts to be offered to retail investors, it is necessary to establish a regulatory framework for the governance of business trusts.
7 The Business Trusts Bill is formulated with two objectives in mind:
- First, to safeguard the rights of investors or unitholders in the business trust; and
- Second, to establish the duties and accountability of the trustee-manager of a business trust and its directors.
8 MAS has conducted public consultation on the regulatory framework and draft Bill. There has been broad support for the proposed legislation. MAS has considered the comments received in drafting the present Bill, made certain amendments in response to the comments and published its responses to the comments received.
9 Mr Speaker Sir, I will now go through the key provisions of the Business Trusts Bill.
REGISTRATION UNDER THE BUSINESS TRUSTS BILL
10 The Business Trusts Bill sets out the requirements for the governance of business trusts registered under the Bill. The Securities and Futures (Amendment) Bill will make it mandatory for business trusts offered to the retail public to be registered under the Business Trusts Bill. Other business trusts, such as those offered to accredited and institutional investors will not require registration under the Bill. This is because such investors are generally better able to protect their own interests. Such business trusts may however be voluntarily registered under the Bill where, for instance, the offeror considers that the investors targeted prefer to have the assurance that the business trust is one which is registered under the Bill. Business trusts which are not registered under the Bill will continue to be subject to the Trustees Act, which sets out the general obligations of trustees .
SINGLE RESPONSIBLE ENTITY
11 The Bill requires that the business trust be run by a single responsible entity known as the trustee-manager. The trustee-manager must be incorporated in Singapore. The trustee-manager has the dual responsibility of safeguarding the interests of unit-holders and managing the business of the business trust.
12 This requirement ensures that fiduciary responsibility towards unitholders of a business trust is clearly placed on a single entity. The alternative would be a bifurcated structure, involving a manager of the business trust and an independent trustee. However, the running of a business trust involves management of an operating business and the making of business decisions on a day-to-day basis. It would be difficult for an independent trustee to oversee the manager's business decisions. It would also be impracticable for a separate trustee to set out an operating mandate for the manager, without fettering the manager's ability to run the business as an operating enterprise. More importantly, it would be difficult to apportion liability for breaches of trust between the trustee and the manager. Adopting the single responsible entity model avoids this problem. This was the approach taken in Australia, in response to a number of cases in which the Court found difficulty in apportioning liability between the trustee and the manager.
ACCOUNTABILITY OF THE TRUSTEE-MANAGER AND ITS DIRECTORS
13 The trustee-manager, as a company, would be owned by shareholders. It would typically be controlled by the sponsoring entity which had divested its business by setting up the business trust. The trustee-manager and its board of directors have a fiduciary duty to manage the trustee-management company in the best interests of the company and its shareholders. At the same time, as a trustee, the trustee-manager has an additional group of constituents whose interests must be safeguarded, namely, the unitholders of the business trust. The trustee-manager and its board of directors owe a duty to unitholders of the business trust to manage the business trust in the best interests of the unitholders. There is therefore potential for divergence between the interests of the trustee-manager and its shareholders, and the interests of unitholders. This may result in a conflict of duties on the part of the trustee-manager. For instance, the trustee-manager may wish to maximize management fees or may have less interest in minimising operating expenses which are paid to the trustee-manager out of the assets of the business trust. To cite another example, the controlling shareholder of the trustee-manager may influence the operations of the trust or engage in related party transactions that benefit the shareholder, to the detriment of unitholders of the business trust.
14 To address such potential conflicts of interests, the Business Trusts Bill sets out the duties and accountability of the trustee-manager and its directors.
Duties of the Trustee-Manager and its Directors
15 The Business Trusts Bill imposes a duty on the trustee-manager to act in the best interests of unitholders and to give priority to the interests of unitholders where these conflict with the trustee-manager's own interests.
16 The Bill also imposes a duty on the individual directors of a trustee-manager to take all reasonable steps to ensure that the trustee-manager discharges its duties towards unitholders. Directors also have a duty to give priority to the interests of unitholders where these conflict with the trustee-manager's own interests. This makes the directors of the trustee-manager responsible for safeguarding unitholder interests.
Annual Certification by the Board and the Chief Executive Officer of the Trustee-manager
17 The Business Trusts Bill requires that the board of directors and the Chief Executive Officer ("CEO") of the trustee-manager each provide annual certification on specific issues relating to the governance of the trustee-manager. In particular, they are required to certify whether they are aware of any violation of duties of the trustee-manager which would have a materially adverse effect on the operations of the business trust and the interests of unitholders. Where the board or the CEO is unable to make such a certification, the reasons should be disclosed to unitholders.
18 This certification requirement is intended to make the board and CEO of the trustee-manager acutely aware of their responsibility to safeguard the interests of unitholders of the business trust.
Board Composition of the Trustee-Manager
19 The Business Trusts Bill provides MAS the power to prescribe requirements on the composition of the board of the trustee-manager. MAS intends to require the board of directors of the trustee-manager to have a strong element of independence to protect the interests of unitholders. The test of independence will be based on three criteria, independence from management of the trustee-manager, independence from substantial shareholders of the trustee-manager, and independence from business relations with the trustee-manager. The details will be set out in the Regulations.
20 In addition, the trustee-manager will be required to establish an audit committee. The Bill provides MAS with the power to prescribe the composition and duties of the audit committee. MAS intends to require in Regulations that the audit committee has a strong element of independence. We also intend to require that the audit committee review the governance policies and practices applied by the trustee-manager in operating the business trust. This provides a further mechanism to ensure that the interests of unitholders are objectively considered by the board.
SETTING OUT THE RIGHTS OF UNITHOLDERS
21 The Business Trusts Bill sets out the rights of unitholders. I will highlight the key provisions.
Limited Liability of Unitholders
22 The Business Trusts Bill provides that a unitholder's liability is limited to the sum of money which he has expressly agreed to contribute to the business trust. Under common law, unitholders may be exposed to unlimited liability for the obligations of the trust. The Bill provides certainty and protection to unitholders by limiting their liability and puts them in an equivalent position to shareholders of companies.
Change of Trustee-Manager and Trust Deed
23 One of the fundamental rights of unitholders is the right to vote to remove the trustee-manager where the trustee-manager is unable or unwilling to fulfil its obligations to unitholders.
24 The Bill requires that the removal of the trustee-manager be subject to a special resolution of unitholders - that is, it must be approved by 75% of unitholders voting in presence or by proxy. Removal of the trustee-manager may adversely impact the continuity of operations of the business trust. The 75% threshold balances the need to guard against the frivolous removal of a trustee-manager with the need to provide sufficient rights to unitholders to remove an inept or poorly functioning trustee-manager.
25 Unitholders have the right to vote on amendments to the trust deed. The trust deed is analogous to a contract between the trustee-manager and the unitholders. The Bill requires that amendments to the trust deed must be approved by a special resolution of the unitholders. This voting threshold for amending the trust deed is consistent with the approval threshold for amendments to the memorandum and articles of a company by shareholders in the Companies Act. As an exception, the trustee-manager may amend the trust deed without unitholders' approval where such amendments to the trust deed are necessary to comply with any laws in Singapore.
26 The Business Trusts Bill provides for any unitholder who suffers loss or damage because of any conduct of the trustee-manager to take civil action against the trustee-manager. Also, any unitholder may apply to the court for an order in the case of oppression arising from the conduct of the affairs of the business trust, or for leave to bring a derivative or representative action on behalf of all unitholders of the business trust.
27 The business trust structure provides an alternative business structure to companies, particularly for businesses with stable growth and operating cash flow. Introducing this new structure in Singapore will allow for a new asset class for investors and potentially add to the development of our capital markets. At the same time, there must be appropriate safeguards of the interests of retail investors investing in business trusts. The Business Trusts Bill puts in place a governance framework for business trusts, to protect the fundamental rights of unitholders and to set out the duties and accountability of the trustee-manager and its directors.
28 Sir, I beg to move.
(i) a person with net personal assets of $2 million or more or annual income of $300,000 or more; or
(ii) a corporation with net assets exceeding $10 million.
Institutional investors are generally regulated institutions or other entities that deal in financial products in the course of ordinary business. These include banks, insurance companies, capital markets services licensees and pension funds or collective investment schemes.