Burns v Steel HC Christchurch CIV 2005-409-1349
[2005] NZHC 469
•22 December 2005
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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2005-409-1349
UNDER The Trustee Act 1956
IN THE MATTER OF the Estate of ANDREW CLEMENT KIRKPATRICK
BETWEEN JANET MARY BURNS Plaintiff
ANDLEO JAMES STEEL, WILLIAM JOHN MCKIE, CHRISTOPHER JOHN CLARK Defendants
Hearing: 2 November 2005
Appearances: R A Osborne & G J Ryan for Plaintiff and the J M Burns Children’s
Family Trust
E D Wylie QC for DefendantsR L Brennan for Elaine Anne Kirkpatrick, Diane Elizabeth Jones and the Trustees of the Elaine Kirkpatrick Trading Trust
Judgment: 22 December 2005
RESERVED JUDGMENT OF RANDERSON J
This judgment was delivered by me on 22 December 2005 at 3.00 pm, pursuant to r 540(4) of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Duncan Cotterill, PO Box 5, Christchurch Steel & Co, PO Box 753, Christchurch Blackwells, PO Box 9325, Newmarket, Auckland
Counsel: E D Wylie QC, PO Box 2929, Christchurch
BURNS V STEEL & ORS HC CHCH CIV-2005-409-1349 22 December 2005
Introduction
[1] At the time of his death on 30 March 2004, Andrew Clement Kirkpatrick owned valuable shares in Christchurch Cool Stores Limited, a company established by his late father.
[2] The late Mr A.C. Kirkpatrick neither married nor had children. But he had three sisters: the plaintiff Janet Mary Burns, Elaine Anne Kirkpatrick and Diane Elizabeth Jones. Each of the sisters also owned shares in the company at the date of the death of the deceased, either directly or through family trusts.
[3] By his will dated 22 December 1999, the deceased appointed the three defendant trustees with whom he had enjoyed a long-standing relationship. Mr L J Steele is a solicitor. He and his firm had represented the deceased, the company and other family members for many years. Mr W J McKie was a director of the company and its chairman from May 1990. Mr C J Clark was the accountant both for the company and the deceased.
[4] The deceased’s Will was simple. He gave all his shares in the company to the plaintiff with the residue of the estate divided equally between the three sisters. The operative clauses read:
3. I GIVE all shares which I own at the date of my death in CHRISTCHURCH COOL STORES LIMITED inclusive of the full benefit of any dividends thereon (without any apportionment whatever) which shall not actually have been received by me during my lifetime to my sister JANET MARY BURNS PROVIDED HOWEVER should she predecease me then to divide the same between such of her children as shall be living at the date of my death and if more than one as tenants in common in equal shares.
4. I GIVE the whole of my estate not hereinbefore otherwise disposed of to my trustees UPON TRUST to convert it into money and after payment of all my debts funeral and administration expenses and all death duties payable on my dutiable estate to hold the balance for such of my sisters namely the said JANET MARY BURNS, ELAINE ANN KIRKPATRICK and DIANE ELIZABETH JONES as shall survive me and if more than one as tenants in common in equal shares PROVIDED HOWEVER should any of my said sisters predecease me leaving a child or children who shall survive me then such child or children shall take and if more than one as tenants in common in equal shares the
share in my estate which his her or their parent would have taken had such parent survived me.
5. I EMPOWER my trustees to postpone the sale of any part of my estate for such time as they shall think fit even if it is of a speculative nature.
[5] Almost all of the estate has now been distributed other than the shares given to the plaintiff under clause 3 of the Will. A difficulty has arisen in relation to the shares because the company’s constitution contains rights of pre-emption which apply to any transfer of the shares from the trustees to the plaintiff. Differences have arisen between Ms Burns and the trustees over how and when the pre-emption process is to be undertaken. As well, Ms Burns has sought to direct the trustees as to how they are to exercise their rights as holders of the deceased’s shares in the company pending completion of the pre-emption process.
[6] In brief, the plaintiff maintains that the trustees are obliged to act in accordance with her directions on both these issues while the trustees contend they are not bound by the plaintiff’s directions and are obliged and entitled to exercise their discretion as trustees.
[7] Ms Burns has applied under s 68 Trustee Act 1956 for orders and declarations designed to obtain clarification on these issues. The trustees have counterclaimed seeking directions on a range of related issues under s 66 Trustee Act.
[8] Counsel agreed during argument there were two principal issues to be resolved which would set the direction for most of the related issues. These principal issues are:
a) Does the plaintiff have the right to direct the trustees as to how and when the pre-emption process is to proceed?
b)Does the plaintiff have the right to direct the trustees as to how they are to exercise their rights as shareholders in the company pending completion of the pre-emption process?
[9] There is a subsidiary issue about dividend entitlement in the period up to completion of the pre-emption process.
The company and its constitution
[10] At the date of the death of the deceased, the share capital of the company comprised 735,000 shares held as follows:
a) The deceased 249,900 b) J M Burns Children’s Trust 161,700 c) Elaine Kirkpatrick Trading Trust 161,700 d) Diane Jones 161,700
[11] Mr McKie has resigned as a director. The current directors are the plaintiff or her alternate (a Mr Craze) and her two sisters.
[12] Regulation 4 of the constitution deals with the transfer of shares. Shares may be transferred by entry of the name of the transferee on the share register. On receipt of a formal transfer signed by the present holder of the shares (or that person’s representative) and the transferee, the company must forthwith cause the name of the transferee to be entered on the share register unless the board resolves to refuse or delay the registration.
[13] Regulation 4.4(f) and (g) relevantly provide that the board may refuse or delay registration where the board considers it would not be in the best interests of the company to register the transfer or where the rights of pre-emption under regulations 4.5 and 4.11 have not been exhausted.
[14] By regulations 4.12 and 4.13, certain transfers of shares are exempted. It is common ground that the pre-emption provisions do not apply to a transfer from the deceased to trustees as his personal representative: regulation 4.13(a)(i) and s 86
Companies Act 1993. But it is accepted that any transfer from the trustees to the plaintiff is subject to the pre-emption provisions.
[15] Regulations 4.5 to 4.11 govern the pre-emption process. Those provisions are attached as a schedule to this judgment.
[16] In substance:
a) A shareholder desiring to sell or transfer any shares must give a transfer notice to the company nominating the value of the shares;
b)The transfer notice constitutes the board as the agent of the proposing transferor for the sale of the shares to any shareholder or shareholders of the company or other person or persons nominated by the board at the sum specified in the transfer notice or, at the option of the purchasing shareholder(s) or person(s) nominated by the board, at a fair value to be fixed (by arbitration if necessary).
c) In the first instance, the shares must be offered to the other shareholders in proportion to their existing holdings;
d)If within one calendar month of receipt of the transfer notice the board finds a purchaser whom the board is prepared to register as a shareholder and gives notice to the proposing transferor, the latter (subject to a right of revocation) is bound to transfer the shares to the transferee upon payment of the price or fair value.
e) If the fair value fixed is less than the sum nominated in the transfer notice, the proposing transferor may revoke the transfer notice by giving notice to the company within seven days of notice of the fair value.
f) If the company is not able to find a purchaser that the board is prepared to register as a shareholder within one month after service of the transfer notice then, unless the proposing transferor has revoked the notice, the company may within three calendar months after the expiry of the one month period, sell and transfer the shares to any person at a price not lower than the value specified in the notice or the fair value as fixed. That transfer may be made free from the pre- emption provisions.
The Affidavit Evidence
[17] Affidavits have been filed by the plaintiff and Mr Steel. It is unnecessary to traverse these in detail. But it is evident there has been extensive correspondence between the solicitors for the plaintiff and trustees respectively. Through her solicitors, the plaintiff maintains that it is for her to decide upon the value of the shares and when the transfer notice is to be given. She also asserts the right to direct the trustees to revoke the transfer notice under the constitution of the company if the price is less than that stipulated in the notice.
[18] In March 2005 the plaintiff requested the trustees to proceed with a transfer notice at a figure of $7 per share (which would place a value on the deceased’s shares of approximately $1.7 million). However, the following month she withdrew the request having received advice from the trustees that they did not accept the plaintiff had the right to revoke the transfer notice after the fair value had been determined under the constitution. At least at that time, the trustees appeared to accept that the plaintiff had the right to determine the date upon which the transfer notice should be given and the value of the shares to be included in it. However, the trustees added the qualification that, in their view, the plaintiff was obliged to act within a reasonable time and in a reasonable manner.
[19] Apart from issues between the parties over the pre-emption process, the plaintiff has raised issues about the management of the company, its financial performance, the appointment of executives and the removal and substitution of directors. In December 2004, the plaintiff asserted through her solicitors that the trustees were bound to proceed in accordance with her directions in voting on certain shareholders’ resolutions she proposed. This advice was given following receipt of an opinion obtained by the trustees from a Christchurch Queen’s Counsel to the effect that the trustees held the deceased’s shares as bare trustee for the plaintiff. They were obliged to act in accordance with the instructions contained in the Will. There was no discretion given to the trustees and it was a matter for the plaintiff to determine the date on which the transfer notice was given and the value of the shares to be included in the transfer notice. It was further considered that, pending the
completion of the process of pre-emption, the trustees were not in a position to exercise their own discretion when voting on any shareholders’ resolutions in the company.
[20] Despite counsel’s opinion, the trustees continued to have concerns. As expressed by Mr Steel in his affidavit, these were to ensure that the trustees acted even-handedly between the beneficiaries; the need to ensure that the estate was wound up promptly; the need to avoid any conflicting interests between the plaintiff on the one hand and her sisters on the other; and the need to consider the best interests of the company or its shareholders when exercising their discretion.
[21] In a reply affidavit, the plaintiff expresses concern about the governance of the company and what she sees as its deteriorating financial position. She expresses the view that, if a transfer notice were to be given now, she would be seriously disadvantaged. It is for that reason, she says, that she does not wish the trustees to control the timing of the transfer notice.
The Plaintiff’s Submissions
[22] Mr Osborne for the plaintiff made it clear at the outset that the plaintiff does not seek costs against the trustees personally nor does she allege any breach of trust against them. The application is essentially in the nature of a declaratory proceeding.
[23] Initially, counsel believed the trustees might assert that the gift of shares had or would adeem if the pre-emption process were not promptly pursued. However, it is now common ground that, upon completion of the pre-emption process, the plaintiff would either receive the shares herself or, at the least, would be entitled to receive the proceeds of sale of the shares. That follows because there was a specific gift of the shares made after the company’s constitution was adopted. The plaintiff is therefore entitled, at the least, to the proceeds of sale unless she renounces or disclaims that entitlement: Verran v Public Trustee [1976] 1 NZLR 518 applying re Pyle, Pyle v Pyle [1895] Ch 724.
[24] Mr Osborne also accepted that the plaintiff did not have an absolutely vested interest in the shares themselves. That must be so since her right to receive the shares is contingent on the outcome of the pre-emption process. As Mr Wylie QC for the trustees pointed out, she might receive all or some of the shares or the proceeds of sale of all or some of them.
[25] Mr Osborne submitted that the intention of the testator as expressed in his Will was clear. The deceased intended the plaintiff to have the full benefit of the shares in specie. He submitted this intention was evident from the express language of clause 3 of the Will as well as the reference to the plaintiff receiving the “full benefit of any dividends thereon …”. Mr Osborne further submitted that the trustee was obliged to ensure that the donee received the shares rather than the proceeds of their sale. The power for the trustees to postpone the sale of any part of the estate under clause 5 of the Will could be exercised upon the request of the donee. Mr Osborne further submitted that the gift of shares under clause 3 was independent of the gift of the residuary estate under clause 4 and, that in respect of the gift of shares, the trustees had an undivided loyalty and duty to the plaintiff alone.
[26] Although the correspondence between the solicitors for the parties had asserted that the trustees were bare trustees, Mr Osborne accepted there were some difficulties in applying the bare trustee concept when determining the extent of any discretion enjoyed by the trustees in relation to the deceased’s shareholding. He submitted that the extent of discretion, if any, should be driven primarily by the nature of the gift and the provisions of the Will. Here, given that the testator clearly intended the plaintiff to receive the full benefit of the shares, the trustees’ role was essentially a mechanical one which could be exercised independently of any obligations to the other beneficiaries under the residuary clause in the Will.
[27] It was submitted that the residue of the estate could be distributed and the shares dealt with separately at a time which would serve the best interests of the plaintiff. It was also contended that in undertaking the pre-emption process, the trustees did not owe any duty to the other beneficiaries. None of the trustees is now a director of the company and it was a matter for the board to decide what is in the best interests of the company and whether a proposed transferee of the deceased’s
shares should be registered as a shareholder. It followed, Mr Osborne submitted, that the trustees were able and indeed, obliged, to focus entirely upon the best interests of the plaintiff as the donee of the shares. They were also obliged to act as she directed.
[28] To support the plaintiff’s contentions, Mr Osborne relied particularly on the decision of the English Court of Appeal in Butt v Kelson & Ors [1951] Ch 197 where, in the circumstances of the case, it was stated that beneficiaries were entitled to direct the trustee directors as to the use of the voting rights attaching to the shares in issue. While acknowledging that the decision in Butt v Kelson had been the subject of some criticism by later commentators, Mr Osborne submitted that, in the absence of duties owed to any other beneficiaries (and hence, the absence of any risk of disagreement amongst the beneficiaries) there was no reason not to apply the principles established in Butt v Kelson.
[29] Mr Osborne submitted that the same principles applied when considering the ability of the plaintiff to direct the trustees as to the governance of the company. The plaintiff had direct and legitimate interests in the company’s performance both for reasons of dividend and in relation to sale proceeds in the event of a sale of the shares to others under the pre-emption process.
The Trustees’ Submissions
[30] Mr Wylie (supported by Mr Brennan) submitted that the trustees had active duties under the Will or at law which meant they could not be regarded as bare trustees. He submitted that as executors and trustees, the defendants were obliged to administer the assets of the deceased according to the terms of the Will. In particular, they had assumed responsibility for distributing the estate in accordance with the wishes of the deceased as expressed in the Will and as required by law.
[31] Because the shares passed first to the defendants as executors of the deceased estate, they were obliged as the legal owners of the shares to comply with the pre- emption process in the company’s constitution. That required a number of steps to be taken including giving the transfer notice; nominating the sum considered to be
the value of the shares; postponing the giving of the transfer notice if the trustees thought it appropriate to do so; considering whether to transfer only part of the deceased’s shareholding if the exercise of the pre-emptive rights did not result in an offer to take up all the shares in the transfer notice; participation in any arbitration as to fair value if there were a dispute with any proposed transferee; and considering whether to revoke the transfer notice if the fair value fixed by any arbitration were less than the sum nominated in the transfer notice.
[32] Having regard to the nature and extent of the trustees’ obligations, Mr Wylie submitted the testator could not have intended that the role of the trustees in the pre- emption process was to be undertaken at the dictate or direction of the plaintiff. If that were the case, the trustees could be placed in an impossible position if, for example, the plaintiff declined for an extended period to instruct the trustees to give the transfer notice; or nominated an unrealistically high share price; or unreasonably declined to accept the fair value for the shares fixed at arbitration and instructed the trustees to revoke the transfer notice. Mr Wylie raised the prospect of that process continuing through repeated cycles while the trustees continued to hold the deceased’s shares in the company as their legal owner for an indefinite period and, if the plaintiff’s contentions were accepted, exercising their rights and obligations as shareholders under the plaintiff’s direction.
[33] As to the submission that the trustees were obliged to act in accordance with the plaintiff’s directions on issues of governance and administration of the company, Mr Wylie pointed out that the plaintiff might never become a registered shareholder in the company. If, pending the completion of the pre-emption process, she were to have the right to direct the trustees in such matters then she would be obtaining in advance, rights to which she might never be entitled.
[34] Finally, Mr Wylie submitted that Butt v Kelson had been somewhat discredited as an authority. He relied instead on In re Whichelow Ltd [1954] 1
WLR 5, Walker v Wallis [1969] VR 778 and Hespe v Surfers Paradise Forests Ltd (1985) 10 ACLR 182 in submitting that, in the absence of an absolute entitlement to the shares themselves, the plaintiff was not entitled to direct the trustees as alleged.
First Issue: Does the Plaintiff have the right to direct the trustees as to how and when the pre-emption process is to proceed?
The Nature of the Plaintiff’s interest in the gift
[35] The starting point is to consider the nature of the plaintiff’s interest in the gift of shares under clause 3 of the Will. If she has an absolutely vested interest in the shares then certain rights follow. She would be entitled, for example, to call upon the trustees to transfer the shares to her forthwith under the rule in Saunders v Vautier (1841) Cr & Ph 240; 41 ER 482; see also Re Lushington (deceased) [1964] NZLR 161, 175 (CA).
[36] As discussed in Dal Pont and Chalmers Equity and Trusts in Australia (3rd ed) at [27.185], the rule in Saunders v Vautier operates only where the entitlement to the beneficial interest is unrestricted. It does not apply where the beneficiary is not entitled to the trust property indefeasibly and absolutely. As the learned authors point out, where for example, a beneficiary is entitled to the proceeds of sale of a farm only after an offer for the property has been made to another beneficiary, the former may not put an end to the trust without the agreement of the latter.
[37] In the present case, Mr Osborne was right to concede that the plaintiff does not have an absolutely vested interest in the shares in the sense that she has the right to receive them in specie. The gift of the shares is necessarily subject to the terms of the constitution of the company (see s 39 Companies Act 1993). The plaintiff’s right to receive the shares in specie is entirely contingent upon the outcome of the pre- emption process. She may or may not receive a transfer of the shares. Or, if she does receive some of the shares, she may not receive them all. While she is entitled absolutely to the benefit of the proceeds of sale of the shares if they are sold to others under the pre-emption process, her right to receive shares in specie is no more than a possibility.
The Brockbank line of cases
[38] Even beneficiaries who are sui juris and are absolutely entitled to trust property do not have untrammelled rights over the trust property or to control the exercise by the trustees of their duties. In re Brockbank, Ward v Bates [1948] Ch
206 is authority for the proposition that beneficiaries who, together, are absolutely entitled to trust property are not entitled to control the exercise by their trustees of the fiduciary power of appointing new trustees. Vaisey J held at 209 that beneficiaries in these circumstances must choose between two alternatives. They must either keep the trusts of the Will on foot (in which case the trusts continue to be executed by the appointed trustees or, the beneficiaries and trustees may, by mutual agreement, extinguish the trusts.
[39] Brockbank has been followed in other cases such as Stephenson (Inspector of Taxes) v Barclays Bank Trust Company Ltd [1975] 1 WLR 882 where Walton J discussed at 889 the limitations on the rights of the holders of beneficial interests in a trust fund who are sui juris with an absolutely vested interest. Walton J held that while persons holding all the beneficial interests in a particular fund are all sui juris and acting together, they are entitled to direct the trustees as to how the trust fund may be dealt with but they cannot override the trusts while still seeking to keep them in existence. Nor, Walton J considered, could the beneficiaries direct the trustees as to particular investments of the trust fund. Where an individual beneficiary was involved, Walton J considered the rights of the beneficiary were more restricted.
[40] And in Ingram v Inland Revenue Commissioners [1997] All ER 395, Millett LJ relied at 424 on the Brockbank line of cases in observing that a trustee who was under a duty to deal with the property in question “as [the beneficiary] might direct” was bound to convey the land to her or to whom she might direct, but he was not bound to comply with other directions she might give. This observation was made in a dissenting judgment. Millett LJ’s dissent was upheld on appeal ([2000] 1 AC 293), although the Brockbank line of cases was not discussed.
Bare Trustees
[41] The absence of any absolutely vested right by the plaintiff to receive the shares in specie is an important consideration when considering the scope of the trustees’ duties pending completion of the pre-emption process. In particular, it is relevant to the question whether the trustees are bare trustees. Halsbury’s Laws of
England (4th ed) volume 48, has the following definition of a bare trustee at [650]:
Meaning of ‘bare trustee’. A bare trustee is a person who holds property in trust for the absolute benefit and at the absolute disposal of other persons who are of full age and sui juris in respect of it, and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to persons entitled to hold it, and he is bound to convey or transfer the property accordingly when required to do so.
[42] The same definition is adopted in the Laws of New Zealand (volume 29, at [120]). Similarly in Lewin on Trusts (17th ed), at [1]-[21]. It is immediately apparent that if the Halsbury definition is applied, the absence of any absolutely vested interest in the shares means that the trustees could not be treated as bare trustees. But it may be more helpful in this context to consider whether the trustees have active rather than merely passive duties.
[43] In Herdegen v Federal Commission of Taxation (1988) 84 ALR 271
Gummow J discussed the concept of a bare trust at 281 et seq. He referred to the historic distinction between active and passive trusts first drawn in 16th century decisions and went on to say:
Today the usually accepted meaning of “bare” trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party. The beneficiary may of course hold the equitable interest upon a sub-trust for others or himself and others: see Halsbury’s Laws of England,
4th ed, vol 48, “Trusts”, para 938. The term is usually used in relation to trusts created by express declaration. But it has been said that the assignor
under an agreement for value for assignment of so-called “future” property becomes, on acquisition of the title to the property, trustee of that property
for the assignee (Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1 at 27) and this trust would answer the description of a bare trust. Also, the term “bare trust” may be used fairly to describe the position occupied by a person
holding the title to property under a resulting trust flowing from the provision by the beneficiary of the purchase money for the property.
[44] Gummow J then cited the following passage from Professor Waters’ work
Law of Trusts in Canada (2nd ed) 1984, at 27:
It is of course true that so long as a trustee holds property on trust he always retains his legal duties, namely to exercise reasonable care over the property, either by maintaining it or by investing it; he cannot divest himself of these duties. The reference, however, is to duties which the settlor has enumerated. For example, the settlor may have required that the beneficiary be maintained until he reaches the age of majority, when he is entitled to call for capital and income. The trustee is then bare or naked of these active duties decreed by the settlor. If the trustee possesses his legal duties only for the purpose of guarding the property, prior to conveyance to the beneficiary, these duties are said to be passive.
[45] Although, in the present case the testator has not enumerated any specific duty other than the basic obligation at law to give effect to the will by implementing the gift of shares, it cannot be said that the trustees’ duties are confined to transferring the shares to the plaintiff and guarding the property in the interim. The testator must be taken to have known of the pre-emption provisions of the company’s constitution and the trustees’ duties must be defined accordingly.
[46] In Corumo Holdings Pty Ltd & Ors v C ITOH Limited & Ors (1991) 24
NSWLR 370, Meagher JA held in the context of the Companies (NSW) Code then in force that a reference to a “bare trust” must be related to situations where a trustee is “no more than a nominee or cypher, in a common sense commercial view”. As Meagher JA pointed out at 398, as a matter of strict logic, “almost no situation can be postulated where a trustee cannot in some circumstances have active duties to perform”. But he considered too narrow the submission by the applicants that the phrase “bare trustee” should be confined to situations where the trustee was immediately bound to transfer the share to his beneficiary.
[47] The issue of whether there was a bare trusteeship arose recently in the Hong Kong Court of Appeal: Hotung v Ho Yuen Ki [2002] 3 HKLRD 641. There, the beneficiaries requested the trustee of shares in two companies to execute powers of attorney to appoint them (the beneficiaries) as the trustee’s attorney in respect of the shares. The trustee refused to execute the powers of attorney and the beneficiaries commenced proceedings seeking an order compelling the trustee to execute the documents. The beneficiaries argued that the trustee was a bare trustee and had no
active duties to perform. The Court of Appeal held that the trusts were not bare trusts as they were created at a time when the beneficiaries were minors and thus the settlor obviously intended the trustee to perform duties in respect of the shares. In any event, after examining academic commentary and case law the Court held at 651:
….we are not convinced that the Re Brockbank line of authorities [establishing that beneficiaries cannot dictate to the trustee what to do] is applicable only to special trust and not to bare trust. While there is a distinction between bare and special trust, it is too much of a generalisation to say the restriction on interfering with the trustee's powers does not apply to a bare trust.
[48] While the shares were held for the beneficiaries absolutely, the trustee still had duties to perform as a registered owner of the shares in order to safeguard the interest of beneficiaries. These included attending the shareholders’ meeting, requesting company meetings, ensuring the proper operation of the company, and receiving and directing payment of dividends of the shares. The Court went on to say at 652 that voting cases must be considered in a class of their own and that a beneficiary cannot:
….say to the trustee that since you have to obey my instructions on voting you may as well let me do the job for you.
[49] The Court added in fairly robust terms that if the beneficiaries wished to perform the role of trustee then the proper course was to terminate the trust.
Butt v Kelson
[50] Mr Osborne relied particularly on the decision of the Court of Appeal in Butt v Kelson. In that case, the defendant trustees held substantially all the shares in a company for the plaintiff beneficiary on somewhat complicated trusts. The trustees were also directors of the company. The plaintiff became dissatisfied with the manner in which the defendants were running the company and sought a declaration that he, as a beneficiary, was entitled to inspect all documents which came into the possession or power of the defendants by virtue of their position as directors of the company. Harman J at first instance made the declaration. On appeal, Romer LJ
held that the restrictions imposed by the articles of the company (no right to inspect documents) applied equally to beneficiaries. Romer LJ went on to hold at 207 that if a beneficiary:
…firstly, specifies the documents of the company which he wishes to see; secondly, makes out a proper case for seeing them, and thirdly, is not met by any valid objection by the other beneficiaries or by the directors from the point of view of the company, then the directors should give inspection, not because they can be compelled to do so as directors, but as a short circuit, if one may so describe it, to an order compelling them to use their voting powers so as to bring about what the plaintiff desires to achieve.
[51] He added:
So long as the plaintiff gets out of his head the idea that he is entitled to call upon these directors to use their powers as directors as though they held those powers of trust for the plaintiff, and if he realises that his rights in relation to the trust holding are as I have briefly described them, then I do not think any difficulty should arise.
[52] Significantly, Romer LJ commented that “the true way of looking at the matter” was that the beneficiaries are entitled to be treated as thought they were the registered shareholders of the shares and that they can compel the trustee directors if necessary to use their votes as the beneficiaries think proper: at 207.
[53] Butt v Kelson has not been widely followed in subsequent decisions. It has never been applied in New Zealand. At least one judge has described it as being difficult to reconcile with other authority (including the Brockbank line of cases) and it has also been suggested that the case should be confined to its own facts. With respect, I agree with the criticisms which have been made of it for reasons which I later discuss but I now briefly review the later authorities.
[54] In re Whichelow Ltd (above), three blocks of shares in a company were left by a testatrix in trust for each of her three daughters respectively for life, with the remainder to their children who should attain 21. A dispute arose in relation to the conduct of the company’s affairs and the three daughters and their eight children directed the trustees either to appoint the eldest of the daughters as their proxy, or to vote in a certain way on the resolutions. The trustees declined to follow the
directions and stated they would use their votes in accordance with their discretion. At 8, Upjohn J said he found it difficult to reconcile Butt v Kelson with In re Brockbank and that it did not apply to the case at hand because it could not be said that all the potential beneficiaries were before the Court.
[55] In Walker v Wallis (above), 50% of the issued shares in a company were given by will to trustees who held them on trust for the plaintiff contingent upon his obtaining the age of 25 years. The remaining issued shares in the company were given by the same will to two of the trustees who were directors of the company. The plaintiff brought an action seeking to restrain the trustees from holding the annual general meeting until he turned 25 – one month after the trustees wished to hold the annual general meeting. Lush J said at 781:
The first matter of significance is that the plaintiff is not a shareholder and is not absolutely entitled to the beneficial interest in the one half of the shares. If he were so absolutely entitled he might be entitled to direct the trustees how the voting power of the trust shares was to be exercised at a general meeting and possibly how they were to act upon some issue upon which they would in the end be bound to accept the directions of a general meeting: see Butt v Kelson, [1952] Ch 197; [1952] 1 All ER 167. But not being absolutely entitled he has no such rights: see Re Whichelow, [1954] 1 WLR 5: [1953] 2
All ER 1558.
[56] Lush J held that according to the constitution, the duty of the directors was to exercise their power of governance of the company for the benefit of the company as a whole. Plainly, this could not properly be performed by exercising their powers for the benefit of the plaintiff as against other persons interested in the company.
[57] At 781, Lush J again drew attention to the fact that the trustees in Butt v Kelson were also directors of the company. In Butt v Kelson, Romer LJ accepted counsel’s argument (summarised at 204) that it was vital to bear in mind the distinction between a business which is being carried on by trustees of an estate and a business which is being carried on by a limited liability company in which the trustees merely hold shares. In the former, the beneficiaries have the right to see such documents and papers relating to the business as the trustees might have in their possession on the ground that, in effect, the beneficiaries are the owners of the business. But in the latter, the beneficiaries are interested not in the business itself
but as beneficiaries of shares held by the trustees. In that case, their rights are to see that the trustees use their voting power attaching to the trust holding in the best interests of the beneficiaries themselves.
[58] In Hespe v Surfers Paradise Forests Ltd (above), Carter J cited with approval the following passage from Jacob’s Laws of Trust In Australia (4th ed) para 2041:
It is the duty of a trustee-shareholder to use his voting powers in the interests of the beneficiaries and, if all the beneficiaries are sui juris and absolutely entitled and are agreed upon the way in which the voting power should be exercised, the trustee usually should vote as the beneficiaries wish.
[59] Carter J emphasised the words “usually should”. Clearly, he did not regard the trustees as being under a legal obligation to vote in accordance with the wishes of the beneficiary.
[60] Finally, the learned authors of Underhill and Hayton, Law relating to Trusts and Trustees, (16th ed) suggest at 736 that Butt v Kelson should be restricted to trustee shareholders who are also directors.
Conclusion on First Issue
[61] An examination of the authorities as a whole shows it would be going too far to treat Romer LJ’s obiter observations in Butt v Kelson as appropriate for general application. The issue was narrow and the trustees were also directors of the company. But whatever view may be taken of his Lordship’s remarks, the case is clearly distinguishable from the present. And, for the reasons already outlined, the plaintiff does not have any absolute entitlement to receive the shares in specie. That means, amongst other things, that she does not have the right to call upon the trustees immediately to transfer the shares to her, and most importantly, that she may never receive them.
[62] Although consideration of whether the trustees are “bare trustees” may be helpful in some contexts, there is a risk of becoming overly concerned with nomenclature to the point where the nature of the duties and discretions of the trustees may be obscured. Where the expression “bare trustee” is used in statute, the
courts are of course obliged to give some meaning to it. But in the absence of a statutory reference of this kind, the real task is to ascertain the nature and extent of the trustees’ obligations and discretions by reference to the terms of the instrument establishing the trust, assessed in the context of all the relevant surrounding circumstances and the obligations imposed on trustees by the general law or by statute.
[63] Translated to the present case, consideration must be given to the deceased’s presumed intentions by reference to the terms of the Will, assessed in the context of the company’s constitution and the obligations at law of trustees and executors.
[64] Here, I am satisfied the trustees are not mere cyphers and that they have active duties and discretions both as executors and trustees. As executors, the defendants are obliged to get in the assets of the deceased, pay the expenses and distribute the residue in accordance with the terms of the Will. And, as trustees, they have the fundamental obligation to adhere to the terms of the trust and to act in the best interests of the beneficiaries.
[65] In this case, the trustees’ duty under clause 3 of the Will is confined to a consideration of the plaintiff’s best interests. The residuary beneficiaries are not affected in that capacity by the outcome of the pre-emption process. Although they may be affected as shareholders in the company, that is irrelevant to the trustees’ obligations under clause 3.
[66] In ordinary circumstances, it would have been a straightforward matter to have taken a transfer of the shares and then distributed them to the plaintiff in accordance with clause 3 of the Will. But the existence of the pre-emption provisions of the company’s constitution make it impossible to follow that simple course, a fact of which the deceased must be taken to have been aware in making the gift of shares to the plaintiff. The trustees will be obliged to take at least some, and possibly all, of the steps outlined in Mr Wylie’s submissions at [31]. These are not merely mechanical matters but require the careful exercise of judgment and discretion. The trustees must hold the shares and, in order to fulfil their duty, undertake the pre-emption process in the best interests of the plaintiff as beneficiary.
[67] In the absence of any absolute entitlement by the plaintiff to the shares in specie, the trustees must exercise their own discretion in a conscientious manner. It is for them to decide when it is appropriate to issue a transfer notice and, the amount which should be nominated for the value of the shares. It is also a matter for them to proceed with any other steps inherent in the pre-emption process including participation in any arbitration as to the fair value of the shares and deciding whether to revoke the transfer notice if the price fixed as the fair value is less than the figure nominated in the notice.
[68] If the trustees do not have a discretion to proceed as outlined, then they could be placed in the invidious position referred to by Mr Wylie and summarised at [32]. In particular, the trustees could be left the registered owners of a substantial block of shares in this private company for an indefinite period while the plaintiff decides when it is appropriate for the transfer notice to be given. If the plaintiff subsequently directed the trustees to revoke the transfer notice, the trustees would be back to square one and would be obliged to continue to hold the subject shares until further direction. The deceased cannot have intended that the trustees be placed in such a position which, in the event of ongoing delays, could conflict with their ultimate duty to distribute the estate within a reasonable time and to give effect to the gift of shares to the extent available under the company’s constitution.
[69] It should not be thought that the plaintiff would be left without a remedy if she considered the trustees were not exercising their discretion in a proper manner. Although consultation is not obligatory, the trustees could expose themselves to serious risk should they not consult with the plaintiff about the pre-emption process. But in the end, it is a matter for the trustees to exercise their own discretion after taking into account the views of the beneficiary as they see fit. If the plaintiff remains dissatisfied, she has the ability to apply to the Court to review any act, omission or decision of the trustees under s 68 Trustee Act.
Second Issue – Does the plaintiff have the right to direct the trustees as to how they are to exercise their rights as shareholders in the company pending completion of the pre-emption process?
[70] In the light of the conclusions already reached and the discussion of the authorities, this issue may be disposed of shortly. If the plaintiff is unable to direct the trustees as to how the pre-emption process is to proceed then she is in an even weaker position in asserting the right to direct the trustees as to how they are to exercise their rights as shareholders in the company while the pre-emption process proceeds. I accept Mr Wylie’s simple submission that, since the plaintiff may never become a registered shareholder, if she were to have the right to direct the trustees in matters of governance and administration of the company in the interim period, she would be obtaining in advance, rights to which she may never become entitled. I am satisfied she has no such right. It is a matter for the trustees to exercise their discretion in dealing with the rights attaching to the shares in the interim period.
[71] The scope of the duties of the trustees as shareholders in the company is a matter of some complexity. The traditional view has been that shareholders are entitled to act in their own interests even where those interests conflicted with the interests of the company: Burland v Earle [1902] AC 83 (PC). But more modern company law has cast considerable doubt on this proposition: Morison’s Company
& Securities Law, Companies Commentary at [16.9]; and Brookers Company and Securities Law at CA 96.01. Since this matter was not fully argued, I prefer not to embark on a discussion of this point. Where the company’s interests and those of the plaintiff (in her capacity as a beneficiary) coincide, there is no difficulty. But where those interests conflict, the trustees will need to take such advice as is available to them and, if necessary, seek the direction of the Court on matters relating to the management of the company and the exercise of their voting rights. These complexities further serve to justify the conclusion that the trustees must be free to exercise their own judgment.
Dividends
[72] Mr Wylie indicated on behalf of the trustees that he would abide the decision of the Court as to whether the plaintiff is entitled to any dividends on the shares between the date of death of the deceased and the date of completion of the pre- emption process. I have no doubt that the plaintiff is so entitled. That is made abundantly clear by the terms of clause 3 which state expressly that the plaintiff is to receive the shares “inclusive of the full benefit of any dividends thereon (without any apportionment whatever) which shall not actually have been received by me during my lifetime …”. The plaintiff is entitled to receive those dividends whether or not she ultimately receives the shares in specie.
[73] If she does so prior to any sale of the shares, then the absence of available dividends would be reflected in the share value.
Summary and Conclusions
[74] The plaintiff has no right to direct the trustees as to when and how the pre- emption process is conducted nor does she have any right to direct the trustees as to how to exercise their rights as shareholders in the company. But she is entitled to the interim dividends as stated in [72].
[75] I apprehend that no formal declarations will be necessary. But counsel should advise the Court if clarification of any matters is required.
[76] Costs are reserved. Counsel for the defendants and the interests represented by Mr Brennan are to file and serve any submissions by 9 February 2006, and
counsel for the plaintiff may respond within 14 days thereafter.
A P Randerson, J Chief High Court Judge
SCHEDULE
Pre-emptive Rights – Share Transfers
4.5 (a) Except where the transfer is made pursuant to Regulations 4.12 or 4.13 every shareholder, who desires to sell or transfer any shares (the “proposing transferor”) shall give notice in writing (a “transfer notice”) to the Company that the proposing transferor desires to transfer the shares. The transfer notice must nominate the sum the proposing transferor considers to be the value of the shares referred to in the transfer notice.
(b) A transfer notice shall (subject to the provisions of Regulations 4.5 to 4.11) constitute the Board the agent of the proposing transferor for the sale of such shares to any shareholder or shareholders of the Company or other person or persons nominated by the Board at the sum specified in the transfer notice, or, at the option of the purchasing shareholder or shareholders or person or persons nominated by the Board at the fair value to be fixed in accordance with Regulation 4.7.
(c) If a transfer notice includes several shares it shall not operate as if it were a separate transfer notice in respect of each share and the proposing transferor shall be under no obligation to sell or transfer part only of the shares specified in the transfer notice. Except as provided in Regulation 4.8, the transfer notice shall not be revocable without the sanction of the Board in writing.
4.6 If the Board, within the space of one calendar month after being served with such transfer notice, finds a shareholder or shareholders or any other person or persons willing to purchase the shares (the “transferee” or “transferees”) whom the Board in its discretion is prepared to register as a shareholder or shareholders, and gives notice thereof to the proposing transferor, the proposing transferor shall, subject to Regulation 4.8, be bound to transfer the shares to the transferee or transferees upon payment of the price or fair value as herein provided (subject to any lien which the Company may have under the Constitution or the terms of issue of the shares and to deduction in respect thereof).
4.7 In case any difference arises between the proposing transferor and the transferee as to the fair value of the shares, the question shall be referred to arbitration. A reference to arbitration is deemed to be a “submission” for the purposes of the Arbitration Act 1996.
4.8 If the fair value fixed as aforesaid is less than the sum nominated in the transfer notice, the proposing transferor may revoke the transfer notice by giving notice in writing to the Company within 7 days of notice of the “fair value”.
4.9 If in any case the proposing transferor after becoming bound as aforesaid makes default in transferring the shares, the Company may execute a transfer or transfers of the shares on behalf of the proposing transferor and the Company may receive the purchase money and shall thereupon cause the name or names of the transferee or transferees to be entered in the register as the holder or holders thereof and shall hold the purchase money (subject to any lien in favour of the Company as aforesaid) in trust for the proposing transferor. A director’s receipt shall be a good discharge to the transferee or transferees for the purchase price and no question shall be raised as to the title of the transferee or transferees to the shares after the transferee or transferees are registered as the holders thereof.
4.10 Subject to the provisions of this Constitution, the shares specified in any transfer notice given to the Company as aforesaid shall be dealt with as follows:
(a) The said shares shall be offered in the first instance to holders of the class of shares contained in the transfer notice and, if after satisfying the claims of such holders including their claims to an excess which, inter se, shall be satisfied pro rata according to their holdings, in the second instance to holders of other classes of shares in each case as nearly as may be in proportion to the number of existing shares in that class held by them
respectively, and the offer shall in each case limit the time within which the same if not accepted will be deemed to be declined and may at the same time contain a notification that any such shareholder who desires an allotment of shares in excess of that shareholder’s proportion should in the reply to the Company state how many excess shares that shareholder desires to purchase;
(b) If all such shareholders do not claim their proportions, the unclaimed shares shall be used for satisfying the claims in excess pro rata according to the number of shares applied for;
(c) If thereafter any shares specified in a transfer notice and offered as aforesaid shall not have been accepted the Board may offer such shares to any person or persons whom it is prepared to register as a shareholder or shareholders.
4.11 If the Company shall not within the space of one month after becoming served with a transfer notice find a shareholder or shareholders or other person or persons whom the Board is prepared to register as a shareholder or shareholders willing to purchase the shares and give notice in the manner aforesaid, the proposing transferor shall unless the proposing transferor shall have revoked the transfer notice pursuant to Regulation 4.8 at any time within 3 calendar months after the expiration of the said period of one month be at liberty to sell and transfer the shares to any person at a price not lower than the value specified in the transfer notice or the fair value fixed as aforesaid and the prior subclauses of this Regulation shall not apply to such transfer provided that the right herein conferred on a shareholder shall in all cases be subject to the provisions of Regulation 4.4(a) to 4.4(f).
4.12 Any share may be transferred by a shareholder or shareholders to: (a) any child, grandchild, wife or husband of such shareholder; or
(b) to a trustee or trustees of any trust which is in the opinion of the Board exclusively or principally for the benefit of one or more of the aforesaid persons; or
(c) by a trustee or trustees of any such trust to a beneficiary
but this Regulation shall be read and construed as subject to the provisions of Regulation 4.4(a)
to 4.4(f).
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