Reform of the Trustee Ordinance Consultation Conclusions.

November 2012 Reform of the Trustee Ordinance Consultation Conclusions. The Financial Services and the Treasury Bureau (the FSTB ) published the conclusions (the Conclusions ) to the Consultation on Detailed Legislative Proposals on Trust Law Reform on 23 November 2012. As respondents generally supported the reform proposals, subject to making the revisions discussed below, the FSTB plans to implement the proposed reforms with a view to introducing the amending bill into the Legislative Council in the 2012-2013 legislative session. This alert 1 summarises the changes to those proposals that are most relevant to professional trustees acting in capital markets transactions and analyses the likely effect of such changes for such trustees. Statutory Duty of Care for Trustees A statutory duty of care is proposed to be imposed on trustees carrying out certain functions such as exercise of the power of investment, appointment of agents, nominees and custodians and review of arrangements with such parties. The Conclusions clarified that the statutory duty would replace the common law duty of care when the trustee carries out these functions. The statutory duty of care will apply to new trusts created after the commencement of the amending legislation as well as existing trusts. Similar to the UK position, the statutory duty would not apply if it appears from the trust instrument that it is not meant to apply. We expect that, going forward, professional trustees will expressly exclude the statutory duty in the trust deed for new bond issuances. However, it may be impracticable for existing trust deeds to be amended to expressly exclude the statutory duty. Whilst existing trust deeds would not have contemplated the introduction of the statutory duty, we believe that the proposed language is sufficiently broad so as to be capable of giving effect to terms in an existing trust deed that indicated that the parties did not mean to apply a statutory duty of care. We believe this view is supported by the proposed broadly-drafted appears language and by clarification in the Conclusions that this wording covers Contents Statutory Duty of Care for Trustees... 1 Statutory Controls on Trustee s Exemption Clauses... 2 Powers to Appoint Agents, Nominees and Custodians. 2 Trustee s Entitlement to Remuneration and Reimbursement of Expenses... 3 Beneficiaries Right to Remove a Trustee... 3 Power to Delegate... 3 Review of Agents, Nominees and Custodians. 3 Authorised Investments... 4 Likely Impact of Proposed Trust Law Reforms on Capital Market Transactions... 4 1 For further details on the trust law reform proposals, please see our client alert dated 14 May 2012 on Trust Law Reforms in Hong Kong and their Likely Impact on Capital Markets Transactions. A summary of the key points raised in our meeting with the FSTB in October 2012 is contained in our client alert dated 17 October 2012 on Reform of the Trustee Ordinance meeting with FSTB October 2012. Reform of the Trustee Ordinance Consultation Conclusions 1

cases where the trust instrument expressly or impliedly carves out the statutory duty of care. However, we are concerned by another observation in the Conclusions that the existing proposal only permits the statutory duty to be excluded for new trusts, and as a result, the FSTB will consider introducing an opt-out mechanism for existing trusts to exclude the statutory duty via a deed executed by a living settlor or the beneficiaries under specified conditions. Whilst the introduction of an express opt-out mechanism for existing trusts is welcomed, we will seek clarification from the FSTB that it does not by implication preclude reliance on appropriately drafted exclusion language in an existing trust deed. Statutory Controls on Trustee s Exemption Clauses Deliberately departing from the UK position, the FSTB proposes to introduce statutory controls on exemption clauses used by a remunerated professional trustee. It is proposed that such a trustee cannot be relieved from any liability for breach of trust arising from the trustee s own fraud, wilful misconduct or gross negligence. Following the consultation, the FSTB decided to replace reckless act with gross negligence and to leave that term undefined in the statute. The Conclusions also clarified that the statutory controls would not affect other statutory or administrative controls on trustee s exemption clauses (such as those under the Companies Ordinance, the SFC Code on Unit Trusts and Mutual Funds or the Occupational Retirement Schemes Ordinance) and therefore the statutory controls would apply cumulatively with other applicable restrictions. Given that trustee exemption clauses used in bond transactions typically contain similar carve-outs, we expect the impact on professional trustees of introducing the statutory controls to be minimal in practice. Powers to Appoint Agents, Nominees and Custodians Residual uncertainty as to whether section 41E (containing restrictions on the terms of agency) and section 41F (containing restrictions on the appointment of an asset manager) are overridden by express provisions in the trust instrument was removed in the Conclusions. The FSTB clarified that these statutory restrictions only apply if the default power of appointment under the Trustee Ordinance is exercised in appointing the agent or asset manager. As professional trustees typically engage agents in exercise of express powers of appointment under the trust deed, we do not expect these proposed changes to have any impact in practice. The proposed section 41J(2) of the Trustee Ordinance restricts the choice of custodians to those carrying on a business as custodians or a body corporate controlled by the trustees. Although the definition of custodian is proposed to be left unchanged, the FSTB made it clear that section 41J only applies if the trustee exercises the default power to appoint a custodian for the safe custody of the trust assets or the title documents relating to the assets. Given that bond trust documentation usually contain an express power of appointment of custodians, these proposed changes are not likely to have any impact on professional trustees in practice. Reform of the Trustee Ordinance Consultation Conclusions 2

Trustee s Entitlement to Remuneration and Reimbursement of Expenses As originally drafted, it was unclear whether sections 41V(2) and (3) of the Trustee Ordinance (which contain restrictions on payment of an agent s remuneration and reimbursement of an agent s expenses) would apply when the agent is appointed under express powers in the trust instrument. The FSTB clarified in the Conclusions that these restrictions concern the exercise of trustees powers and are therefore subject to any contrary intention expressed in the trust instrument and take effect subject to the terms of the trust instrument. In the context of capital markets transactions, trust instruments invariably provide for remuneration and reimbursement of agents, nominees and custodians, so the proposed statutory provisions would in practice be displaced by express provisions in the trust deed. Beneficiaries Right to Remove a Trustee The Conclusions clarified that the powers proposed to be given to beneficiaries to direct the retirement of the trustee under sections 40A and 40B of the Trustee Ordinance apply to corporate beneficiaries as well as individual beneficiaries and that mechanism prescribed under section 40D for settlors to exclude the operation of sections 40A and 40B in relation to existing trusts applies to corporate settlors as well as individual settlors. Although these provisions apply to trusts existing trusts as well as newly created trusts, the FSTB noted in the Conclusions that these provisions will not apply if their application is inconsistent with the terms of the trust instrument. In the context of bond transactions, going forward, we expect professional trustees to expressly exclude the operation of these provisions. As for existing trusts, given that trust documentation usually expressly provide for the retirement and removal of a trustee, we expect that these proposals will not have any impact in practice. Power to Delegate The proposed section 27(2A) of the Trustee Ordinance provides that the exercise of a trustee s power of delegation must not result in a trust (which has more than one trustee) having only one attorney or one trustee administering the trust (unless the attorney or trustee is a trust corporation). The FSTB clarified in the Conclusions that this requirement only applies if a trustee exercises the default power of delegation under section 27. This restriction is therefore of little relevance where professional trustees exercise an express power of delegation under the trust instrument. Review of Agents, Nominees and Custodians It is proposed that a trustee must keep under review the arrangements under which the agents, nominees and custodians act and how those arrangements are being put in effect, and intervene where necessary. The Conclusions clarified that such review should be carried out as frequently as the circumstances may reasonably require according to the nature of the duties or transactions undertaken by the agent, nominee or custodian. As these statutory requirements apply unless they are inconsistent with the terms of the trust instrument, they will be excluded if the trust instrument express Reform of the Trustee Ordinance Consultation Conclusions 3

provides for such arrangements or expressly excludes these statutory requirements. Authorised Investments The FSTB indicated that it intends to expand the scope of authorised investments in shares contained in the Second Schedule to the Trustee Ordinance by lowering the issuer market capitalisation requirement from HK$10 billion to HK$5 billion and by relaxing the current five-year cash dividend requirement to a cash or non-cash dividend requirement in respect of three of the previous five years. The list of authorised investments will be kept under review in light of market developments. As trust instruments used in bond transactions usually contain express provisions on the scope of authorised investments, this change is unlikely to have any impact on professional trustees. Likely Impact of Proposed Trust Law Reforms on Capital Market Transactions The FSTB looks set to introduce the reform proposals into the legislature in the current legislative year. In anticipation of the proposals being enacted into law, trustees should assess whether their existing exemption clauses would be rendered invalid when the new statutory controls come into effect and ensure that going forward (and in relation to existing continuing transactions to the extent practicable) they are brought in line with the new restrictions. In relation to trusts created before the commencement date of the amending ordinance, the statutory limitations on trustee liability exemption clauses are proposed to apply one year after the commencement date and the legality or validity of anything done before the expiry of such one-year period will not be affected. As the statutory carve-outs are largely consistent with the standard formulation for exemption clauses used by a number of professional bond trustees, we expect that their introduction will not have a significant effect. As regards the new statutory duty of care, it seems unavoidable that existing trusts will become subject to the new statutory duty unless the existing trust documentation contains a provision that is sufficient to displace the statutory duty. However, as the statutory duty generally reflects the current common law position, this again is unlikely to be of real concern to professional bond trustees. Similarly, the application to existing trusts of the provisions on beneficiaries rights to remove trustees should not cause concern to professional bond trustees if existing trust documentation already provides for the retirement and removal of a trustee. Save as discussed above, the trust reform proposals can be excluded by the trust instrument. Through careful drafting of the trust instrument, professional trustees can ensure that, when the reforms come into effect, they will have minimal impact on their obligations and practice going forward. Reform of the Trustee Ordinance Consultation Conclusions 4

Contacts For further information please contact: Andrew Malcolm Partner +852 2842 4803 andrew.malcolm@linklaters.com Mary Matson Counsel +852 2901 5126 mary.matson@linklaters.com This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters. All Rights reserved 2012 Linklaters Hong Kong is a law firm affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com. Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. 10th Floor, Alexandra House Chater Road Hong Kong Telephone (+852) 2842 4888 Facsimile (+852) 2810 8133/2810 1695 Linklaters.com Reform of the Trustee Ordinance Consultation Conclusions 5 A15891893/1.0/28 Nov 2012