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Corporate trustees have the right to make their own decisions

30 Nov 2009

We recently successfully represented shareholders of a unit trust who attempted to challenge a trustee’s discretionary powers in a bid to reshape the company’s board.

A group of shareholders of a publicly listed gold exploration company differed in their opinion about the exercise of voting rights for 8.8 million shares. The shares were held by a corporate trustee of a unit trust established by the original directors of the gold exploration company. The group of shareholders were in dispute regarding the future direction of the company.

Just days before an EGM was to be held, the minority shareholders made a pre-emptive strike in the supreme court, bringing proceedings against the trustees of the trust. They sought injunctions preventing the trustee from exercising its discretion to vote in what the trustee believed to be in the best interests of the beneficiaries of the trust.

Application was made pursuant to section 8 of the Trusts Act seeking the courts intervention to restrain the trustee of the trust from exercising its voting rights at the EGM on the basis that the minority unit holders suspected that the trustee would vote in a way that they would not agree with given their public dispute. Section 8 of the Trusts Act allows a court to review a trustee’s decision and if necessary, make directions in respect of an apprehended act, omission or decision.

The court was asked to review the trustee’s decision (or in this case, anticipated decision) and determine whether the minority unit holders would be unjustifiably aggrieved by the trustee exercising its discretionary voting rights at the impending EGM.

A trustee must, when exercising their discretion act with honesty, integrity, fairness and good faith. It is well settled that the court cannot interfere with the exercise of discretion of a trustee in circumstances where a beneficiary views the discretion as being exercised in a way that is unfair, unreasonable or unwise. It must clearly be established by the aggrieved beneficiary that either bad faith or improper purpose is shown.

The Hynes Legal commercial recovery and restructuring team with the collaborative efforts of the corporate team successfully argued that there was simply no basis at law for bringing a complaint about a trustee’s decision, yet to be made, on the basis that it was unfair, unreasonable or unwise. The court dismissed the minority unit holder’s application which allowed the trustee to exercise its right to vote at the EGM in the way the trustee saw fit.

Points to remember

  • A trustee has a duty to act in good faith, integrity and in the best interests of the beneficiaries of the trust.
  • The Trusts Act (Qld) gives the court jurisdiction to review a trustee’s acts and/or decisions and in rare circumstances gives the court power to make directions as to how a trustee should discharge its duty, (eg when a trustee is found not to be acting in good faith, responsibly or reasonably).
  • The jurisdiction conferred on the court by the Trusts Act is not to be used as an adjudication process in a corporate dispute and should only be used to review a decision that has already been made.
  • The exercising of a trustees discretion will be impugned when it has been exercised in bad faith, arbitrarily, capriciously, wantonly, irrelevantly, mischievously or without giving genuine consideration to the exercise of the discretion.