July 29, 2016
Delaware Statutory Trust Amendments Signed into Law
By Marla H. Norton
On July 13, 2016, Delaware Governor Jack Markell signed into law Senate Bill 243, with House Amendment 1 (a technical amendment to correct a transcription error). The legislation, which was introduced in early May, updates the Delaware Statutory Trust Act (the “DST Act”). The legislation is effective August 1, 2016. The highlights of DST Act amendments follow:
The 2016 amendments revise the definition of “statutory trust” in Section 3801(g) of the DST Act to permit a statutory trust to opt out of entity status. In order to create a DST that is not a separate legal entity, the parties must include language in both the certificate of trust and the governing instrument of the trust specifying that the trust will not be a separate legal entity. The amendment also adds conforming language to Section 3810(g)(2) of the DST Act providing that entity status continues until cancellation of a DST’s certificate of trust, unless the certificate of trust and governing instrument provide otherwise.
The series concept under the DST Act has not evolved over the years to include the entity-like characteristics bestowed by amendments to the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) on series of LLCs and limited partnerships. However, the 2016 updates add language to Section 3804(a) of the DST Act confirming that a statutory trust with series created under that section may contract, hold title to assets, grant liens and security interests and sue and be sued in the name of the series, unless the governing instrument of the trust provides otherwise. While new language does not affirmatively vest a series of a statutory trust with the independent power or authority to contract, hold title, grant liens or sue and be sued, it does legitimize the practice of titling assets and executing contracts in the name of a series to bolster the “separate and distinct” recordkeeping requirements of the DST Act. In addition, consistent with the 2016 amendment to the LLC Act and the LP Act, the DST Act amendments add language confirming that the general partitioning language in the DST Act or a governing instrument, segregating liabilities of individual series and the statutory trust and shielding each from the obligations and liabilities of the others, does not prevent a series or the trust from affirmatively agreeing to undertake liability for any or all of the obligations or liabilities of another series or the trust generally.
Consistent with the 2016 amendments to the LLC Act and the LP Act, the DST Act legislation amends Section 3806(i) to confirm that a delegation by a trustee may be irrevocable, if and to the extent provided therein.
The legislation adds a new section 3806(l) to the DST Act, which provides that a trustee of a statutory trust that is registered as an investment company under federal law has the same fiduciary duties as the directors of a for-profit corporation organized under the Delaware General Corporation Law, unless the trust agreement or other governing instrument provides otherwise. This amendment makes applicable to trustees of a registered investment company organized as a trust the so-called business judgment rule, and its presumption that decision-makers act in good faith, on a fully-informed basis and in the best interests of the organization for whom they act. The synopsis notes that the express adoption of corporate fiduciary duties with respect to registered investment companies is not intended to imply that these standards are not applicable to trustees or other representatives of statutory trusts that are not registered investment companies.
As with partnerships and limited liability companies, a statutory trust is dissolved by operation of law, and its certificate of trust is cancelled upon the completion of winding up and liquidation. The DST Act amendments update the provisions on revocation of dissolution to conform to the provisions of the LLC Act and the LP Act. New language added to Section 3808(c) of the DST Act provides that if a statutory trust’s governing instrument specifies a method for revoking a dissolution, that method will control. In addition, the amendments acknowledge that a governing instrument may prohibit or condition revocation of dissolution. As revised, Section 3808(c) provides that, absent such prohibition, following the occurrence of an event of dissolution set forth in the governing instrument, prior to the filing of a certificate of cancellation: (1) a dissolution effected by the vote or written consent of beneficial owners or other persons may be revoked by the same vote, and (2) a dissolution otherwise occurring pursuant to the terms of the governing instrument may be revoked by the vote or written consent required to amend the governing instrument provision providing for such dissolution, in each case with the consent of any other persons whose approval or consent is required to revoke a dissolution under the governing instrument. The amendment makes clear that the new language is not intended to override any preexisting right to revoke a dissolution.
Delaware practitioners have traditionally taken the view that, consistent with common law trust principles, execution of a trust instrument must precede the filing of a certificate of trust. Section 3801(g) of the DST Act defines a statutory trust as an unincorporated association created by a governing instrument that files a certificate of trust. Section 3810(a), in turn, provides that a statutory trust is formed when a certificate of trust is filed or becomes effective, provided that there had been substantial compliance with Section 3810. Uncertainty existed as to whether a certificate of trust that was filed and effective before a trust agreement had been executed satisfied the “substantial compliance” test, because at common law, a trust must be formed by a written agreement. Because the LLC Act and the LP previously were amended to provide that an LLC Agreement or partnership agreement could be entered into before, after or at the time of filing of a certificate of formation or limited partnership, parties frequently assumed that a corresponding language appeared in the DST Act and filed a certificate of trust before a trust agreement had been signed. The amendments legitimize a prematurely filed certificate of trust by providing that a statutory trust for which a certificate of trust has been filed and a governing instrument has been adopted is considered duly formed regardless of the sequence of such acts. Nonetheless, the best practice remains that a governing instrument be executed prior to filing a certificate of trust.
The 2016 DST Act amendments expand the provisions applicable to irrevocable powers of attorney to include irrevocable proxies. The amendment to Section 3811(d) also clarifies that a governing instrument may expressly prohibit or condition the irrevocable nature of a power of attorney or proxy and that a power of attorney or proxy contained within the governing instrument of a statutory trust is enforceable.
Since the DST Act was not updated in 2015, the 2016 amendments implement provisions parallel to previous amendments to the LLC Act and LP Act regarding the obligation of the Division of Corporations to provide public access to records. Amended Section 3813 of the DST Act clarifies that the Secretary of State has no duty to provide access to information or copies of records (including bulk data, digital copies or any other type of access) in any form other than photocopies or electronic images of specific records associated with one or more specific entity files upon a request therefor, in each case, upon payment of the applicable fees for each as specified in Section 3813 of the DST Act or in Section 2318 of Title 29. The amendment makes clear that a person cannot subvert Section 3813, and the fee schedule contained therein, or obtain unlimited access to the Division of Corporations database by making a Freedom of Information Act request.
The 2016 DST amendments update Section 3819 to make clear that the right of a beneficial owner or trustee to access records of a statutory trust extends to such person’s attorney or other agent. Section 3819(e), as amended, requires that an attorney or other agent making a books and records demand on a statutory trust must submit with its demand a power of attorney or other written authorization establishing the attorney or agent’s authority to act on behalf of the beneficial owner or trustee for whom such person acts.
A copy of the full text of the amendment is available here. A summary of the 2016 LLC Act and LP Act amendments can be found here.
On July 13, 2016, Delaware Governor Jack Markell signed into law Senate Bill 243, with House Amendment 1 (a technical amendment to correct a transcription error). The legislation, which was introduced in early May, updates the Delaware Statutory Trust Act (the “DST Act”). The legislation is effective August 1, 2016. The highlights of DST Act amendments follow:
Legal Entity Status
The 2016 amendments revise the definition of “statutory trust” in Section 3801(g) of the DST Act to permit a statutory trust to opt out of entity status. In order to create a DST that is not a separate legal entity, the parties must include language in both the certificate of trust and the governing instrument of the trust specifying that the trust will not be a separate legal entity. The amendment also adds conforming language to Section 3810(g)(2) of the DST Act providing that entity status continues until cancellation of a DST’s certificate of trust, unless the certificate of trust and governing instrument provide otherwise.
Series Provisions
The series concept under the DST Act has not evolved over the years to include the entity-like characteristics bestowed by amendments to the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) on series of LLCs and limited partnerships. However, the 2016 updates add language to Section 3804(a) of the DST Act confirming that a statutory trust with series created under that section may contract, hold title to assets, grant liens and security interests and sue and be sued in the name of the series, unless the governing instrument of the trust provides otherwise. While new language does not affirmatively vest a series of a statutory trust with the independent power or authority to contract, hold title, grant liens or sue and be sued, it does legitimize the practice of titling assets and executing contracts in the name of a series to bolster the “separate and distinct” recordkeeping requirements of the DST Act. In addition, consistent with the 2016 amendment to the LLC Act and the LP Act, the DST Act amendments add language confirming that the general partitioning language in the DST Act or a governing instrument, segregating liabilities of individual series and the statutory trust and shielding each from the obligations and liabilities of the others, does not prevent a series or the trust from affirmatively agreeing to undertake liability for any or all of the obligations or liabilities of another series or the trust generally.
Irrevocable Delegation
Consistent with the 2016 amendments to the LLC Act and the LP Act, the DST Act legislation amends Section 3806(i) to confirm that a delegation by a trustee may be irrevocable, if and to the extent provided therein.
Fiduciary Duties of Trustees
The legislation adds a new section 3806(l) to the DST Act, which provides that a trustee of a statutory trust that is registered as an investment company under federal law has the same fiduciary duties as the directors of a for-profit corporation organized under the Delaware General Corporation Law, unless the trust agreement or other governing instrument provides otherwise. This amendment makes applicable to trustees of a registered investment company organized as a trust the so-called business judgment rule, and its presumption that decision-makers act in good faith, on a fully-informed basis and in the best interests of the organization for whom they act. The synopsis notes that the express adoption of corporate fiduciary duties with respect to registered investment companies is not intended to imply that these standards are not applicable to trustees or other representatives of statutory trusts that are not registered investment companies.
Revocation of Dissolution
As with partnerships and limited liability companies, a statutory trust is dissolved by operation of law, and its certificate of trust is cancelled upon the completion of winding up and liquidation. The DST Act amendments update the provisions on revocation of dissolution to conform to the provisions of the LLC Act and the LP Act. New language added to Section 3808(c) of the DST Act provides that if a statutory trust’s governing instrument specifies a method for revoking a dissolution, that method will control. In addition, the amendments acknowledge that a governing instrument may prohibit or condition revocation of dissolution. As revised, Section 3808(c) provides that, absent such prohibition, following the occurrence of an event of dissolution set forth in the governing instrument, prior to the filing of a certificate of cancellation: (1) a dissolution effected by the vote or written consent of beneficial owners or other persons may be revoked by the same vote, and (2) a dissolution otherwise occurring pursuant to the terms of the governing instrument may be revoked by the vote or written consent required to amend the governing instrument provision providing for such dissolution, in each case with the consent of any other persons whose approval or consent is required to revoke a dissolution under the governing instrument. The amendment makes clear that the new language is not intended to override any preexisting right to revoke a dissolution.
Formational Issues
Delaware practitioners have traditionally taken the view that, consistent with common law trust principles, execution of a trust instrument must precede the filing of a certificate of trust. Section 3801(g) of the DST Act defines a statutory trust as an unincorporated association created by a governing instrument that files a certificate of trust. Section 3810(a), in turn, provides that a statutory trust is formed when a certificate of trust is filed or becomes effective, provided that there had been substantial compliance with Section 3810. Uncertainty existed as to whether a certificate of trust that was filed and effective before a trust agreement had been executed satisfied the “substantial compliance” test, because at common law, a trust must be formed by a written agreement. Because the LLC Act and the LP previously were amended to provide that an LLC Agreement or partnership agreement could be entered into before, after or at the time of filing of a certificate of formation or limited partnership, parties frequently assumed that a corresponding language appeared in the DST Act and filed a certificate of trust before a trust agreement had been signed. The amendments legitimize a prematurely filed certificate of trust by providing that a statutory trust for which a certificate of trust has been filed and a governing instrument has been adopted is considered duly formed regardless of the sequence of such acts. Nonetheless, the best practice remains that a governing instrument be executed prior to filing a certificate of trust.
Powers of Attorney and Proxies
The 2016 DST Act amendments expand the provisions applicable to irrevocable powers of attorney to include irrevocable proxies. The amendment to Section 3811(d) also clarifies that a governing instrument may expressly prohibit or condition the irrevocable nature of a power of attorney or proxy and that a power of attorney or proxy contained within the governing instrument of a statutory trust is enforceable.
FOIA Provisions
Since the DST Act was not updated in 2015, the 2016 amendments implement provisions parallel to previous amendments to the LLC Act and LP Act regarding the obligation of the Division of Corporations to provide public access to records. Amended Section 3813 of the DST Act clarifies that the Secretary of State has no duty to provide access to information or copies of records (including bulk data, digital copies or any other type of access) in any form other than photocopies or electronic images of specific records associated with one or more specific entity files upon a request therefor, in each case, upon payment of the applicable fees for each as specified in Section 3813 of the DST Act or in Section 2318 of Title 29. The amendment makes clear that a person cannot subvert Section 3813, and the fee schedule contained therein, or obtain unlimited access to the Division of Corporations database by making a Freedom of Information Act request.
Access to Records
The 2016 DST amendments update Section 3819 to make clear that the right of a beneficial owner or trustee to access records of a statutory trust extends to such person’s attorney or other agent. Section 3819(e), as amended, requires that an attorney or other agent making a books and records demand on a statutory trust must submit with its demand a power of attorney or other written authorization establishing the attorney or agent’s authority to act on behalf of the beneficial owner or trustee for whom such person acts.
A copy of the full text of the amendment is available here. A summary of the 2016 LLC Act and LP Act amendments can be found here.