Trusts over Shares: Rights of Trustees and Beneficiaries

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1 Trusts over Shares: Rights of Trustees and Beneficiaries Introduction Trusts over company shares are potentially complex, particularly where disputes or probate issues come into play. This was the case in Fong Wai Lyn Carolyn v Kao Chai-Chau Linda and others [2017] SGHC 111, where the Singapore High Court had to consider issues involving the rights of the trustee and beneficiaries. The case involved a trust over certain shares held by the owner of a company. After the owner passed away, disputes over the company began to arise. In this application, one of the beneficiaries of the estate sought a declaration that the shares were held on trust for the estate, and that the trustee was obliged to comply with any direction from the executors of the estate regarding the exercise of voting rights. The Court found that the beneficiary had sufficient locus standi and, after considering submissions, granted the declaration. The beneficiary was successfully represented in this application by Ms. Kee Lay Lian of Rajah & Tann Singapore LLP. Brief Facts The company in question ( Airtrust ) was started by the late Peter Fong ( PF ). Under a trust deed (the 2000 Trust Deed ), 600,000 Airtrust shares were transferred by PF to one Linda Kao ( Ms Kao ) to hold on trust for PF as the beneficiary and to transfer the shares according to his directions. It was intended to be sold at a discounted price to deserving employees who PF wished to sell to. However, PF did not give such directions during his lifetime. After PF passed away, a number of disputes arose over the management of Airtrust. As part of this, Carolyn Fong ( Ms Fong ), one of the beneficiaries of the estate, sought to restrict Ms Kao s exercise of the voting powers attached to the trust shares at an upcoming annual general meeting ( AGM ) of Airtrust, concerned that Ms Kao would influence the composition of the board. Ms Fong thus applied for a declaration that the shares were held by Ms Kao on trust for the estate, and that Ms Kao was obliged to comply with any direction from HSBC Trustee (Singapore) Limited ( HSBC ), the executors of the estate, regarding the exercise of the voting rights and the disposal of the shares. The Court thus had to consider: (i) (ii) (iii) Whether Ms Fong had locus standi to seek the declaration on behalf of the estate; Who beneficially owned the trust shares; and Whether Ms Kao was in fact obliged to comply with the executors directions. Rajah & Tann Singapore LLP 1

2 Holding of the High Court The Court allowed Ms Fong s application, granting the declaration sought. Locus standi Ordinarily, the proper party to obtain a remedy on behalf of the estate would be the executor, so as to avoid a multiplicity of suits from numerous beneficiaries. However, the court will permit a beneficiary to bring an action under special circumstances. This involves a fact specific inquiry, with the courts having taken a flexible approach to determining special circumstances. After reviewing the facts, the Court held that there were in fact special circumstances justifying Ms Fong bringing the application instead of HSBC. (i) (ii) (iii) One vital reason was that HSBC supported Ms Fong s application and took the same position as she did. HSBC explained that they were not familiar with the material background concerning the trust shares, while Ms Fong was fully apprised of the facts. Further, the application had to be brought urgently in light of the upcoming AGM, and HSBC was not in a position to conduct investigations and take out the application on such short notice. Ms Fong s case had merits and should be allowed to proceed. It would be prejudicial to the estate to deny Ms Fong s locus standi, as HSBC would raise the same substantive arguments if it were to start a fresh application. Ms Fong was thus found to have locus standi to seek the declaration. Ownership of trust shares The Court had to consider two competing theories regarding the beneficial ownership of the shares. Ms Kao submitted that the shares were an absolute gift to the existing shareholders in proportion to their shareholding at the date of Peter Fong s demise. Ms Fong submitted that the shares were beneficially owned by the estate. After analysing the 2000 Trust Deed, the Court accepted Ms Fong s construction of the provisions. The Court thus granted a declaration that the shares were held on trust for the estate. Trustee s voting powers Ms Kao sought to argue that the Court should not direct how she would exercise her discretion to exercise the voting rights of the trust shares in the absence of evidence that she had done so improperly. Ms Kao relied on cases where the trustees had been given discretion to exercise their power, and where the court had found that the beneficiaries could not dictate the exercise of such discretion. However, the Court accepted Ms Fong s submission that the 2000 Trust Deed did not confer any discretion on Ms Kao as regards the voting powers attached to the trust shares. The 2000 Trust Deed expressly circumscribed Ms Kao s discretion to vote, requiring her to vote according to the directions of the beneficiary. Rajah & Tann Singapore LLP 2

3 In any event, even if Ms Kao did have discretion, the Court found sufficient evidence that she intended to improperly exercise such discretion against the best interests of the estate. The Court thus granted a declaration that Ms Kao was obliged to comply with any direction from HSBC regarding the exercise of the voting rights and the disposal of the trust shares. Concluding Words The Court s interpretation of the terms of the 2000 Trust Deed was a key part of the decision. It is thus important that any trust deed be clearly drafted in terms of the rights and obligations of the trustee with regard to the beneficiaries and the exercise of discretion. In particular, should there be specific intentions regarding the operation of the trust upon the demise of the beneficiary, such provisions should be expressly included in the trust deed. The decision also demonstrates how the courts will approach actions commenced by the beneficiary of an estate instead of the executors. The Court here adopted a practical and reasoned approach in allowing the beneficiary to make the relevant application. For further queries, please feel free to contact our team below. Contact Kee Lay Lian Partner D (65) F (65) lay.lian.kee@rajahtann.com Please feel free to also contact Knowledge and Risk Management at eoasis@rajahtann.com Rajah & Tann Singapore LLP 3

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