Trustees as shareholders or directors of a company: A review
A trust does not have legal personality and therefore cannot vote as a shareholder, because it is only an accumulation of assets.
Despite its lack of legal personality, a trust has legal capacity, and the trustees, on behalf of the trust, may perform juristic acts relating to trust assets, such as managing investments in companies, as long as the trust deed allows for that. The trustees therefore may own shares on behalf of the trust and are able to vote and attend to the trust’s business. They act as shareholders in this capacity and should always act in the best interests of the trust. A company is managed by its directors and other officers. The directors at all times have to act in the best interests of the company and not a particular shareholder (who may have appointed them).
The director has a fiduciary duty towards the company (and not the beneficiaries of the trust he or she may represent as trustee) and may incur personal liability if he or she breaches this duty towards the company. This may cause conflict if a director is expected to act in the best interests of a particular shareholder (trust) that appointed him or her and for which he or she is a trustee.
The Memorandum of Incorporation (MOI)
The MOI is an important document in establishing the balance of power between shareholders and directors. Unless a matter is specifically excluded from the authority and powers of the directors by the company’s MOI or the Companies Act, the directors must manage the business and affairs of the company. The shareholders are not involved in the business and affairs of a company unless the MOI or the Companies Act requires their involvement or their approval of a decision of the directors.
Companies frequently set out additional matters, which would have to be effected through a special resolution of shareholders. These have historically been contained in a shareholders’ agreement.
Under the new Companies Act, the principal governing document is the company’s MOI, and so companies with additional special resolution requirements (for example, the changing of the auditors or the incurring of certain types of debt) should transfer these into their MOIs in order for them to remain effective.
It is therefore important for the board of trustees, which manages the trust assets to be involved in and apply their minds when the MOI is entered into or amended. When a board of trustees invests in an existing company, they should study the MOI and request changes to the extent of protecting the trust’s investment and minimising risks.
Trustees as shareholders and directors
The board of directors and the general meeting of shareholders (such as trustees of the trust) are separate organs of a company.
The directors exercise the managerial and executive powers of the company, save to the extent that their rights are limited by the company’s MOI. Shareholders can remove the directors or change the company’s MOI, but they cannot otherwise control the management of the company placed in the hands of the directors.
As a trust cannot operate as a person distinct from the trustees, it is important to name the trustees on behalf of the trust, as the registered shareholders in a company share register. This should be done in accordance with the provisions of the trust deed and the required duly approved trustee resolutions. The listed trustees therefore have to act as the representative shareholders of the trust.
A share register sets out the classes of shares; who all the shareholders are; the amounts paid for the shareholding; and the changes in shareholding over time. Every company is obliged to keep and maintain a share register at its registered offices.
A share certificate is merely evidence that a person may be a shareholder, but it is the share register that will ultimately provide conclusive proof. In our law, a company can rely only on its share register, which means that the company cannot allow anyone but the person whose name is on the share register to cast a vote.
If this person is holding the shares as a nominee for another (such as a trust), the company cannot be concerned with that fact. Any disagreement between a nominee shareholder (a trustee) and the beneficial shareholder (the trust) is a matter to be decided between them, and the company cannot be party to their dispute or question the validity of decisions taken by the board of trustees. The company can rely only on the share register to ascertain who is authorised to act as shareholder, and cannot rely on any other evidence to question the validity of the actions of trustees on behalf of a trust.
Shareholders only own shares and do not participate in the day-to-day management of the company. The shares are their property and they have voting rights attached to the shares they hold. In essence, the shareholders can do as they please with the shares they own and, as such, they do not have a fiduciary duty towards the company.
The Companies Act prescribes certain matters that need the shareholders’ approval and in these circumstances the shareholders will participate in the control of the company. The only limit the Companies Act places on shareholders is that they must not act oppressively (burdensome, harsh and wrongful) towards other shareholders and directors. Other than that they are free to do and vote as they please.
* This is a shortened version of “Trustees as shareholders or directors of a company”.
* Phia van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner, and the founder of Trusteeze, a professional trust practitioner.