Ownership Reviews Does the Tail Wag the Dog? and Changing Tablets of Stone Karen Sherry and Ross Inder

Ownership Reviews Does the Tail Wag the Dog? 22 energy/electricity trusts in nz which own 28 nz lines companies of 17 trust deeds considered 15 required to undertake ownership reviews reviews usually recurring on 3, 5, 6 yearly basis. costs of reviews vary – from $ $60, to date review results show overwhelming continued support for trust ownership

Ownership Reviews Does the Tail Wag the Dog? Typical Ownership Review Clauses Mandatory Reviews in 16 of 17 Deeds Trustees have duty to carry out Review strictly in accordance with Deed Typically review clause will set out in detail the process the review must follow; the issues the report must address and the how the outcomes of the report are to be presented and published. Where the Company is required to prepare the report the Trust must pay the Company’s reasonable costs.

Ownership Reviews Does the Tail Wag the Dog? “4Review 4.1 Within 3 years from the date of this Deed the Trustees shall require the Directors to prepare a report discussing proposals and options for future ownership of the shares in the Company. Such report shall contain the following details: (a)an analysis of the performance of the Company to the date of the report together with a discussion of the advantages and disadvantages of trust ownership; (b)an analysis of the various ownership options considered including without limitation, a share distribution to Consumers or Electors, a sale of Shares to the Public, a sale of Shares to institutional investors and retention by the Trust; (c)a comparison of the performance of the Company with the performance of other similar companies; (d) the conclusions of the directors as to the most appropriate form of ownership together with an indication as to whether the conclusions are unanimous and if the decision is not unanimous, a summary of the views of the dissenting directors shall be included;

Ownership Reviews Does the Tail Wag the Dog? (e)the matters set out in Clause 4.6 if a distribution of Shares is recommended; (f)a summary of the professional advise (if any ) obtained in respect of the preparation of the report; and (g)a statement as to whether or not the directors have had regard to any views expressed by the public with respect to ownership...” The clause continues: “4.10If following the initial review provided for in this Clause 4 any or all of the Shares of the Company are retained by the Trustees, the Trustees shall thereafter procure that a review in accordance with Clause 4 is held at no more that five yearly intervals until the Termination date so that the first review commences no later than five years after the completion of the first review.” Other Deeds review every 3,5,6 or even 10 years. Other Deeds require the Trustees to prepare Report and conclude what is the most appropriate form of ownership.

Ownership Reviews Does the Tail Wag the Dog? “Distribution of Shares 4.1The Trustees may not sell, charge or otherwise dispose of or deal with any shares unless the proposed sale charge of disposal has been approved by a Poll conducted pursuant to clause 4.3… The Trustees shall…every 6 years …and may at any other time, conduct a Poll in accordance with clause 4.5 to determine whether Customers voting on the Poll wish to Shares to continue to be held by Trust or to be transferred to Customers or to be transferred to Local Authorities or in accordance with any additional proposal of the Trustees pursuant to clause At least one month prior to the conducting of the Poll the Trustees shall prepare and publish a report containing: (a)an analysis of the performance of the Trust to the date of the report together with a discussion of the advantages and disadvantages of continued Trust ownership of the Share…. (b)a discussion of the advantages and disadvantages of a transfer of the Shares to Customers or to Local Authorities or a sale of the Shares and a transfer of the proceeds to Customers or to Local Authorities; (c)any comments by the directors of the Company as to the most appropriate form of ownership of the Shares.”

Ownership Reviews Does the Tail Wag the Dog? Or “the once in the “life-time offer: “Within five years of the commencement of this trust the Trustees shall meet with the directors of the Company to discuss the continuing need for this trust.” Ownership Review Clauses – a mistaken duplication of the discretion and duty inherently vested in Trustee to review trust assets at any and all appropriate times, Or something more sinister?

Ownership Reviews Does the Tail Wag the Dog? Not a cart Blanche to vary Trust Deeds; Very restrictive in nature; Three criteria to be met: (1)The is unanimity of the Trustees with respect to such amendment or variation; (2)Approval in writing of the amendment by the Directors; (3)The Amendment has been subject to public consultation.

Ownership Reviews Does the Tail Wag the Dog? Requirement to obtain Directors consent to vary, from a Corporate Governance perspective inappropriate = the tail wagging the dog; Governance traditionally concerns Directors accountability to shareholders not shareholders accountability to Directors

Ownership Reviews Does the Tail Wag the Dog? Trust Deed Variation of Ownership Review Clause specifically excluded: “Notwithstanding clause 14.1 no alteration or amendment may be made to this Deed that has the effect of limiting or restricting the obligations or powers of the trustees under this deed to: (a)Review proposals and available options for the ownership of the shares held by the trust in the company in accordance with clause 4; or (b)Sell, transfer or dispose of the shares following an ownership review held in accordance with clause 4.” What then to be done?

Ownership Reviews Changing Tablets of Stone? Trustee Act 1956 “64(1) Subject to any contrary intention expressed in the instrument creating the trust, where in the opinion of the Court any sale lease … or other disposition or any purchase investment …or other transaction it is expedient in the management or administration of any property vested in a trustee or would be in the best interests of the persons beneficially interested under the trust but it is inexpedient or difficult or impracticable to effect the same without the assistance of the Court… the Court may by order confer upon the trustee…the necessary power for the purpose.”

Ownership Reviews Changing Tablets of Stone? The expansive language of the section may seem to “the man on the street” to be a licence to change a deed but look again at the language. “Subject to any contrary intention expressed in the instrument” “Any [transaction]is expedient in the management or administration of trust property “ “Or would be in the best interests of the persons beneficially entitled.” Better than the common law position perhaps but still quite restrictive. Have to convince the Court your proposal is expedient in the management or administration of trust property or in the best interests of the beneficiaries. This and another problem were addressed by the legislature in 1960 by passing an amendment to the Trustee Act

Ownership Reviews Changing tablets of stone? “Section 64A (1) Without limiting any other powers of the Court…the Court may if it thinks fit by order approve [three named classes of beneficiary]..any arrangement …varying or revoking all or any of the trusts, or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts”

Ownership Reviews Changing Tablets of Stone? Legislative Hedge betting by way of limitations. The court cannot make an order on behalf of a beneficiary if it is to his/her detriment The Court only concerned with the classes of beneficiary mentioned in the section ; it is not concerned whether the change is to the benefit or detriment of the proposer or of other beneficiaries who are sui juris and consent There is an inherent duty on the trustees to act impartially as between beneficiaries.

Ownership Reviews Changing Tablets of Stone? How to effect a change ? Who May Apply ? “Any trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power or discretion vested in the trustee.” section 66(1) Trustee Act 1956 This is not about the Court re-writing a Trust Deed.

Ownership Reviews Changing Tablets of Stone? Trustees to prepare the proposal for the Court to consider Have to serve all persons who have an interest. Court “consider(s) the arrangement” and “gives directions” Approval can be obtained but the procedure detailed and at time onerous Cost v benefit ?