A Comparison of Business Income Trust
Governance and Corporate Governance:
Is There a Need for Legislation
or Further Regulation?
Mark Gillen *
This paper compares corporate governance to the
governance of business income trusts, highlighting
corporate governance features that may be lacking in
business income trust governance. One observation
drawn from this comparison is that declarations of trust
for income trusts largely replicate provisions of
the Canada Business
corporate statutes such as
Corporations Act (CBCA). There are, however,
features of the CBCA that are not replicated. These
include shareholder proposals, the appraisal remedy, the
derivative action, and the oppression remedy. The
avoidance of these rights and remedies may be to the
disadvantage of investors. This disadvantage could be
addressed either by statute or through securities
regulatory or
If
legislation simply replicates corporate governance in an
income trust structure, however, the only remaining
difference would be tax treatment. A difference in tax
treatment for two otherwise essentially identical forms
of organization would be hard to justify in terms of tax
policy, particularly in light of the underlying tax
principle of neutrality.
stock exchange
requirements.
Cet article tablit une comparaison entre la
gouvernance dentreprise et
la gouvernance des
fiducies de revenus daffaire en mettant en valeur
certaines caractristiques propres la gouvernance
dentreprise qui ne font pas partie de la gouvernance
des fiducies de revenus daffaire. A partir de cette
comparaison, lauteur observe que les dclarations de
fiducie dans les fiducies de revenu reprennent en
grande partie les dispositions de la Loi canadienne sur
les socits par actions, lexception cependant de
certaines caractristiques de cette loi comprenant les
propositions dactionnaires, la demande dvaluation
judiciaire, laction indirecte et le recours en cas dabus
de droit. Labsence de ces droits ainsi que de ces
recours peut constituer un dsavantage pour les
investisseurs. Il serait toutefois possible de remdier
ce dsavantage par ladoption dune loi, par la
rglementation du march des valeurs mobilires ou
encore par la mise en place de formalits visant
rglementer les transactions sur le march boursier. Si
une
la gouvernance
dentreprise tait introduite dans une structure de
fiducie de revenu, lunique diffrence qui demeurerait
entre les deux modles se trouverait au niveau du
traitement fiscal. Une diffrence au niveau du
traitement fiscal pour deux structures organisationnelles
qui sont pour le reste en tous points identiques
savrerait difficile justifier, surtout en ayant lesprit
le principe de neutralit sous-jacent en matire de
fiscalit.
loi reproduisant simplement
* Faculty of Law, University of Victoria. The research for this paper was supported by the Capital
Markets Institute. I am also indebted to Daphne Yew, my research assistant, who assisted in the
research for this paper.
Mark Gillen 2006
To be cited as: (2006) 51 McGill L.J. 327
Mode de rfrence : (2006) 51 R.D. McGill 327
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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Introduction
I. Basic Structure
II. Regulatory Environment
III. Unitholder Control in Business Income Trusts Is Indirect
IV. Specific Comparisons of Corporate Governance and
Business Income Trust Governance
A. Investor Rights
1. Voting Rights
a. Common Corporate Law Requirements
b. Trust Level
c. Operating Entity Level
d. Summary
2. Disclosure
a. Prospectus Disclosure
b. Continuous Disclosure
c. Timely Disclosure
3. Meeting Process
a. Common Corporate Law Requirements
b. Trust Level
B. Management Structure and Powers
1. Trustee Board Structure and Management Board Structure
a. Common Corporate Law Requirements
b. Trust Level
c. Operating Corporation Level
d. Trustees as Directors of the Operating Corporation
2. Trustee Board Powers and Management Board Powers
3. Duties of Directors and Officers
a. Common Corporate Law Rules
b. Trust Level
C. Investor Remedies
1. Personal Action
2. Derivative Action
a. Derivative Action in Corporate Law
b. Similar Actions in the Trust Context
c.
Income Trust Unitholders and Derivative Actions
Concerning the Operating Corporation
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3. Oppression Remedy
a. Operating Corporation Level
b. Trust Level
4. Appraisal
5. Compliance
6.
Investigation
V. Summary of Differences in Governance Provisions
A. Disclosure
1. Declarations of Trust on the SEDAR Database
2. Continuous Disclosure
B. Requirements to Requisition a Security Holder Meeting
C. Unitholder Proposals
D. Remedies
1. Derivative Action
2. Oppression Remedy
3. Appraisal
VI. Other Governance Concerns
A. External Management Contracts
B. Executive Compensation
C. Stability Ratings and Disclosure of Stability Ratings
D. Calculations of Distributable Cash
E. Refinancing in an Economic Downturn
VII. Is There a Need for Legislation?
A. Introduction
B. Legislation to Control Against Potential Abuse
1. Potential for Management Abuse
2. Control of Abuses by the Market, Securities Regulators,
or the Stock Exchange
3. Are Existing Differences Abusive?
4. Minimum Standards That Might Be Adopted
5. Regulatory Competition
C. Legislation as a Means of Reducing Transaction Costs
VIII. Tax Neutrality and Legislation That Replicates Corporate
Law Statutes
Conclusion
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Introduction
Income trust structures were used in the past for real estate investment trusts and
oil and gas royalty trusts.1 More recently, a variation of these trusts has been used to
raise capital for a wide variety of businesses including restaurants, consumer
products, transportation, and industrials.2 These business income trusts are used to
distribute operating entity income to a trust in the form of interest or royalty
payments. The income is then distributed to trust unitholders. The deduction of
interest or royalty payments to the trust reduces tax at the operating entity level.
Distributing these amounts to investors through the trust allows the operating
revenues (net of expenses other than the interest or royalties paid to the trust) to flow
through to the investors to be taxed in their hands.
Business income trusts had become so popular by 2002 that eighty-six per cent of
initial public offerings (IPOs) were income trusts.3 By February 2003 there were
over one hundred income trusts listed on the Toronto Stock Exchange, with a market
capitalization of over $45 billion.4 In September 2003, it was reported that there were
$60 billion worth of income trusts and the amount was expected to grow to $150
billion within two years.5 The growing importance of business income trusts caught
the attention of the media, leading to numerous newspaper and magazine articles on
various aspects of business income trusts.6 It might have been a temporary
1 See Michael Torkin, Real Estate Investment in the 1990s: An Analysis of REITs (1997-98) 13
B.F.L.R. 199 at 206-11, which discusses the development of real estate investment trusts in Canada in
the 1990s. Although oil and gas royalty trusts gained renewed popularity in the 1980s, Waters says the
development of these trusts can be traced to the 1920s and early 1930s (Donovan W.M. Waters, Mark
R. Gillen & Lionel D. Smith, Waters Law of Trusts in Canada, 3d ed. (Toronto: Carswell, 2005) at
457, n. 60).
2 See prospectuses available through SEDAR Search for Public Company documents, online:
SEDAR
business see e.g. A&W Revenue Royalties Income Fund, The Keg, and Boston Pizza. For consumer
products see e.g. FP Newspapers, Heating Oil Partners, and Consumers Waterheater. For
transportation see e.g. IAT Air Cargo and Westshore Terminals. For industrials see e.g. Advanced
Fibre, BFI, and Superior Propane.
3 See Michele Robitaille & Mike Hoehn, Business Income Trusts Evolving into a Core Asset
Class, National Bank Financial: Equity Research (6 March 2003) at 1. See also IPO Activity Falls
Off in First Half Ottawa Business Journal (7 July 2003), online: Ottawa Business Journal archives
in the IPO market was less significant in the first half of 2003, they still accounted for 45% of IPOs
and for 80% of their gross value.
4 Robitaille & Hoehn, ibid. at 1. See also Andrew Willis, Business Trusts No Laughing Matter
Globe and Mail (24 June 2003) B5, where the author put the number of income trusts at 111 [Willis,
No Laughing Matter].
5 See Andrew Willis, Ontario Election Call Puts Trust-Liability Issue on Hold Globe and Mail (9
September 2003) B18.
6 See e.g. IPO Activity, supra note 3, noting the increasing importance of income trusts in the
IPO market; Fabrice Taylor, Will Feds Spoil Trust Tax Rush? Globe and Mail (23 June 2003) B5;
331
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phenomenon. Income trust IPOs dipped somewhat in 2003, but increased again in
2004 and 2005. Income trust offerings in the first half of 2005 accounted for $1.8
billion (or nearly seventy per cent) of the $2.6 billion worth of IPOs in that period.7
One investor service listed 116 business income trusts as of July 2005.8
Lawyers, dealers, and institutional investors expressed concern over the potential
exposure of unitholders to liability, which led to legislation in Ontario, Alberta,
British Columbia, and Manitoba aimed at putting the unitholders on par with
shareholders in terms of their exposure to liability.9 When the Ontario government
announced in its budget speech in February 2003 that it would introduce legislation
dealing with the issue of unitholder liability, it also noted that it would look into
income trust governance issues.10
The introduction of a trust that distributes trust units to investors, instead of a
direct distribution of shares of the operating corporation, creates an opportunity to
avoid many of the mandatory corporate law governance provisions intended to
protect investors who buy shares in a corporation.11 An important question is the
extent to which income trusts provide governance provisions that correspond to
corporate governance provisions. Another important question is the extent to which
existing legal mechanisms require them to provide corresponding provisions. The
purpose of this paper is to compare corporate governance to business income trust
governance and highlight what corporate governance features may be lacking in
business income trusts.
Willis, No Laughing Matter, supra note 4; Elizabeth Church et al., A Matter of Trust Globe and
Mail (23 June 2003) B1; Rob Carrick, Putting Trust in Trusts Globe and Mail (1 June 2002),
online: Globeinvestor.com
B1; Amanda Long, Nothing in Life is FreeTrusts Included Globe and Mail (23 June 2003) B6.
7 See Sinclair Stewart, Hot Trust Sector Yields IPO Bonanza Globe and Mail (6 July 2005) B1.
Although income trusts are said to be interest rate sensitive, it has been suggested that an increase in
interest rates wont spell the end for income trusts. See Wayne Cheveldayoff, Interest Rates Wont
Scuttle Income Trusts Daily Gleaner (8 July 2005).
8 For up-to-date information see Investcom, Income Trusts, online: Investcom.com
9 The Government of Ontario proposed a Trust Beneficiaries Liability Act, introduced as Schedule L
to Bill 41, An Act to Implement Budget Measures, 4th Sess., 37th Leg., Ontario, 2003 (first reading 22
May 2003). The legislature was dissolved prior to the election, before the legislation was enacted. The
legislation was later enacted in a subsequent session: see the Trust Beneficiaries Liability Act, 2004,
S.O. 2004, c. 29, Schedule A [Trust Beneficiaries Liability Act]. See also Income Trusts Liability Act,
S.A. 2004, c. I-1.5 [Alberta Income Trust Act]; Income Trust Liability Act, S.B.C. 2006 c. 14 [B.C.
Income Trust Act]; Investment Trust Unitholders Protection Act, S.M. 2005, c. 36 [Manitoba
Unitholders Protection Act]. See also Bill 40, An Act respecting Income Trusts, 2d Sess., 25th Leg.,
Saskatchewan, 2006 (Third Reading 1 May 2006).
10 See 2003 Ontario BudgetThe Right Choices: Securing Our Future at 13, online: Ontario
Minister of Finance
11 See Part II, below, infra note 18-28 and the accompanying text noting the flexible nature of trust
law and the consequent potential for avoiding mandatory corporate law provisions.
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One observation drawn from this comparison is that declarations of trust for
business income trusts largely replicate provisions of corporate statutes, such as the
Canada Business Corporations Act.12 There are, however, features of the CBCA that
are not replicated. These include shareholder proposals, the appraisal remedy, and, at
least at the trust fund level, the derivative action and the oppression remedy. The
avoidance of these investor rights and remedies may be to the disadvantage of
investors. This disadvantage could be addressed by legislation that mandates these
rights for unitholders in business income trusts or by additional securities regulatory
or stock exchange requirements. If such legislation or regulation only recreates
existing corporate statutes in a trust context, what purpose would it serve? If the only
remaining difference were in tax treatment, what could be the tax policy reason for
the difference in treatment, particularly in light of the accepted principle of neutrality?
If, however, avoiding corporate statute rights and remedies actually increases firm
value, perhaps it is time to review the efficacy of these corporate rights and remedies.
If such a review leads to corporate law modifications, so corporate law comes into
line with income trust governance, the same concern arises: why have different tax
treatment for two essentially identical forms of organization?
Part I of the paper sets out the basic structure of business income trusts, which is
essential to assessing the extent to which the rights given to unitholders correspond to
the rights they would have as shareholders in a corporation. Part II outlines the legal
environment for the regulation of corporate governance and compares it to the legal
environment for the regulation of business income trusts. Part III notes the indirect
nature of unitholder control at the level of the entity carrying on the underlying
business operations (the operating entity) and the need to assess unitholder
governance at the level of both the trust and of the operating entity. Part IV provides
specific comparisons of corporate governance and business income trust governance.
Part V summarizes and discusses key differences between business income trust
governance and governance under corporate statutes. Part VI notes other governance
concerns that may arise in the context of business income trusts. Part VII discusses
the need for a business income trust statute, and Part VIII recommends a
reconsideration of tax policy or a reconsideration of those corporate law provisions
that business income trusts avoid.
I. Basic Structure
A wide variety of business income trust structures have been used and
generalizations are difficult.13 For the purposes of the discussion that follows, it is
useful to keep in mind a simple structure and a few modified versions of it.
12 R.S.C. 1985, c. C-44 [CBCA].
13 See Robitaille & Hoehn, supra note 3 at 44, 61-66, where the authors provide a breakdown of six
general structures.
333
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Diagram A
A very simple business income trust structure (see Diagram A) is one in which a
trust fund has sold units to the public. The funds raised are invested in an entity that
carries on the business operations. Unitholders are the beneficiaries of the trust.
Trustees hold the equity interests in the operating entity, with the majority of funds
advanced to the operating entity as a loan. The terms of the loan allow for most of the
before-interest expense income of the operating entity to be distributed to the trustees
as interest, thereby reducing the taxable income of the operating entity. The trustees
can then distribute the amounts they receive from the operating entity to unitholders,
so the pre-interest income of the operating entity flows through to unitholders to be
taxed in their hands. The devices for extracting income from the operating entity may
include the acquisition of rights to its trade names or marks which are then licensed
back to the operating entity in exchange for royalty fees. The operating entity is
normally a corporation, which provides limited liability for the trustees as
shareholders. In some cases, however, the operating entity is a limited partnership or
another trust.14
14 For examples where the operating entity is a limited partnership, see e.g. Consumers Waterheater
Income Fund, prospectus, 5 December 2002, available through SEDAR Search, supra note 2; Bell
Nordiq Income Fund, prospectus, 9 April 2002, available through SEDAR Search, supra note 2;
Noranda Income Fund, prospectus, 18 April 2002 at 16, available through SEDAR Search, supra note
2. In some cases, the operating entity is an operating trust, the units of which are held by the trustees
of the trust that issues units to the investing public (this trust is usually referred to as the Income
Fund). See e.g. Great Lakes Hydro Income Fund, prospectus, 28 June 2000 at 2, available through
SEDAR Search, supra note 2; Clean Power Income Fund, prospectus, 30 October 2002 at 4, available
through SEDAR Search, supra note 2.
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Diagram B
A modification to this simple structure is the insertion of one or more limited
liability entities between the trust fund and the operating entity. A limited partnership
is frequently used (see Diagram B). The trustees own limited partnership interests and
the limited partnership owns equity interests in the underlying operating entity. The
general partner in the limited partnership is normally a corporation.15 In some
business income trusts, there is an additional trust (see Diagram C).16 The trust fund
that distributes units to the investing public is often referred to as the income fund
and the trustees of the income fund are beneficiaries of another trust, often referred to
as the operating trust.17 The trustees of the operating trust own the limited
partnership interests and receive, at least initially, the distributions of interest or
royalties from the operating entity.
15 Structures with limited partnerships are briefly described in Robitaille & Hoehn, supra note 3 at
63-64. See e.g. Menu Foods Income Fund prospectus, 10 May 2002 at 14, 17, 40, available through
SEDAR Search, supra note 2. The general partner in the limited partnership is Menu Foods General
Par Limited, a corporation incorporated under the laws of Ontario. The operating trust owns all the
shares of the general partner.
16 In some cases, the trustees of operating trusts directly own the operating assets. See e.g. Great
Lakes Hydro Income Fund, supra note 14; Clean Power Income Fund, supra note 14. In other cases,
the trustees of the operating trust own interests in the operating entity. See e.g. Bell Nordiq Income
Fund, supra note 14; Noranda Income Fund, supra note 14. In still other cases, the trustees own
interests in an entity that owns interests in the operating entity. See e.g. Menu Foods Income Fund,
ibid.
17 See e.g. Menu Foods Income Fund, ibid.; Bell Nordiq Income Fund, ibid.; Noranda Income Fund,
ibid. A structure with both an operating trust and fund trust is also briefly described in Robitaille &
Hoehn, supra note 3 at 62.
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
Diagram C
335
In some structures, trustees may have very limited control over management of
the operating entity. For instance, the operating entity may enter into a management
contract with another corporation that manages significant aspects of its business.
Another structure that limits control occurs where the loan from the trustees is made
to a royalty corporation that owns the trade name and marks under which the business
is operated. The royalty corporation then licenses the trade name and marks to the
entity that carries on the business, but the trustees do not own the equity interests in
the operating entity (see Diagram D).
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Diagram D
Key documents include a trust instrument, usually entitled declaration of trust,
which sets out the terms of the trust, and a note indenture setting out the terms of the
loan between the trustees and the operating entity. The declaration of trust is the
primary source of governance provisions for the trust.
II. Regulatory Environment
In common law jurisdictions, a corporation is normally subject to the statute
under which it was incorporated and the case law in the jurisdiction where it was
incorporated.18 A corporation will be subject to securities law requirements in
jurisdictions in which it distributes securities to the public.19 If the corporation lists its
securities on an exchange, it will be subject to requirements of the exchange.20
18 See National Trust Co. v. Ebro Irrigation & Power Co., [1954] O.R. 463 at 478, [1954] 3 D.L.R.
326 (H.C.); Brown, Gow, Wilson v. Beleggings-Soceiteit N.V., [1961] O.R. 815 at 829, 29 D.L.R. (2d)
673 (H.C.J.). See also Jean-Gabriel Castel & Janet Walker, Canadian Conflict of Laws, 6th ed.,
looseleaf (Markham, Ont.: Butterworths, 2005) at para. 30.1.
19 For instance, subject to an exemption, a person or company that distributes securities is required
to provide a prospectus. See e.g. Securities Act, R.S.O. 1990, c. S-5, s. 53 [OSA]; Securities Act,
R.S.B.C. c. 418, s. 61 [BCSA]. Once securities have been distributed under a prospectus, the issuer
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Normally, a trust will be subject to the trust law of the jurisdiction designated in
the trust instrument,21 or failing that, the jurisdiction with which the trust is most
closely connected.22 It will be subject to the securities law requirements of
jurisdictions in which it distributes units subject to a prospectus requirement.23 If units
of the trust are listed on an exchange, it also will be subject to the requirements of the
exchange.24
The key difference between the two is that the trust is governed by trust law,
while the corporation is governed by corporate law. Corporate statutes in Canada
generally have several mandatory provisions that provide certain rights to
shareholders.25 Trust law is primarily case-based and is very flexible.26 While trust
becomes a reporting issuer (OSA, ibid., s. 1(1); BCSA, ibid., s. 1(1)), and is subject to continuous
disclosure requirements such as financial disclosure (OSA, ibid., ss. 77-79; Securities Rules, B.C. Reg.
194/97, s. 112 [B.C. Reg 194/97]), proxy solicitation (OSA, ibid., ss. 84-88; BCSA, ibid., ss. 116-19),
reporting of insider trades (OSA, ibid., ss. 107-109; BCSA, ibid., s. 87), and reporting of material
changes (OSA, ibid., s. 75; BCSA, ibid., s. 85).
20 The Toronto Stock Exchange requires each listed company to sign a Listing Agreement that
makes the company subject to the rules and policies of the exchange. The company agrees to comply
with all Exchange requirements applicable to listed companies, including Exchange rules, policies,
rulings and procedural requirements, and any additions or amendments which may be made thereto
from time to time … (Listing Agreement in Toronto Stock Exchange Company Manual (N.p.: CCH
Canadian, 2006) at s. 351 and Appendix A at 1038, para. 1 [Listing Agreement], online: Toronto
Stock Exchange
21 See Frymer v. Brettschnieder (1992), 10 O.R. (3d) 157, 9 C.P.C. (3d) 294 (Gen. Div.), affd
(1994), 19 O.R. (3d) 60, 115 D.L.R. (4th) 744 (C.A.). See also Jean-Gabriel Castel & Janet Walker,
supra note 18 at 28.2(b). Where there is no designation by the settlor, the residence of the trustee will
be a significant factor in determining the applicable law for administration of the trust. See Branco v.
Veira (1995), 8 E.T.R. (2d) 49 (Ont. Gen. Div.). See also Convention on the Law Applicable to Trusts
and on their Recognition at art. 6, online: Hague Conference on Private International Law
convention has not been ratified in the United States and has not been extended to or implemented in
the provinces of Ontario, Quebec, or Nova Scotia. It has been implemented by other provinces in
Canada. See the conventions of the Hague Conference on Private International Law, online: Hague
Conference on Private International Law,
22 Castel & Walker, ibid. at 28.2(b).
23 See e.g. OSA, supra note 19, s. 53; BCSA, supra note 19, s. 61. Trust units are likely to be
considered securities under provincial securities legislation. A business income trust unit could be
covered under any of several elements of the definition of security common in provincial
legislation. See e.g. OSA, ibid., s. 1(1). Business income trust units could fall within paragraph 1(1)
security (e) as a unit; under paragraph 1(1) security (h) as a certificate of share or interest in a
trust …; and failing these, either paragraph 1(1) security (n) as an investment contract; or
paragraph 1(1) security (i) as a profit-sharing agreement or certificate. Given the similarity of a
unit in a business income trust to a share in a corporation, and given the jurisprudence on the
expression investment contract, it would be highly unlikely that a unit in a business income trust
would not be considered a security under provincial securities legislation.
24 In TSX Company Manual, supra note 20, Part I, a company is defined to include a trust. A trust
that lists units on the Toronto Stock Exchange would have to enter into a listing agreement.
25 See e.g. CBCA, supra note 12, ss. 173, 183, 211, 176, 241, 190.
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law developed with a view, in part, to protecting the interests of beneficiaries, they
were usually beneficiaries of estate-planning trusts.27 They were not usually
investors.28 Trust law thus does not have the kinds of provisions found in corporate
law to provide rights to shareholders. Since trust law is flexible, however, a trust
instrument could be drafted in a way that replicates for unitholders most of the rights
that shareholders in a corporation would have in Canada. Although replication of
shareholder rights in a trust instrument is possible, no feature of trust law makes it
mandatory.
Units of business income trusts in Canada are typically publicly traded and listed
on the Toronto Stock Exchange (TSX), so business income trusts are subject to
securities regulatory control and to control by the TSX. Either securities regulators or
the TSX could require that business income trusts replicate standard corporate
governance features. Securities regulators could use their public interest discretion by
refusing to issue a receipt for a prospectus where unitholders were not given rights
26 With respect to the duty of care, see e.g. Re Poche (1984), 6 D.L.R. (4th) 40, 16 E.T.R. 68 (Alta.
Q.B.) where it was held that a trust instrument may not waive the liability of a trustee for gross
negligence. It was implicit that the trust instrument can otherwise waive the duty of care. The court
cited several cases in which waiver provisions were considered. More recently in Armitage v. Nurse
(1997), [1998] Ch. 241, [1997] 2 All E.R. 705 (C.A.) [Armitage cited to Ch.], Millet L.J. on behalf of
the court noted that there was an irreducible core of obligation owed by trustees, but went on to note
that [t]he duty of the trustees to perform the trusts honestly and in good faith for the benefit of the
beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is
sufficient (Armitage, ibid. at 253-54). With respect to conflicts of interest, see e.g. Kelly v. Cooper
(1992), [1993] A.C. 205, [1992] 3 W.L.R. 936 (P.C.). In an agency context, there were said to be
implied terms varying the duty of the agent not to put itself in a position where its interests conflicted
with those of the principal. The case varied the duty of the agent to keep the principal informed about
matters of concern to the principal). See also Space Investments Ltd. v. Canadian Imperial Bank of
Commerce Trust Co. (Bahamas) Ltd., [1986] 1 W.L.R. 1072, [1986] All E.R. 75 (P.C.). The court
noted that, [a]lthough as a general rule, a trustee is not allowed to derive a benefit from trust property,
that general rule may be altered by the express terms of the trust instrument (ibid. at 1075).
27 Many of the cases that laid the foundations of trust law are from the nineteenth century and early
part of the twentieth century. See Gregory S. Alexander, The Transformation of Trusts as a Legal
Category, 1800-1914 (1987) 5 L.H.R. 303 at 322-49. While the business trust (i.e., the use of a trust
as a means of organizing for the carrying on of business) appears to have begun in England near the
beginning of the eighteenth century, this use of the trust is one which historically has found only
occasional popular appeal (Robert D. Flannigan, The Nature and Duration of the Business Trust
(1984) 6 E.&T.Q. 181 at 181). See generally Robert D. Flannigan, Business TrustsPast and
Present (1982-84) 6 E.&T.Q. 375 [Flannigan, Past and Present].
28 There was limited use of business trusts in England in the nineteenth century and mutual funds
did not appear in England until the 1930s. See Flannigan, Past and Present, ibid. at 375-78. See also
John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce (1997)
107 Yale L.J. 165 at 165-66, 189. Langbein says that the main forms of commercial trust are
twentieth-century inventions.
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comparable to those provided in corporate statutes.29 The TSX could also refuse to
approve a listing for a business income trust that did not provide such rights.30
Where business income trust units are publicly traded in Ontario and listed on the
TSX, regulation by the Ontario Securities Commission sets the same governance
requirements required of corporations. For instance, Ontario Securities Commission
Rule 61-501 concerning related-party transactions would apply, as would National
Instrument 58-101.31
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III. Unitholder Control in Business Income Trusts Is Indirect
Although the trust instrument may be able to effectively recreate a corporate
structure, with unitholder rights mimicking those provided by a corporate statute, the
business income trust complicates the structure. The structure has at least two tiers32
and unitholders are thus one step further removed from the managers of the
underlying operating entity. Unitholder control over management of the operating
entity is exercised through the trustees who hold the shares (or other interests) and
can exercise the rights associated with them. Unitholder control of the management of
the underlying entity is indirect. They either direct the trustees concerning, for
instance, voting on corporate fundamental changes, or they replace the trustees33
where they feel the trustees have not effectively monitored the management of the
underlying operating entity.
Declarations of trust for income trusts typically set out a regime for unitholders
similar to that for shareholders. Unitholders elect the trustees and can vote to remove
29 See e.g. OSA, supra note 19, which provides that the Director shall issue a receipt for a
prospectus filed under this Part unless it appears to the Director that it is not in the public interest to do
so (ibid., s. 61). See also BCSA, supra note 19, s. 64.
30 As noted above at note 20, the TSX requires a person listing on the Exchange to enter into a
listing agreement. The opening words of the standard form listing agreement provide that [i]n
consideration of the listing on Toronto Stock Exchange … the Applicant agrees with the Exchange as
follows: … (Listing Agreement, supra note 20). The Listing Agreement is contractual in nature.
The TSX could refuse to enter into a listing agreement with the business income trust if its declaration
of trust did not provide certain terms specified by the exchange.
31 Disclosure of Corporate Governance Practices, O.S.C. NI 58-101 (17 June 2005) [National
Instrument 58-101].
32 See Part I, above.
33 Typically, a declaration of trust grants voting rights regarding the election and removal of trustees
comparable to those provided for in the CBCA, supra note 12, ss. 106(3), 109. See e.g. A&W Revenue
Royalties Income Fund, Declaration of Trust, 18 December 2001, ss. 8.2, 8.6, available through
SEDAR Search, supra note 2 [A&W Declaration]; BFI Canada Income Fund, Amended and Restated
Declaration of Trust, 15 April 2002, ss. 8.2, 8.6, available through SEDAR Search, supra note 2 [BFI
Declaration]; Chemtrade Logistics Income Fund, Amended and Restated Declaration of Trust, 11 July
2001, ss. 8.2, 8.6, available through SEDAR Search, supra note 2 [Chemtrade Declaration].
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trustees.34 They can requisition a meeting of unitholders.35 They vote on other
important matters, such as the amendment of the declaration of trust, the sale of all or
substantially all of the trust assets, or the dissolution of the trust.36 The meeting
process is similar to the meeting process for shareholders of a CBCA corporation.37
There are important differences, however. Unitholders normally do not directly elect
the management board of the underlying operating entity.38 Although trustees are
typically required to obtain unitholder consent to certain operating entity fundamental
changes,39 they do not directly control fundamental changes in the underlying entity.
In comparing the governance of business income trusts to that of corporations in Part
IV below, the analysis looks at the rights of unitholders at the trust level and also at
the level of the operating entity.
The discussion below assumes that trustees of the trust that has issued units to the
public have either direct or indirect control over the equity interests of the operating
entity. It should be noted, however, that while this situation is normal, there are
exceptional situations in which trustees have neither direct nor indirect control of the
operating entitys equity interests.40 There are also some situations in which the
operating entity has entered into a management contract that significantly impinges
on the degree of control over management of the operating entity, even if trustees
have direct or indirect control over the equity interests.
IV. Specific Comparisons of Corporate Governance and Business
Income Trust Governance
This Part compares the governance of business income trusts to that of
corporations. Section A looks at investor rights, noting the particular voting rights, the
34 See e.g. A&W Declaration, ibid., ss. 8.2, 8.6; BFI Declaration, ibid., ss. 8.2, 8.6; Chemtrade
Declaration, ibid., ss. 8.2, 8.6.
35 Typically, a declaration of trust contains a section comparable to CBCA, supra note 12, s. 143.
See e.g. A&W Declaration, ibid., s. 12.2; BFI Declaration ibid., s. 12.1; Chemtrade Declaration, ibid.,
s. 12.5.
36 See CBCA, ibid., ss. 211, 189. Compare A&W Declaration, ibid., ss. 11.1, 14.2, 9.4(a)(iii), 9.4(b);
BFI Declaration, ibid., ss. 11.1, 12.6, 14.2, 9.4(a)(iii), 9.4(b); Chemtrade Declaration, ibid., ss. 11.1,
14.2, 9.4(a)(iii), 9.4(b).
37 See Part IV.A.3, below.
38 There are some exceptions. First, it is not uncommon for the trustees to also serve as the directors
of the operating entity. The elections of trustees thus may be tantamount to an election of directors of
the operating entity. Second, some declarations of trust call for trustees to vote only for directors
approved by unitholders. See e.g. BFI Declaration, ibid.
39 See e.g. A&W Declaration, supra note 33, s. 9.4(a); BFI Declaration, ibid., s. 9.4(a); Chemtrade
Declaration, supra note 33, s. 9.4(a).
40 For instance, according to the A&W prospectus, the trustees own equity interests in a corporation
that licenses the trademark to the operating entity. The licensing corporation does not own the
operating entity. The licensing corporation is partly owned by the operating entity. See A&W Revenue
Royalties Income Fund prospectus, 8 February 2002 at 12, available through SEDAR Search, supra
note 2 [A&W Prospectus].
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
disclosure that supports those rights, and the process through which those rights are
exercised. Section B looks at the management structure, noting the structure of the
board of trustees and the board of the underlying operating entity as well as the
powers and duties of the trustees. Section C examines the remedies available to
investors.
341
A. Investor Rights
1. Voting Rights
a. Common Corporate Law Requirements
Shareholders in a corporation have a right to vote on certain matters. They vote to
elect directors.41 They can also vote to remove one or more directors.42 They normally
vote to appoint auditors43 and on certain fundamental changes including the
amendment of the articles,44 an amalgamation,45 a sale, a lease, or an exchange of all
or substantially all of the corporations assets,46 or a voluntary dissolution of the
corporation.47 Voting on fundmental changes requires a supermajority vote,48 which
under the CBCA is two-thirds of the votes cast.49 In addition, where a corporation has
more than one class of shares, certain fundamental changes may require separate
special resolutions from affected classes of shares.50
b. Trust Level
Declarations of trust for business income trusts typically give unitholders the
right to elect and to remove the trustees of the fund by majority vote.51 Unitholders
also typically must approve appointment of an auditor.52
41 CBCA, supra note 12, s. 106(1); Ontario Business Corporations Act, R.S.O. 1990, c. B-16, s.
119(4) [OBCA].
42 CBCA, ibid., s. 109; OBCA, ibid., s. 122.
43 CBCA, ibid., s. 162; OBCA, ibid., s. 149. Note that corporate statutes usually provide that
shareholders can vote to waive the appointment of an auditor if the corporation has not made a
distribution to the public. CBCA, ibid., s. 163; OBCA, ibid., s. 148.
44 CBCA, ibid., s. 173; OBCA, ibid., s. 168.
45 CBCA, ibid., s. 183; OBCA, ibid., s. 176.
46 CBCA, ibid., s. 189; OBCA, ibid., s. 184.
47 CBCA, ibid., s. 211(3); OBCA, ibid., s. 193.
48 CBCA, ibid., ss. 173, 183, 189(3), 211; OBCA, ibid., ss. 168, 176, 184(3), 193 requiring approval
by special resolution.
49 CBCA, ibid., s. 2(1) special resolution; OBCA, ibid., s. 1(1) special resolution.
50 See e.g. CBCA, ibid., ss. 176(1), 183, 211, 189.
51 See e.g. A&W Declaration, supra note 33, ss. 8.2, 8.6; BFI Declaration, supra note 33, ss. 8.2,
8.6; Chemtrade Declaration, supra note 33, ss. 8.2, 8.6.
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Unitholders must vote to approve the amendment of the declaration of trust,53
which is the constitutional document of the trust. It is similar to the articles of
incorporation. They must also typically approve other fundamental changes that are
particularly relevant at the trust level. Two such changes (similar to fundamental
changes to a corporation) are the termination of the trust (equivalent to the dissolution
of a corporation)54 and the sale, lease, or exchange of all or substantially all of the
trust assets.55 Two other fundamental changes that typically must be approved by
unitholders are an amendment to the note indenture and a sale of the notes issued
by the underlying operating entity56 or the interests in, or connected to, the underlying
operating entity.57 The note indenture is normally the document appointing an
indenture trustee and setting out the terms on which a loan has been made to the
underlying operating entity.58 Since interest on the loan is normally the main source of
distributions to the trust, it is of vital importance to unitholders. Notes issued by the
operating entity and the interests in or connected to it are, in a sense, the raison dtre
of the unitholders investment. The sale of these interests is of fundamental
importance. Voting on these fundamental changes typically mimics the CBCA
requirement of a two-thirds majority of the votes cast.59
c. Operating Entity Level
What rights do unitholders have concerning the voting of shares of the operating
corporation? In the simplest business income trust structures, trustees are the
registered holders of the shares of the operating corporation. The trustees thus
exercise voting rights on the shares. Declarations of trust typically provide that the
unitholders must approve certain fundamental changes at the level of the operating
entity, including its voluntary dissolution, an amalgamation of the operating
corporation (or other form of combination or merger of a noncorporate operating
52 See e.g. A&W Declaration, ibid., s. 17.2; BFI Declaration, ibid., s. 17.2; Chemtrade Declaration,
ibid., s. 17.2.
Declaration, ibid., s. 11.1.
53 See e.g. A&W Declaration, ibid., s. 11.1; BFI Declaration ibid., ss. 11.1, 12.6; Chemtrade
54 See CBCA, supra note 12, s. 211. Compare A&W Declaration, ibid., s. 14.2; BFI Declaration
ibid., ss. 14.2, 12.6; Chemtrade Declaration, ibid., s. 14.2.
55 See CBCA, ibid., ss. 189. Compare A&W Declaration, ibid., s. 9.4(b); BFI Declaration, ibid., s.
9.4(b); Chemtrade Declaration, ibid., s. 9.4(b).
56 See e.g. A&W Declaration, ibid., ss. 9.4(a)(iii), 9.4(b); BFI Declaration ibid., ss. 9.4(a)(iii), 9.4(b);
Chemtrade Declaration, ibid., ss. 9.4(a)(iii), 9.4(b).
57 Usually these are shares in an operating corporation. See e.g. A&W Declaration, ibid., s. 9.4(b);
BFI Declaration, ibid., s. 9.4(b); Chemtrade Declaration, ibid., s. 9.4(b).
58 See e.g. A&W Revenue Royalties Income Fund, Note Indenture Between A&W Trade Marks
Inc. and Computershare Trust Company of Canada, 1 February 2002, available through SEDAR
Search, supra note 2; BFI Canada Income Fund, Note Indenture between BFI Canada Holdings Inc.
and Computershare Trust Company of Canada, 25 April 2002, available through SEDAR Search,
supra note 2.
59 See A&W Declaration, supra note 33, s. 9.4(b); BFI Declaration, supra note 33, s. 9.4(b);
Chemtrade Declaration, supra note 33, s. 9.4(b).
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
entity), or an amendment to its articles (or other constituting document). The trustees
are not to vote the operating entity equity interests in favour of such fundamental
changes without the approval of unitholders.60
343
d. Summary
Unitholders rights at the trust level appear to generally replicate the corporate
law regime. Unitholders have rights, roughly corresponding to those of shareholders,
to choose the trustees and to control changes in the trust that are of fundamental
importance to unitholders. They also have rights at the level of the operating
corporation that roughly replicate rights they would have as shareholders of that
corporation, except that those rights must be exercised indirectly through the trustees.
2. Disclosure
a. Prospectus Disclosure
Members of the investing public acquiring shares in a corporation are provided
with initial disclosure in the form of a prospectus. Securities laws require this
disclosure,61 and also require prospectus disclosure where units of a trust that would
constitute a security are sold to the public.62
Business income trust units are securities under provincial securities laws63 and
thus the distribution of business income trust units to the public requires a prospectus.
Part 2 of National Policy 41-20164 sets out a number of expectations the Canadian
Securities Administrators (CSA) have for income trust prospectus disclosure. These
expectations concern unique features of income trusts that should be disclosed for the
prospectus to contain full, true and plain disclosure of all material facts.65 For
instance, paragraphs 2.1 to 2.5 deal with disclosure concerning distributable cash
that forms the base from which distributions to the trust and then to unitholders can
be made. Paragraphs 2.6 to 2.9 deal with disclosure concerning material debt, that
is, debt that ranks before rights of unitholders to distributable cash. Interest charges
60 See e.g. A&W Declaration, ibid., s. 9.4(a); BFI Declaration, ibid., s. 9.4(a); Chemtrade
Declaration, ibid., s. 9.4(a). Since the declaration of trust requires the trustees to refer such changes to
unitholders, a vote on such changes without unitholder approval would be a breach of trust.
61 See e.g. OSA, supra note 19, s. 53; BCSA, supra note 19, s. 61.
62 OSA, ibid., provides that [n]o person or company shall trade in a security … where such trade
would be a distribution of such security, unless a preliminary prospectus and a prospectus have been
filed and receipts therefor obtained from the Director (ibid., s. 53). A person is defined to include a
trust. See the definition of person in OSA, ibid., s. 1(1); BCSA, ibid., ss. 1(1), 61.
63 See supra note 23 and accompanying text.
64 Income Trusts and Other Indirect Offerings, O.S.C. NP 41-201 (3 December 2004) [National
Policy 41-201].
65 Legislation requires that the issuer provide a certificate with this wording. See e.g. OSA, supra
note 19, s. 58; BCSA, supra note 19, s. 68.
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on such debt, particularly where it is floating rate debt, and breaches of financial
covenants on such debt could have a significant effect on distributions to unitholders.
National Policy 41-201 also deals with stability ratings that rate the stability of the
cash flows from the income trust. While paragraph 2.11 says that a stability rating is
not required, paragraph 2.12 provides that where one is obtained the CSA expect it to
be displayed on the cover page of the prospectus. Paragraphs 2.14 to 2.16 of the
policy also indicate the CSAs expectation that income trust prospectuses will contain
disclosure concerning the executives of the operating entity (as if the operating entity
were a subsidiary of the income trust), including management compensation,
management incentive plans, and external management contracts.
b. Continuous Disclosure
Once shares have been issued, corporate statutes in Canada require that certain
information be provided, or made available, to shareholders. This information may
assist shareholders in monitoring the performance of the corporations management
and help them make informed decisions when exercising their voting rights. These
requirements include access to specified corporate records,66 the provision of
financial statements,67 and a proxy circular.68 There are similar securities law
requirements for financial statement disclosure,69 proxy solicitation, and proxy
circular disclosure70 where the corporation has distributed securities to the public by
way of a prospectus.71 If the shares of the corporation are also listed on the TSX, there
will be a TSX requirement to provide financial disclosure as well.72 The CBCA and
similar corporate statutes in Canada also provide shareholders with access to records
such as the articles and bylaws, minutes of shareholder meetings, copies of notices of
directors and of the registered office, and access to the securities register.73 In
addition, they can request that the corporation provide a list of shareholders.74
66 CBCA, supra note 12, ss. 20, 21; OBCA, supra note 41, ss. 141, 142.
67 CBCA, ibid., s. 155; OBCA, ibid., s. 154.
68 CBCA, ibid., ss. 149, 150; OBCA, ibid., ss. 111, 112.
69 See e.g. OSA, supra note 19, ss. 77, 78; B.C. Reg. 194/97, supra note 19, ss. 144, 145. See also
Continuous Disclosure Obligations, O.S.C. NI 51-102 (2 April 2004), Part IV [National Instrument
51-102] on financial disclosure requirements.
70 See e.g. OSA, ibid., ss. 85, 86; BCSA, ibid., s. 117. See also National Instrument 51-102, ibid.,
Part IX on proxy solicitation and information circulars.
71 It is reporting issuers that are subject to the financial disclosure, proxy solicitation, and
information circular requirements. See e.g. OSA, ibid., ss. 77, 78, 85, 86; BCSA, ibid., s. 117; B.C. Reg
194/97, supra note 19, ss. 144, 145. A reporting issuer is defined under OSA as an issuer … that has
filed a prospectus and obtained a receipt therefor under [the] Act (ibid., s. 1(1)). See also BCSA, ibid.,
s. 1(1) reporting issuer (a), (b).
72 See TSX Company Manual, supra note 20 at ss. 436-54.
73 CBCA, supra note 12, ss. 20, 21(1), (1.1), (2).
74 See CBCA, ibid., s. 21.
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Securities laws also require reporting issuers to provide annual information forms and
management discussion and analysis.75
At the trust level, the declaration of trust normally gives unitholders
corresponding rights. There is usually a provision calling for the delivery of financial
statements to unitholders.76 The delivery of an information circular (corresponding to
a proxy circular) is also required.77 Even if these rights were not specifically given in
the declaration of trust, unitholders would have rights to financial disclosure and
proxy solicitation under securities laws.78
Declarations of trust for business income trusts usually also provide for access to
records, although the access is usually limited to the declaration of trust and the list of
unitholders.79 There is, however, a broader general trust law right of beneficiaries to
request that trustees, on reasonable notice, produce documents relating to the trust for
their inspection. It is not clear what documents are included. An application to court
may be necessary where the trustees dispute the obligation to disclose the particular
documents requested.80 This right of access might extend to minutes of unitholder
meetings and to bylaws passed concerning the affairs of the trust, thereby making the
right of access to documents roughly equivalent to rights of access under corporate
statutes such as the CBCA. Declarations of trust also usually provide for a list of
unitholders to be provided to a unitholder on request in a manner similar to the
CBCA.81
While disclosure at the trust level is important, disclosure of what is happening at
the operating corporation level is at least as important, if not more so. Distributions to
unitholders ultimately depend on the performance of the operating corporation.
Financial disclosure at the trust level should address this fact, since securities law
requires that the issuer provide audited financial statements.82 Generally accepted
75 See National Instrument 51-102, supra note 69 at Parts V and VI.
76 See e.g. A&W Declaration, supra note 33, s. 16.7; BFI Declaration, supra note 33, s. 16.9;
Chemtrade Declaration, supra note 33, s. 16.7.
77 See e.g. A&W Declaration, ibid., s. 16.8; BFI Declaration, ibid., s. 16.10; Chemtrade Declaration,
78 See e.g. OSA, supra note 19, ss. 77, 78; B.C. Reg. 194/97, supra note 19, ss. 144, 145; National
ibid., s. 16.8.
Instrument 51-102, supra note 69.
79 See e.g. A&W Declaration, supra note 33, s. 16.5; BFI Declaration, supra note 33, s. 16.5;
Chemtrade Declaration, supra note 33, s. 16.5.
80 On the rights of beneficiaries to disclosure see e.g. Re Ballard Estate (1994), 20 O.R. (3d) 350,
119 D.L.R. (4th) 750 (Gen. Div.); Re Murphys Settlement, [1998] 3 All E.R. 1 (Ch. D.); Re
Londonderrys Settlement (1964), [1965] Ch. 918, [1964] 3 All E.R. 855 (C.A.); Jones v. Shipping
Federation of British Columbia (1963), 37 D.L.R. (2d) 273, 41 W.W.R. 636 (B.C.S.C.). Schmidt v.
Rosewood Trust Ltd. (Isle of Man), [2003] 3 All E.R. 76, [2003] UKPC 26 provides a recent and
extensive discussion of the issue of beneficiary access to trust documents.
81 See e.g. A&W Declaration, supra note 33, s. 16.5; BFI Declaration, supra note 33, s. 16.5;
Chemtrade Declaration, supra note 33, s. 16.5.
82 OSA, supra note 19, ss. 77, 78; B.C. Reg. 194/97, supra note 19, ss. 144, 145; National
Instrument 51-102, supra note 69. These statements are to be prepared according to generally
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accounting principles require consolidated information concerning entities controlled
by the trust.83 Since the trust normally controls the shares of the operating corporation
(either directly or indirectly through a limited partnership or another trust), financial
statements should
the underlying operating
corporation. Financial statements of income trusts are generally consolidated and
provide operating corporation financial information.84 National Policy 41-201
confirms the expectation that financial statements will include disclosure of financial
information concerning the operating entity.85 It adds that where securities laws of
certain jurisdictions are ambiguous in this respect, the issuer of income trust units will
be required to provide an undertaking that the operating entity will be treated as a
subsidiary of the income trust.86
The extent to which proxy circular disclosure extends to the level of the
underlying operating corporation is an interesting question. For corporations that
have made distributions to the public, regulations under the CBCA contain specific
requirements for proxy circular disclosure.87 There is also a common law principle
that shareholders be given sufficient information to make a reasoned decision on any
matter to be voted on at a shareholders meeting.88 Provincial securities regulations
contain detailed information circular requirements. There is also a requirement that if
action other than approval of financial statements is to be taken at a meeting of
security holders, the substance of the matter … should be described … in sufficient
detail to permit security holders to form a reasoned judgment concerning the
matter.89 Where unitholders vote to approve an amalgamation of the operating
corporation, an amendment of its articles, a voluntary dissolution of the operating
accepted accounting principles, as set out in the CICA HandbookAccounting, looseleaf (Toronto:
Canadian Institute of Chartered Accountants, 1999) [CICA Handbook]. See OSA, R.R.O. 1990, Reg.
1015, s. 2; BCSA Rules ss. 1, 2. See also Notice of Rule Under the Securities Act, O.S.C. NI 14-101
(31 December 2002) [as amended].
83 See CICA Handbook, ibid. s. 1590, which deals with when financial statements should be
consolidated.
84 See e.g. Chemtrade Logistics Income Fund, 2002 Annual Report at 21, n. 2, available through
SEDAR Search, supra note 2, concerning the basis of consolidation. Whether financial statements
include a consolidation of the operating entity itself may depend on the structure of the income trust.
For instance, the A&W Revenue Royalties Income Fund Annual Report for 2002, available through
SEDAR Search, supra note 2, consolidates the accounts of the trust and of A&W Trade Marks Inc. at
19, n. 2. A&W Trade Marks Inc. does not operate the business. Instead it owns trademarks that are
licensed to A&W Food Services of Canada Inc., which operates the business. The annual report and
the management discussion and analysis therein focus on the underlying business of the operating
entity at 10-14. On the organization of the income trust, see the A&W Prospectus, supra note 40.
85 Supra note 64 at para. 3.1.
86 Ibid.
87 S.O.R./2001-512, s. 57.
88 See e.g. Pacific Coast Coal Mines Ltd. v. Arbuthnot, [1917] A.C. 607, 36 D.L.R. 564 at 571-72
(P.C.); Re N. Slater Ltd., [1947] 2 D.L.R. 311 at 313-14, O.W.N. 226 (H.C.J.); Re Natl Grocers Ltd.,
[1938] O.R. 142 at 154 (H.C.J.); Garvie v. Axmith (1961), [1962] O.R. 65, 31 D.L.R. (2d) 65 at 84-87
(H.C.J.).
89 Information Circular, B.C.S.C. BCF 54-901F (1 June 2001), Item 11.
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2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
corporation, or a sale, lease, or exchange of all or substantially all of its assets,
unitholders would have to be given information sufficient to make an informed
decision on the matter, much as if they were shareholders of the operating
corporation.
In addition to proxy disclosure, an income trust that has made a distribution of
units to the public pursuant to a prospectus will be required to provide an annual
information form and management discussion and analysis.90 National Policy 41-201
indicates the CSA expectation that these forms of disclosure for an income trust cover
information about the operating entity.91
What information should unitholders be given about the managers of the
underlying operating corporation? Arguably unitholders should be given detailed
information, particularly about the directors (or other equivalent managers in a
noncorporate operating entity). Since one of the main functions of trustees, at least in
a simple business income trust structure,92 is appointing the directors of the operating
corporation, unitholders should be given information about the directors to assess the
performance of the trustees. To the extent there is uncertainty, it might be helpful for
securities regulators to add an item to the form for a proxy circular, requiring business
income trusts to provide information about the managers of the operating entity. This
information should correspond to the information that shareholders would get in a
proxy circular concerning the managers of a corporation. National Policy 41-201
indicates that the annual information form of the income trust should provide
complete business disclosure about the operating entity. Where securities laws are
ambiguous in this regard, an undertaking to provide such disclosure will be required
before a receipt for a prospectus is provided to permit the issuance of income trust
securities.
c. Timely Disclosure
Securities laws and stock exchanges require timely disclosure to shareholders.
Most provincial securities laws require that if shares have been distributed by way of
90 See National Instrument 51-102, supra note 69, Parts IV and V.
91 Supra note 64 at para. 3.1.
92 Things may be more complex in the context of more complicated income trust structures. For
instance, the trustees of the fund may own units in an operating trust. The trustees in the operating
trust may own units in a limited partnership, which owns shares in the corporation. It may be more
difficult to argue that unitholders in the fund need information about the directors and officers of the
operating corporation if it lies three layers below the fund. The trustees of the fund have control over
the appointment of trustees of the operating trust, but the trustees of the operating trust might not have
control over the appointment of directors of the operating corporation. Their rights as limited partners
might be so limited for fear of losing their limited partnership status (by taking part in control of the
limited partnership). Nonetheless, information about who runs the operating entity from which their
returns come is important information for unitholders.
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a prospectus, the corporation must disclose material changes.93 A material change is
typically defined as a change in the business, operations or capital of the issuer that
would reasonably be expected to have a significant effect on the market price or
value of any of the securities of the issuer …94 When a material change occurs, the
corporation must issue a press release and file a report with the securities commission
as soon as possible.95 If the shares are listed on the TSX, the timely disclosure
requirement extends to material facts.96 A material fact is any fact that would
reasonably be expected to have a significant effect on the market price or value of the
issuers securities.97 The units of a business income trust are securities98 and if (as is
the normal case) they have been distributed to the public by way of a prospectus
offering, the trust will be subject to the timely disclosure requirements under
provincial securities laws.99 If units are listed on the TSX, as is also normally the case,
the timely disclosure requirement extends to material facts as well.100
The question is just how far this disclosure extends. The shares of the operating
corporation (or the equity interests of a noncorporate operating entity) in a business
income trust are not publicly distributed. Typically they will not have been part of a
prospectus offering. They will also typically not be listed on a stock exchange. The
operating entity thus will not be subject to the timely disclosure requirement either
under securities laws or TSX rules. Does the trusts timely disclosure obligation
extend to disclosure of material facts concerning the operating entity itself? Any fact
or change material for the operating entity would also be material for the trust, since
the value of the units of the trust is directly tied to the fortunes of the operating entity.
National Policy 41-201 indicates the CSA expects that material changes at the
operating entity level be reported.101
3. Meeting Process
a. Common Corporate Law Requirements
Corporate statutes in Canada require that notice of meetings be given to
shareholders of record.102 The statutes allow directors to set a record date to determine
93 OSA, supra note 19, s. 75; BCSA, supra note 19, s. 85.
94 OSA, ibid., s. 1(1). See also BCSA, ibid., s. 1(1).
95 See e.g. OSA, ibid., s. 75; BCSA, ibid., s. 85.
96 TSX Company Manual, supra note 20 at ss. 407, 410.
97 OSA, supra note 19, s. 1(1). See also BCSA, supra note 19, s. 1(1).
98 See supra note 23.
99 Reporting issuers are subject to the timely disclosure requirements. See e.g. OSA, supra note
19, s. 75. See also supra note 71.
100 See TSX Company Manual, supra note 20 at ss. 407, 410. Company is defined to include a
trust TSX Company Manual, ibid., Part I.
101 Supra note 64 at para. 3.1.
102 CBCA, supra note 12, s. 135; OBCA, supra note 41, s. 96.
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the shareholders who will be entitled to get notice.103 Corporate statutes generally
give shareholders a right to vote by proxy104 and require management of the
corporation to solicit a proxy from shareholders.105 They also typically specify that the
business of annual meetings include the presentation and approval of the financial
statements, election of directors, and appointment of auditors.106 They set out a default
quorum for the meeting107 and allow for voting by a show of hands, with a right to
demand a poll.108 Provision is also made for resolutions in writing signed by all
shareholders entitled to vote on the matter, in lieu of a meeting.109 Corporate statutes
also allow shareholders to requisition meetings.110 The CBCA allows shareholders
holding five per cent or more of the rights to requisition a meeting to vote on matters
for which the meeting is requisitioned.111 Many corporate statutes also permit a
shareholder to make a proposal to amend corporate bylaws112 or to otherwise put
matters before the shareholders using the management proxy solicitation materials.113
Not all resolutions passed by shareholders will be binding. Corporate law divides
powers between directors and shareholders. Shareholders can pass resolutions on
those matters that are within their powers. They can also pass resolutions relating to
matters falling within the powers of directors, but such resolutions are not binding on
the directors.114 Shareholder resolutions that purport to dictate to directors how they
are to exercise their powers are sometimes referred to as precatory resolutions
because they are not legally binding. They amount to no more than expressions of the
wishes of the majority of shareholders.
b. Trust Level
For the most part, corporate meeting requirements are replicated at the trust level.
Declarations of trust contain provisions for notice of meetings,115 the setting of a
103 CBCA, ibid., s. 134; OBCA, ibid., s. 95(2).
104 CBCA, ibid., s. 148; OBCA, ibid., s. 110.
105 CBCA, ibid., s. 149; OBCA, ibid., s. 111.
106 CBCA, ibid., s. 135(5); OBCA, ibid., s. 96(5).
107 CBCA, ibid., s. 139; OBCA, ibid., s. 101.
108 CBCA, ibid., s. 141; OBCA, ibid., s. 103.
109 CBCA, ibid., s. 142; OBCA, ibid., s. 104.
110 CBCA, ibid., s. 143; OBCA, ibid., s. 103(5).
111 CBCA, ibid., s. 143. OBCA, ibid., s. 103(5) also allows a requisition of a meeting by shareholders
with five per cent or more of the rights to vote on matters for which the meeting is requisitioned.
112 CBCA, ibid., s. 103; OBCA, ibid., s. 116(5).
113 CBCA, ibid., s. 137; OBCA, ibid., s. 99.
114 See e.g. Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame, [1906] 2 Ch. 34
(C.A.); Kelly v. Electrical Construction Co. (1907), 16 O.L.R. 232 (H.C.J.); Scott v. Scott, [1943] 1 All
E.R. 582 (Ch.).
115 See e.g. A&W Declaration, supra note 33, s. 12.3; BFI Declaration, supra note 33, s. 12.2;
Chemtrade Declaration, supra note 33, s. 12.2.
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record date to determine unitholders entitled to receive notice,116 a right to vote by
proxy,117 and provision for trustees to solicit proxies.118
Declarations of trust also provide that annual meetings include presentation and
approval of the financial statements, election of trustees, and appointment of
auditors.119 They set out a default quorum and allow for voting by a show of hands
with a right to demand a poll.120 They also provide for resolutions in writing, although
they differ from the CBCA by typically allowing resolutions signed by two-thirds of
unitholders entitled to vote on the matter, rather than the unanimous signing required
by the CBCA.121 Declarations of trust typically also allow unitholders to requisition
meetings, but only by unitholders holding ten per cent of the units. This requirement
contrasts to the five per cent threshold in the CBCA.122 The other significant
difference between trust regimes and corporate statutes is the lack of any right for
unitholders to make proposals to amend the trust declaration or bylaws or to put any
other matter before the unitholders using the trustee (management) notice of meeting
and proxy circular. Unitholders wanting to make proposals would have to requisition
a meeting (typically requiring unitholders holding collectively at least ten per cent of
the trust units).
Declarations of trust also contain provisions restricting the types of unitholder
resolutions that will be binding on trustees. These provisions appear to be intended to
replicate the corporate law position that only resolutions within shareholder powers
are binding. Resolutions that are binding on trustees typically include the
appointment or removal of trustees, the appointment or removal of auditors, the
appointment of an inspector, amendments to the declaration of trust, termination of
the trust, and frequently also the sale of all or substantially all of the trust assets.123
116 See e.g. A&W Declaration, ibid., s. 12.9; BFI Declaration, ibid., s. 12.8; Chemtrade Declaration,
117 See e.g. A&W Declaration, ibid., s. 12.5; BFI Declaration, ibid., s. 12.4; Chemtrade Declaration,
ibid., s. 12.8.
ibid., s. 12.4.
118 See e.g. A&W Declaration, ibid., s. 16.8; BFI Declaration, ibid., s. 16.10; Chemtrade
Declaration, ibid., s. 16.8. In any case, trustees would be required to solicit proxies by securities laws:
see e.g. OSA, supra note 19, s. 85; BCSA, supra note 19, s. 117.
119 See e.g. A&W Declaration, ibid., s. 12.2; BFI Declaration, ibid., s. 12.1; Chemtrade Declaration,
120 See e.g. A&W Declaration, ibid., ss. 12.4, 12.5; BFI Declaration, ibid., ss. 12.3, 12.4; Chemtrade
ibid., s. 12.1.
Declaration, ibid., ss. 12.3, 12.4.
121 CBCA, supra note 12 at 142. Compare A&W Declaration, ibid., s. 12.11; BFI Declaration, ibid.,
s. 12.10; Chemtrade Declaration, ibid., s. 12.10.
122 CBCA, ibid. at 143. Compare A&W Declaration, ibid., s. 12.2; BFI Declaration, ibid., s. 12.1;
Chemtrade Declaration, ibid., s. 12.5.
123 See e.g. A&W Declaration, ibid., ss. 8.2, 8.6, 17.2, 11.1, 14.2, 9.4(b); BFI Declaration, ibid., ss.
8.2, 8.6, 17.2, 11.1, 12.6, 14.2, 9.4(b); Chemtrade Declaration, ibid., ss. 8.2, 8.6, 17.2, 11.1, 14.2,
9.4(b).
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B. Management Structure and Powers
351
1. Trustee Board Structure and Management Board Structure
a. Common Corporate Law Requirements
The CBCA deals with board structure through provisions on the number of
directors,124 their qualifications,125 the circumstances in which they cease to hold
office,126 the filling of vacancies,127 and the need for nonemployee directors in
distributing corporations.128 The CBCA also sets out a default quorum requirement for
directors meetings129 and allows meetings to be held by telephone or other forms of
electronic communication.130 It deals with the validity of acts of the board in
situations where there has been an irregularity in appointments to the board.131 CBCA
distributing corporations must also have an audit committee with a majority of
independent directors.132 The CBCA also allows for the formation of other committees
of directors and the delegation of powers to such committees.133 Governance
committees or compensation committees may be formed pursuant to this provision.
Corporations that are reporting issuers are required to provide corporate
governance disclosure that includes an indication of whether the majority of directors
are independent directors.134 An independent director is a director who has no direct
or indirect relationship that could reasonably interfere with the exercise of
independent judgment by the director.135
b. Trust Level
Declarations of trust for business income trusts include the same basic elements
as the CBCA for the structure of the board and meetings of the board. They contain
similar provisions on the number of trustees, their qualifications, the circumstances in
124 CBCA, supra note 12, ss. 6, 102, Form 1; OBCA, supra note 41, ss. 5, 115, Form 1.
125 CBCA, ibid., s. 105; OBCA, ibid., s. 118.
126 CBCA, ibid., s. 108; OBCA, ibid., s. 121.
127 CBCA, ibid., s. 111; OBCA, ibid., s. 124.
128 CBCA, ibid., s. 102(2); OBCA, ibid., s. 115(3).
129 CBCA, ibid., s. 114(2). See also OBCA, ibid., s. 126(3).
130 CBCA, ibid., s. 114(9). See also OBCA, ibid., s. 126(13).
131 CBCA, ibid., s. 116. See also OBCA, ibid., s. 128.
132 CBCA, ibid., s. 171. See also OBCA, ibid., s. 158.
133 CBCA, ibid., s. 115. See also OBCA, ibid., s. 127.
134 National Instrument 58-101, supra note 31, para. 2.1, Form 58-101F2.
135 See ibid., para. 1.2(1); Audit Committees, O.S.C. MI 52-110, (2004) 27 O.S.C. Bull. 837 (16
January 2004), para. 1.4.
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which they cease to hold office, and the filling of vacancies.136 They provide for
meetings by telephone or other means of electronic communication.137 Declarations of
trust also provide for the validity of acts of the trustees.138
Income trusts typically have a majority of independent trustees. Trustees,
however, typically include persons who are directors of the operating corporation.
Declarations of trust for many income trusts do not set out a specific requirement for
an audit committee at the trust level.139
It should be noted that the mimicking of corporate statute provisions for trustees
is optional in trust law. In the absence of specific legislation, the requirement that
corporate statute provisions on board structure and operation be mimicked depends
on requirements by either securities regulators or the TSX.
c. Operating Corporation Level
At the operating corporation level, corporate statute provisions, such as those
described above for the CBCA, will apply. Although operating corporations normally
are not distributing corporations and do not have shares listed on the TSX, they
generally have a majority of independent directors. Not being distributing
corporations, they are not required to have an audit committee under corporate
statutes such as the CBCA, although they normally do have an audit committee.140
d. Trustees as Directors of the Operating Corporation
Is there a concern if the board of trustees consists largely or wholly of persons
who are directors of the operating corporation? The two main functions of the board
of trustees are: first, to oversee the administration of the trust; and second, to monitor
the performance of the operating corporation. The main trust assets in the simplest
income trust structure will be the shares and notes of the operating corporation.
Trustees have a duty of care that would presumably include a requirement to monitor
the performance of the corporation on which the value of those shares and notes
136 See CBCA, supra note 12, ss. 6(1)(e), 105, 108, 111. Compare A&W Declaration, supra note 33,
ss. 7.1, 8.1, 8.5, 8.7; BFI Declaration, supra note 33, ss. 7.1, 8.1, 8.5, 8.7; Chemtrade Declaration,
supra note 33, ss. 7.1, 8.1, 8.5, 8.7.
137 See CBCA, ibid., s. 114(9). Compare A&W Declaration, ibid., s. 7.4; BFI Declaration, ibid., s.
committee.
7.4; Chemtrade Declaration, ibid., s. 7.4.
Chemtrade Declaration, ibid., s. 8.8.
138 See CBCA, ibid., s. 116. Compare A&W Declaration, ibid., s. 8.8; BFI Declaration, ibid., s. 8.8;
139 There are exceptions. See e.g. Consumers Waterheater Income Fund, Amended and Restated
Declaration of Trust, 4 December 2002. The operating entity will not necessarily be a corporation and
even if it is it will not be a reporting issuer. The operating entity itself will not be specifically required
to have an audit committee. There will, of course, still be audited financial statements, as required
under securities laws where the income trust units have been distributed to the public.
140 See e.g. CBCA, supra note 12, s. 171, requiring a distributing corporation to have an audit
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depend. The duty may also require them to exercise their power as shareholders to
replace the directors of the operating corporation if it performs poorly. If many or all
of the trustees are also directors of the operating corporation, they may be ineffective
at monitoring themselves. It is unlikely that, in their capacity as trustees, they will
remove themselves as directors of the operating corporation. The only way the
directors of the operating corporation are likely to be replaced is if the trustees are
replaced.
Unitholders have the power to replace the trustees. They may also have a claim
against trustees for breach of their duty of care if they imprudently supervise the
management of the operating corporation.141 If the unitholders consist of a disperse
group of retail investors, however, it is unlikely that they will engage in the
monitoring necessary to determine when the trustees should be replaced. They are
also unlikely to communicate and coordinate their voting to remove the trustees. It is
possible that an investor, such as an institutional investor, might monitor the operating
corporation and the trust units and, where the operating corporation is performing
poorly, buy up enough trust units to replace the trustees. The investor could then have
the new trustees replace the directors and officers of the operating corporation. If
there are provisions that discourage takeovers, such an action may not happen readily.
While unitholders disinclination to replace trustees may be a concern, it is arguably
not more of a concern than it is for shareholders of a corporation. If a corporation
with significant takeover deterrence devices makes an IPO, the market (if it is
reasonably efficient) should price the shares accordingly. But what if institutional or
other substantial investors are reluctant to invest in trust units, perhaps out of a
concern for unitholder liability? Without institutional or substantial investor
involvement, it is unlikely that anyone would purchase enough units to provide
sufficient voting rights to replace trustees, even where takeovers are not deterred.
Without institutional or substantial investor involvement, would IPOs for business
income trusts with substantial antitakeover devices be properly priced? It seems
unlikely. The issues can be complex and it may be important to have institutional
investors who are sophisticated enough to properly price trust units, taking into
account provisions affecting the probability of a takeover.
2. Trustee Board Powers and Management Board Powers
Corporate law statutes generally set out several powers for the board of directors.
It has broad powers to manage or supervise the management of the corporation.142 It
also typically has the power to appoint officers and delegate powers to officers.143 It
usually has the power to appoint committees of the board and delegate powers to
141 See e.g. Bartlett v. Barclays Bank Trust Co. Ltd., [1980] Ch. 515 at 532, [1980] 1 All E.R. 139;
Walker v. Stones (2000), [2001] Q.B. 902 at 916-17, [2000] 4 All E.R. 412 (C.A.) [Walker cited to
Q.B.].
142 CBCA, supra note 12, s. 102(1); OBCA, supra note 41, s. 115(1).
143 CBCA, ibid., s. 121; OBCA, ibid., s. 133.
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those committees.144 It has the power to determine the remuneration of the directors
and officers.145 It typically has power to borrow,146 to issue shares of the
corporation,147 to call shareholder meetings,148 and to make changes to the bylaws of
the corporation with immediate effect (but subject to confirmation by shareholders for
their continued effectiveness).149
Business income trust declarations of trust mimic these corporate law provisions
concerning the powers of the board of directors. They give trustees powers to manage
or supervise the management of the trust, appoint officers for the trust, delegate duties
to the officers, and create committees of trustees and delegate duties to them.150 They
also give trustees the power to issue units of the trust, borrow for the trust, call
unitholder meetings, and enact bylaws for the trust.151
3. Duties of Directors and Officers
a. Common Corporate Law Rules
Directors and officers of corporations are subject to a range of duties. They have
a duty of care, codified in the CBCA and other corporate statutes in Canada, requiring
that they act with the care, diligence and skill that a reasonably prudent person
in comparable circumstances.152 Directors and officers of
would exercise
corporations must also not take corporate opportunities for themselves.153 They must
exercise their powers for the purpose for which they were intended154 and in the best
144 CBCA, ibid., s. 115; OBCA, ibid., s. 127.
145 CBCA, ibid., s. 125; OBCA, ibid., s. 137.
146 CBCA, ibid., s. 189(1); OBCA, ibid., s. 184(1).
147 CBCA, ibid., s. 25(1); OBCA, ibid., s. 23.
148 CBCA, ibid., s. 133; OBCA, ibid., s. 94.
149 CBCA, ibid., s. 103; OBCA, ibid., s. 116.
150 See CBCA, ibid., ss. 102, 121, 115. Compare A&W Declaration, supra note 33, ss. 9.2(a), 9.2(x),
9.2(y), 7.10, 10.1; BFI Declaration, supra note 33, ss. 9.2(a), 9.2(h), 9.2(i), 9.2(j), 7.10, 10.1;
Chemtrade Declaration, supra note 33, ss. 9.2(a), 9.2(h), 9.2(i), 7.10, 10.1.
151 See CBCA, ibid., ss. 25(1), 189(1), 133, 103. Compare A&W Declaration, ibid., ss. 9.4(cc), 9.4,
12.2, 9.4(gg); BFI Declaration ibid., ss. 9.2(m), 9.2(s), 12.1, 9.2(r); Chemtrade Declaration, ibid., ss.
9.2(m), 9.2(s), 12.1, 9.2(r).
152 CBCA, ibid., s. 122(1)(b).
153 See e.g. Regal (Hastings) Ltd. v. Gulliver, [1942] 1 All E.R. 378 (H.L.); Peso Silver Mines Ltd.
(NPL) v. Cropper, [1966] S.C.R. 673, 58 D.L.R. (2d) 1; Canadian Aero Service Ltd. v. OMalley
(1973), [1974] S.C.R. 592, 40 D.L.R. (3d) 371 [OMalley cited to S.C.R.].
154 See e.g. Bonisteel v. Collis Leather Co. (1919), 45 O.L.R. 195 (H.C.) [Bonisteel]; Hogg v.
Cramphorn Ltd., [1967] Ch. 254, [1966] 3 W.L.R. 995 [Hogg]; Howard Smith Ltd. v. Ampol
Petroleums Ltd., [1974] A.C. 821 (H.L.). In Teck Corporation Ltd. v. Millar (1972), 33 D.L.R. (3d)
288, [1973] 2 W.W.R. 385 (B.C.S.C.) [Teck cited to D.L.R.], Berger J. suggested that the test is simply
whether the directors acted in good faith in the best interests of the corporation, rather than whether
they acted for a proper purpose. The approach of first assessing whether the directors acted within the
355
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interests of the corporation.155 The duty to act in the best interests of the corporation is
codified in the CBCA and other corporate statutes.156 These statutes provide that the
duty of care and the duty to act in the best interests of the corporation cannot be
waived.157
The common law rule concerning conflicts of interest was, without exception,
that directors and officers were not to put themselves in a position where their
personal interests conflicted with the interests of the corporation.158 This duty could
be modified. It was frequently modified in a way that allowed some conflicts to
occur, as long as certain procedural safeguards were followed.159 In particular, it was
typically required that notice of the conflict be given and that the directors approve
the conflict transaction. The director who had the conflict was not to vote.160
Corporate statutes have provisions allowing conflicts of interest as long as
procedural safeguards are met.161 These safeguards generally include that notice of the
conflict be given,162 that the transaction be approved by directors (with the interested
director not voting), and that the transaction be reasonable and fair.163 As an
alternative, the transaction may be approved by a special resolution of shareholders
upon sufficient disclosure, if the transaction is reasonable and fair.164 The statutory
provision on conflicts of interest is not a default provision. One cannot substitute an
alternative scheme.
In Ontario, statutory provisions on conflicts of interest are now supplemented by
Ontario Securities Commission Rule 61-501,165 which sets out requirements for
related-party transactions that raise conflict of interest concerns. The rule also deals
with issuer bids, insider bids, and business combinations, which can also raise
scope of their authority and then assessing whether they did so in the best interests of the corporation
is more consistent with the agency law approach.
155 See e.g. CBCA, supra note 12, s. 122(1)(a); OSA, supra note 19, s. 134(1)(a). See also Teck,
ibid.; Olsen v. Phoenix Industrial Supply Ltd. (1984), 9 D.L.R. (4th) 451, [1984] 4 W.W.R. 498 (Man.
C.A.).
156 See e.g. CBCA, ibid., s. 122(1)(a).
157 Ibid., s. 122(3).
158 See Aberdeen Railway Co. v. Blaikie Brothers (1854), 1 Macq. 461, [1843-60] All E.R. Rep. 249
(H.L.).
159 See e.g. Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co., [1914] 2
Ch. 488 (C.A.) [Transvaal Lands]; The Liquidators of the Imperial Mercantile Credit Association v.
Coleman, [1873] L.R. 6 H.L. 189 [Liquidators]; Gray v. New Augarita Porcupine Mines Ltd., [1952] 3
D.L.R. 1 (P.C.) [Gray].
160 See Transvaal Lands, ibid. at 488, referring to art. 98 of the companys articles; Liquidators, ibid.
at 192, referring to art. 83 of the companys articles; Gray, ibid. at 13, referring to company bylaws 54
and 55.
161 See e.g. CBCA, supra note 12, s. 120; OBCA, supra note 43, s. 132.
162 CBCA, ibid., s. 120; OBCA, ibid., s. 132.
163 CBCA, ibid., s. 120(7); OBCA, ibid., s. 132(7).
164 See e.g. CBCA, ibid., s. 120(7.1); OBCA, ibid., s. 132(8).
165 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions, O.S.C. Rule
61-501 (7 May 2004) [Ontario Rule 61-501].
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conflicts of interest between insiders (or control block shareholders), and minority
shareholders. The requirements of the rule would apply where shares of the
corporation are traded in Ontario.
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b. Trust Level
Trust is the origin of much of the law on fiduciary duties. Trustees have fiduciary
duties corresponding to those of directors and officers of corporations.166 In some
respects, trustees duties may be stricter than the duties of directors of corporations.167
These duties include a general duty of care168 and a duty that trustees not take
advantage of opportunities for themselves that arise in the context of carrying out
their duties as trustees.169 Trustees are also not to put themselves in a position where
their personal interests conflict with the interests of beneficiaries.170 These duties can,
for the most part, be varied in the trust instrument.171 A key difference between trust
law fiduciary duties and the fiduciary duties codified in corporate statutes is that trust
law fiduciary duties can generally be modified, while corporate statutory fiduciary
duties cannot.
Declarations of trust for business income trusts generally attempt to include
corporate fiduciary duties by reference to corporate statutory requirements.172 This
substitution replaces strict trustee fiduciary duties with the arguably more lenient
duties of directors and officers.173 The job of corporate managers involves
166 See e.g. Waters, supra note 1 at 857-955 where trustees duties are discussed.
167 See e.g. Keech v. Sandford (1726), Sel. Cas. Ch. 61 [Keech] (which applied a strict test
concerning trustees taking advantage of opportunities they became aware of while acting in their
capacity as trustees); Boardman v. Phipps (1966), [1967] 2 A.C. 46, [1966] 3 All E.R. 721 (H.L.) (a
case involving persons acting opportunistically on knowledge gained while acting on behalf of a
trust). Compare OMalley, supra note 153, concerning the taking of corporate opportunities by
directors and which applied a more lenient fairness test. See also Fales v. Canada Permanent Trust
Co., [1977] 2 S.C.R. 302, 70 D.L.R. (3d) 257 [Fales cited to S.C.R.] with the corporate duty of care
cases such as Re Cardiff Savings Bank, [1892] 2 Ch. 100; Re Brazilian Rubber Plantations and
Estates Ltd., [1911] 1 Ch. 425; Re City Equitable Fire Insurance Co., [1925] Ch. 407 (C.A.); Soper v.
Canada [1998] 1 F.C. 124, 149 D.L.R. (4th) 297 (C.A.); Peoples Department Stores Inc. v. Wise,
[2004] 3 S.C.R. 461 at paras. 54-57, 244 D.L.R. (4th) 564, 2004 SCC 68 [Peoples cited to S.C.R.];
UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002), 214 D.L.R. (4th) 496, 27 B.L.R.
(3d) 53 (Ont. Sup. Ct. J.), affd (2004), 250 D.L.R. (4th) 526, 183 O.A.C. 310, 42 B.L.R. (3d) 34
(C.A.), which arguably take a more lenient approach to the duty of care.
168 See e.g. Fales, ibid.
169 See e.g. Ex Parte James (1803), 8 Ves. Jr. 337, 32 E.R. 385 (Ch.) [James]; Keech, supra note
167; Crocker v. Tornroos, [1957] S.C.R. 151, 7 D.L.R. (2d) 104.
170 See e.g. Ex Parte Lacey (1802), 6 Ves. Jr. 625, 31 E.R. 1228 (Ch.); James, ibid.; Williams v.
Barton, [1927] 2 Ch. 9.
171 See supra note 26 and accompanying text.
172 See e.g. A&W Declaration, supra note 33, ss. 9.6, 9.11; BFI Declaration, supra note 33, ss. 9.6,
9.11; Chemtrade Declaration, supra note 33, ss. 9.6, 9.11.
173 See supra note 152 and accompanying text.
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2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
entrepreneurial risk taking whereas trustees, in their traditional capacity managing
estate funds, are normally expected to avoid risks and preserve the capital of the fund.
Since the business income trust approximates a corporate form of organization and is
intended to oversee the operation of a business entity, the corporate approach to
fiduciary duties may be more appropriate. A contrary argument could be made that
the duties of trustees, in their capacities as trustees, do not involve the management of
a corporation. Their task may more closely approximate the task of estate trustees,
requiring prudent and capital-preserving investment of funds received as interest or
royalties pending distribution to unitholders.
The conflict of interest provisions in declarations of trust generally mirror the
corporate statute provisions by requiring disclosure of the conflict and that the
interested trustee not vote on the matter. These provisions do not specifically contain
the additional CBCA requirement that the contract or transaction was reasonable and
fair to the corporation when it was approved.174
Since units of business income trusts are typically listed on the TSX, they are
traded in the province of Ontario. The conduct of the affairs of the trust would thus be
subject to Ontario Rule 61-501.175 Accordingly, the requirement for issuer bids,
insider bids, business combinations, and related-party transactions would apply to
business income trusts. The operating entity itself, however, would not be a reporting
issuer and would not be subject to Ontario Rule 61-501. Business combinations
would not apply since the operating entity is private. Similarly the issuer bid and
insider bid provisions of the policy are not likely to apply to the operating entity,
since it will normally not be a reporting issuer in Ontario. It might be argued that
Ontario Rule 61-501 does not apply to related-party transactions in the income trust
structure that do not involve the trust that has issued units to the public. They might
nonetheless be a concern to the extent they affect the value of the trust units. Ontario
Rule 61-501, however, now provides that a transaction of an underlying operating
entity of an income trust is deemed to be a transaction of the income trust, and a
related party of the underlying operating entity is deemed to be a related party of the
income trust.176 Related-party transactions not involving the trust that has issued
units to the public would be subject to the common law rules on conflict transactions
or statutory standards (such as those in the CBCA) if the transaction involved a
corporation in the income trust structure.
174 CBCA, supra note 12, s. 120(7)(c). It might be argued that the requirement that the transaction be
reasonable and fair is implicit in the duty of the trustees to act in good faith in the interests of the trust.
While a failure to fulfill the duty might not make the transaction void or voidable, it would leave open
an argument that the trustees approving the transaction are nonetheless liable for losses incurred as a
result of the transaction. For an American case in which such an argument was accepted by the court
although procedural requirements were met (disclosure and interested director not voting) see
Remillard Brick Co. v. Remillard-Dandini Co. (1952), 241 P.2d 66 (Cal. C.A.).
175 Supra note 165.
176 Ibid.
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C. Investor Remedies
1. Personal Action
Shares constitute bundles of rights granted to shareholders by the corporation.
The corporate statute may grant shareholders other rights against the corporation. A
breach of such rights would allow an action by the shareholder against the
corporation. In some cases in the past, shareholders were allowed to bring a personal
action to remedy acts of directors or officers where a derivative action would
probably not have been possible.177 Today, many personal action claims would be
pursued as an oppression application.
In a business income trust, unitholders would have personal actions against the
trustees for breach of trust if the trustees failed to honour the rights of beneficiaries
set out in the declaration of trust. As noted above, beneficiaries have a personal right
of action for a breach of a fiduciary duty by trustees.
It is unlikely that unitholders would have personal actions against the underlying
operating corporation, as they are not shareholders of the corporation. They would
not have rights as shareholders either pursuant to the share rights granted by the
corporation or the rights of shareholders under the corporate statute. Shareholder
rights would be exercised by the trustees or an intermediate entity holding the shares.
2. Derivative Action
a. Derivative Action in Corporate Law
The corporation is a separate legal entity. The directors (as a group) act on behalf
of the corporation and the officers (individually) act as agents of the corporation.
Directors and officers owe fiduciary duties to the corporation.178 The action for a
breach of a fiduciary duty by directors or officers thus is the corporations action. The
corporations decision to bring an action, however, is a management decision within
the discretion of the board of directors. The board may be reluctant to cause the
corporation to bring such an action against themselves. They may also be reluctant to
cause the corporation to bring an action against officers if officers of the corporation
constitute a substantial portion of the board. Shareholders could bring an action on
behalf of the corporation: a so-called derivative action. This type of action was once
177 See e.g. Hogg, supra note 154; Bonisteel, supra note 154; Teck, supra note 154.
178 Percival v. Wright, [1902] 2 Ch. 421; Peoples, supra note 167 at paras. 42-47. See also Clarkson
v. Davies, [1923] A.C. 100 (P.C.); Brant Investments Ltd. v. KeepRite Inc. (1991), 3 O.R. (3d) 289, 1
B.L.R. (2d) 225 at 244 (C.A.); Western Finance Co. Ltd. v. Tasker Enterprises Ltd. (1979), 106 D.L.R.
(3d) 81, [1980] 1 W.W.R. 323 (Man. C.A.).
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subject to stringent conditions,179 but modern corporate statutes now set more lenient
ones.180 Prior to the expansion of the oppression remedy to include complaints that
are derivative in nature,181 the statutory provisions for leave to bring a derivative
action would have been the logical remedy for a breach of a fiduciary duty. The
expansion of the procedurally simpler oppression remedy to include complainants of
a derivative nature has limited the use of the derivative action.182
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b. Similar Actions in the Trust Context
Breaches of fiduciary duty by trustees in a business income trust would be
addressed by a direct action by beneficiaries, rather than a derivative action. The trust
is not a separate entity. Trustees therefore cannot owe fiduciary duties to the trust.183
Instead trustees owe fiduciary duties directly to the beneficiaries.
179 Foss v. Harbottle (1843), 2 Hare. 461, 67 E.R. 189 (Ch.) significantly constrained actions by
shareholders on behalf of the company against directors who had breached their fiduciary duty. It
required that a majority of shareholders approve the action. Actions by shareholders were further
constrained in North-west Transportation Co. Ltd. v. Beatty (1887), 12 A.C. 589 (P.C.), which allowed
interested majority shareholders (who might indeed have also been the directors alleged to have
breached their fiduciary duty to the company) to vote their shares at a shareholders meeting on a
resolution ratifying the breach. A number of very limited exceptions developed over the years. In
jurisdictions where the power to manage is exclusively assigned to directors, it is doubtful that even a
majority of shareholders could cause a suit to be brought by the company. See Stanley M. Beck, An
Analysis of Foss v. Harbottle in Jacob S. Ziegel, ed., Studies in Canadian Company Law (Toronto:
Butterworths, 1967) 545 at 560-96. On development of the common law derivative action in the U.K.,
see e.g. Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2), [1982] Ch. 204 (C.A.);
Gerber Garment Technology Inc. v. Lectra Systems Ltd., [1997] R.P.C. 443 at 468-78 (C.A.); Johnson
v. Gore Wood & Co., [2002] 2 A.C. 1, [2001] 1 All E.R. 481, [2001] 2 W.L.R. 72 (H.L.); Walker, supra
note 141 at 927-34. This subsequent development of the common law derivative action is of limited
relevance to the development of derivative actions, because statutory derivative actions have
superseded the common law action in Canada.
180 See e.g. CBCA, supra note 12, ss. 238-40.
181 Several cases have addressed the relationship between the derivative action provision and the
oppression remedy. See Dennis H. Peterson, Shareholder Remedies in Canada, looseleaf (Markham,
Ont.: Butterworths, 1989). Peterson says that the preponderance of authority … supports the idea that
the oppression remedy should be available to a complainant even though other remedies are available
(ibid. at para. 18.237). It is still necessary to show that a breach of duty by directors or officers was
oppressive or unfairly prejudicial to or unfairly disregarded the interests of the complainant (see ibid.).
See also Jeffrey G. MacIntosh, The Oppression Remedy: Personal or Derivative? (1991) 70 Can.
Bar Rev. 29. It is not necessary to establish a breach of a duty to succeed in an oppression claim, but a
breach of a fiduciary duty that is oppressive or unfairly prejudicial to, or unfairly disregards the
interests of the complainant may support an oppression claim.
182 It appears that the derivative action continues to have a role where the corporation has rights
against third parties, as opposed to cases involving breaches of fiduciary duties. See Peterson, ibid.
183 See e.g. Kingsdale Securities Co. Ltd. v. Minister of National Revenue, [1974] 2 F.C. 760, 74
D.T.C. 6674 at 6681 (C.A.). See also David J. Hayton, Underhill and Hayton: Law Relating to Trusts
and Trustees, 16th ed. (London: Butterworths, 2003) at 6.
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A derivative action might arise in the corporate context where the corporation has
a right of action that arises, not as a result of a breach of a fiduciary duty owed by the
directors or officers, but out of some independent right. It could be a right on a
contract or because the corporation was the victim of a tort. A shareholder might be
allowed to pursue such an action on behalf of the corporation. In the trust law
context, if the trustees have a right of action arising out of the conduct of the affairs of
the trust but fail to pursue it, one or more of the beneficiaries might seek a court order
to pursue the action in the name of the trustees on behalf of the trust.184 In some cases,
the beneficiary may have a direct right of action where third parties have received
trust property in circumstances where they knew or should have known of the trust.
c.
Income Trust Unitholders and Derivative Actions Concerning
the Operating Corporation
While unitholders would have rights of action at the trust level that may
correspond to the right to bring a derivative action in corporate law, their right to
bring a derivative action at the level of the operating corporation is more tenuous. As
noted above, most corporate law statutes in Canada have derivative action provisions
that replace the common law approach. The most common form of derivative action
provision in Canada allows a complainant to bring an action on behalf of the
corporation, subject to satisfying certain procedural safeguards.185 Complainant is
defined to include a registered or beneficial holder of a security or any person a court
thinks is a proper person to bring an application for leave to bring a derivative
action.186 Unitholders might be able to seek leave on the basis that they are beneficial
owners of the shares of the operating corporation. Failing this, they may be able to
apply for leave if they can convince a court that they are proper persons to bring an
action.
If the trustees own the shares of the operating corporation, unitholders might be
able to argue that they are beneficial holders of the shares. The situation, however, is
different than most beneficial holders of shares where, for instance, a depository
institution is the registered holder of the shares. The depository institution is usually a
bare trustee of the shares. Trustees in business income trusts do not hold the shares as
bare trustees. Unitholders interests are in the income of the trust and not in the shares
of the operating corporation per se. This fact might suggest that they should not be
considered beneficial holders of securities for the purpose of the definition of
complainant in corporate law statutes such as the CBCA. For the reasons discussed
below, these differences should not mean that unitholders are not entitled to leave to
bring a derivative action.
184 See Waters, supra note 1 at 1204-205; L.A. Sheridan, The Law of Trusts, 12th ed. (Chichester:
Barry Rose, 1993) at 451-52.
185 See e.g. CBCA, supra note 12, s. 239.
186 See e.g. CBCA, ibid., s. 238 regarding complainant.
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Since the conduct of the affairs of the underlying corporation is critical to the
value of the units, it seems likely that the court would consider unitholders proper
persons to make an application for leave to bring a derivative action. A court might
also consider the wording in a provision for application for leave to bring a derivative
action, such as CBCA section 239 that allows a complainant to apply to a court for
leave to bring an action in the name and on behalf of a corporation or any of its
subsidiaries …187 While an underlying operating corporation does not quite fit the
definition of subsidiary,188 the position of unitholders relative to the underlying
operating corporation is clearly analogous to the position of shareholders in a parent
corporation. This fact would reinforce the argument in favour of finding business
income trust unitholders to be proper persons to apply for leave to bring an action in
the name of and on behalf of the underlying operating corporation. It seems possible
that unitholders in a business income trust would be given leave to bring a derivative
action. Even if unitholders were not considered complainants, they might instead, as
beneficiaries of the trust, ask to be subrogated to the rights of the trustees to seek
leave to bring a derivative action.
Where there is a complaint against the directors of the operating corporation and
those directors are the same persons as the trustees, unitholders might be able to make
their claim directly against the trustees. The argument might be that in carrying out
their duties as directors of the operating corporation, they had a duty to do so in a way
consistent with the best interests of the beneficiaries. Although in their capacity as
directors, they would owe duties to the corporation, their duty would be to act in its
best interests. This duty would, in many situations, arguably be synonymous with
their duty as trustees. In other words, a failure to act in the best interests of the
corporation might be a breach of their duty as trustees, as well as a breach of their
duty as directors.
The rights of unitholders to seek leave to bring a derivative action pursuant to
corporate legislation would not apply if the operating entity is not a corporation. It
might be possible in these cases for unitholders to address breaches of fiduciary
duties by management of the operating entity by seeking a court order allowing them
to sue in the names of the trustees on behalf of the trust.189 For instance, where the
trust owns units in a limited partnership operating entity, unitholders might be able to
sue the general partner in the name of the trustees. Subrogation might be much more
complicated where the income trust structure is more complex. For example, if the
trustees of the trust with publicly issued units are beneficiaries of an operating trust
187 Ibid., s. 239(1) [emphasis added].
188 CBCA, ibid. defines subsidiary as a body corporate is a subsidiary of another body corporate
if … (ibid., s. 2(5) [emphasis added]). For a corporate operating entity to be a subsidiary under the
CBCA it would have to be a subsidiary of another body corporate. A body corporate is defined as
a company or other body corporate wherever or however incorporated (ibid., s. 2(1)). The trust is
not an incorporated entity and thus would not be a body corporate. The operating corporation would
not be a subsidiary of the trust under the CBCA.
189 See Waters, supra note 1 at 1204-205; Sheridan, supra note 184 at 451-52.
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that owns units in a limited partnership, which in turn owns interests (e.g., shares or a
partnership interest) in the underlying operating entity, it becomes more difficult to
construct a right to sue in the name of the trustees on behalf of the trust that would get
at breaches of fiduciary duties by managers of the operating entity.190
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3. Oppression Remedy
a. Operating Corporation Level
Shareholders in corporations can apply to court for a remedy on the basis that
some conduct of the affairs of the corporation or any of its affiliates, or the exercise of
powers by directors of the corporation or any of its affiliates has been oppressive or
unfairly prejudicial to the applicants or unfairly disregarded their interests as
shareholders.191 The application can be brought by a complainant. Complainant is
defined for this purpose in the same way as for the derivative action discussed above.
The definition includes any registered or beneficial security holder. While unitholders
of a business income trust would not be registered shareholders of the underlying
operating corporation, they might be considered beneficial shareholders of the
underlying operating corporation. Also, for the reasons noted above, they might be
considered proper persons to bring an application.192
Being recognized as a complainant for the purposes of making an oppression
application is only the first step. One must show that the conduct of the affairs of the
corporation or the exercise of the powers of the directors is oppressive, unfairly
prejudicial to, or unfairly disregards the interests of, any security holder, creditor,
director or officer.193 Unitholders would not be creditors,194 directors, or officers of
190 Unitholders might seek an order to pursue rights of the trustees of the fund trust, as beneficiaries
of the operating trust, to seek an order to sue on behalf of the operating trust. They might then pursue
the rights of the trustees of the operating trust, as limited partners, to apply to be considered a proper
person to bring an action on behalf of the general partner corporation. From there, they could pursue
the right to bring an action on behalf of the operating corporation.
191 See e.g. CBCA, supra note 12, ss. 241(1), 241(2).
192 See e.g. CBCA, ibid., s. 238(d) regarding complainant. The argument would be similar to that
made above for unitholders to be proper persons to seek leave to bring a derivative action. Since the
conduct of the affairs of the underlying corporation is critical to the value of the units, it seems likely
that a court would consider unitholders proper persons to make an application. A court might also look
at the use of the word affiliate in an oppression provision such as CBCA, ibid., s. 241. Unitholders
would not be shareholders in an affiliate because it is defined as a body corporate (ibid., s. 2(2)), and
the trust fund is not a body corporate (since a body corporate is defined as an incorporated entity:
ibid., s. 2(1)). The position of the unitholders of the trust is clearly analogous to the position of
shareholders in an affiliate. Consequently a court might take the position that finding unitholders to be
proper persons to make an oppression application is consistent with the oppression application
provision, since unitholders occupy essentially the same position as shareholders in an affiliated
controlling corporation.
193 CBCA, ibid., s. 241(2).
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the corporation, so the only category in the list of capacities under which they might
claim to have suffered oppression is as a security holder. The expression security
holder is not defined in the part of the CBCA in which the oppression remedy
appears, nor is it defined in subsection 1(1) for the purposes of the Act as a whole.
However, security is defined as a share of any class or series of shares or a debt
obligation of a corporation and includes a certificate evidencing such a share or debt
obligation.195 Unitholders of the trust would not be registered holders of shares or
debt obligations of the underlying operating corporation. It might be argued, however,
that since the trustees hold the shares (and notes) on behalf of unitholders, unitholders
are beneficial shareholders, thereby qualifying them as security holders for the
purposes of arguing that they have, in that capacity, been oppressed or unfairly
prejudiced or disregarded.196
Even if an oppression application were available against an underlying operating
corporation, one should bear in mind that the oppression remedy is provided in
corporate statutes. It might be avoided altogether if the operating entity were not a
corporation. For instance, the operating entity might be a limited partnership. Limited
partnership statutes do not have oppression remedy provisions.
b. Trust Level
The trust in which unitholders are beneficiaries is, as noted above, largely set up
to reflect many features of the corporate form of organization. It replicates many
rights provided to shareholders by corporate statutes. Since the trust recreates the
rough equivalent of a corporate form of organization, it carries the potential for the
kinds of problems that led to the adoption of the oppression remedy in corporate
statutes. If unitholders in a business income trust are to be put on a par with
shareholders in corporations, they should be given a right to relief from oppression at
the trust level, in addition to relief from oppression at the level of the operating entity.
Declarations of trust for business income trusts do not provide for relief from
oppression. While beneficiaries can apply to court for orders concerning the
interpretation or administration of trusts,197 there is the question of whether orders can
be made on the same basis as on an oppression application. It is also uncertain
194 If unitholders can sue on behalf of the trust to pursue the rights of trustees as creditors, they
might make an oppression claim on the basis that the trustees were prejudiced in their capacity as
creditors of the operating corporation. This sort of claim could only be made where the operating
entity was a corporation and where the trustees were the persons who loaned to the operating
corporation the funds received from unitholders.
195 CBCA, supra note 12, s. 2(1).
196 It might also be argued that unitholders have been oppressed in their capacity as security holders
where the trustees have a debenture representing a debt owed by the operating corporation. The
debenture would also fall within the definition of security as including a certificate evidencing … a
debt obligation (ibid.). Since the trustees would hold the debenture for the benefit of unitholders, the
unitholders might be said to be beneficial owners of that security.
197 See e.g. Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 14.05(3).
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whether the court has the same range of possible orders as on an oppression
application.
In trust law, trustees have a duty to be impartial as between beneficiaries.198 This
duty developed largely to ensure fairness between beneficiaries with life interests and
beneficiaries with remainder interests.199 It might be a stretch to extend this concept to
unitholders in a business income trust. Even stretching the duty of impartiality may
not fully serve the purposes for which the oppression remedy was designed.200 If the
duty were extended to business trusts such that it worked as a rough equivalent to
statutory oppression provisions, it would not empower a court to use the wide range
of remedies provided by statutory oppression remedy provisions. Even if it were
roughly equivalent to statutory oppression provisions, the duty of impartiality could
be waived or modified in the declaration of trust.201
Applications might also be made where trustees act beyond the scope of their
powers, act for improper purposes, or fail to act. These bases for claims against
trustees are more consistent with breaches of fiduciary duty in the corporate context.
The unique feature of the oppression application, which may not be easy to replicate
in a declaration of trust, is that it can also be the basis for claims where there is
neither a breach of duty nor an act contrary to the statute, articles, or bylaws, but
where the acts nonetheless operate oppressively, unfairly prejudicially, or unfairly
disregard the interests of a complainant in their capacity as a security holder, creditor,
director, or officer.
4. Appraisal
In certain situations the CBCA, or the statutes modeled after it, allows
shareholders of a corporation to apply to have the corporation acquire their shares at a
fair value.202 The situations include certain amendments of the articles, fundamental
changes such as an amalgamation, a continuance, a sale, a lease, or an exchange of all
or substantially all of the corporations property, or a going-private transaction or
198 Waters, supra note 1, at 966-70.
199 Ibid. at 970-1063.
200 See Primewest Energy Trust v. Orion Energy Trust (Trustee of) (1999), 238 A.R. 193, 1 B.L.R.
(3d) 294 (Q.B.). The court considered whether the duty of trustees to maintain an even hand applied in
the adoption of a poison rights plan that denied exercise of the rights to the unitholder. The unitholder
acquired sufficient units to trigger the rights plan while allowing other unitholders to exercise their
rights. The court accepted that the trustees adoption of the plan did not violate their duty to maintain
an even hand, since every holder of a unit had the same rights and was subject to the same
consequence of acquiring sufficient units to trigger the rights. The situation may be somewhat
different where a unitholder has acquired a triggering number of units before the adoption of the plan
(see Rio Tinto Canadian Investments v. Labrador Iron Ore Royalty Income Fund, [2001] O.J. No.
2440 (S.C.J.) (QL), affd, (2001), 41 E.T.R. (2d) 283 (Ont. C.A.) (although in that case the decision
was based on an interpretation of the declaration of trust and not on a duty of evenhandedness).
201 See Waters, supra note 1 at 969, 1055.
202 See e.g. CBCA, supra note 12, s. 190.
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squeeze-out transaction.203 The statutes provide procedures to determine a fair
value.204
The appraisal right is available only to shareholders.205 Trustees in a business
income trust could exercise an appraisal right if they are shareholders in the operating
corporation206 but unitholders, not being shareholders of the operating corporation,
could not exercise an appraisal right against it. The trust, not being incorporated
under a statute providing an appraisal remedy, would not be subject to a mandatory
statutory appraisal remedy. A declaration of trust could provide unitholders with such
a right, but they generally do not do so.207
5. Compliance
Many corporate statutes in Canada have a compliance provision. The compliance
provision in section 247 of the CBCA allows a complainant or a creditor of the
corporation to apply to court for an order directing a director, officer, employee, or
agent of the corporation to comply with the Act, the regulations, the articles, or
bylaws of the corporation or restraining such persons from breaching the provisions
of the Act, the articles, or the bylaws of the corporation. Complainant has the same
broad meaning described above with respect to leave to bring a derivative action or
oppression application.
At the trust level, there would be a roughly corresponding right for a unitholder to
seek an order of the court requiring the trustees to comply with the terms of the
declaration of trust, or perhaps also to restrain trustees from breaching a provision of
the declaration of trust. The right of unitholders to seek compliance at the level of the
operating entity using a corporate compliance provision, such as CBCA section 247,
would depend on the operating entity being incorporated under a statute having a
203 See e.g. CBCA, ibid., s. 190(1). Amendments of articles that could lead to an appraisal remedy
are an amendment to add, change, or remove any provisions restricting or constraining the issue,
transfer, or ownership of shares of a class (ibid., s. 190(1)(a)); an amendment to add, change, or
remove any restriction on the business or businesses that the corporation may carry on (ibid., s.
190(1)(b)); or any amendment that would create a class voting right (ibid., s. 190(2)).
204 See e.g. CBCA, ibid., s. 190.
205 See e.g. CBCA, ibid., ss. 190(1), 190(2). For example, a holder of shares of any class of a
corporation may dissent … (ibid., s. 190(1)).
206 It seems unlikely that they would ever do so, however.
207 I have reviewed more than a dozen declarations of trust and I have yet to find anything
corresponding to an appraisal remedy provided to unitholders. This absence may be due not only to
the cost that such a remedy might impose on the trust, but also to the fact that units of income trusts
are generally publicly traded. Unitholders have a ready form of appraisal remedy: they may simply
sell the units. This remedy may not precisely correspond to the appraisal remedy, particularly if the
market price of the units already reflects a change that has a negative impact on their value.
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corporate compliance provision. The unitholders would also have to be recognized as
complainants.208
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6.
Investigation
Corporate statutes in Canada typically provide for court-ordered investigations
upon the application of a security holder.209 Declarations of trust for business income
trusts also provide for investigations upon the request of unitholders.210 Rather than
being made at the request of a single unitholder, the request must typically be made at
the request of unitholders holding twenty-five per cent or more of the units. Under the
corporate law provisions, a court can control against abusive uses of investigations. A
court has a discretion to order an investigation where,
(a) the business of the corporation or any of its affiliates is or has been carried
on with intent to defraud any person,
(b) the business or affairs of the corporation or any of its affiliates are or have
been carried on or conducted, or the powers of the directors are or have been
exercised in a manner that is oppressive or unfairly prejudicial to or that
unfairly disregards the interests of a security holder,
(c) the corporation or any of its affiliates was formed for a fraudulent or
unlawful purpose or is to be dissolved for a fraudulent or unlawful purpose, or
(d) persons concerned with the formation, business or affairs of the corporation
or any of its affiliates have in connection therewith acted fraudulently or
dishonestly.211
The requirement for twenty-five per cent or more of unitholders to request an
investigation of the affairs of an income trust presumably is intended to control
against abusive uses of investigations. The cost of an investigation, which would
likely be borne out of trust funds, could be quite high and might reduce the value of
trust units. Some restriction is justified. At the same time, the twenty-five per cent
threshold probably puts it beyond the reach of most unitholders. While they could
request the list of unitholders and encourage others to join in a request for an
investigation, the cost is likely to make an investigation impractical.
V. Summary of Differences in Governance Provisions
The comparisons in Part IV noted various differences between governance
provisions in corporate statutes and business income trust governance provisions.
This Part reviews and discusses significant differences highlighted in Part IV.
208 Whether unitholders could be considered complainants is discussed in Part IV.C.2.c, above.
209 See e.g. CBCA, supra note 12, ss. 229-35.
210 See e.g. A&W Declaration, supra note 33, s. 12.10; BFI Declaration, supra note 33, s. 12.9;
Chemtrade Declaration, supra note 33, s. 12.9.
211 CBCA, supra note 12, s. 229(2).
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A. Disclosure
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1. Declarations of Trust on the SEDAR Database
An issue related to the access to records is unitholder access to important
documents on SEDAR.212 When an issuer of securities files a prospectus, it must also
file material contracts and other material documents. In many cases, they are filed in
electronic form and made available on the SEDAR database. One can often find a
business income trusts declaration of trust on SEDAR, along with other material
documents. The track record for electronic filing appears to be inconsistent. In some
cases, declarations of trust appear to be unavailable on SEDAR. In other situations,
they are difficult to identify amongst a list of other documents (of which there are
often many in complex business income trust restructurings). The declaration of trust
is the crucial document for income trust investors to determine the rights the trust
units provide. It would help if it were consistently available on SEDAR and clearly
identified.
2. Continuous Disclosure
The trust that issues units to the investing public is the reporting issuer in a
business income trust. A narrow view of reporting obligations might focus on just
developments concerning the trust. While ongoing information about the trust itself is
important, the most important information to unitholders is information about the
operating entity. Some clarification is needed to make it clear that proper continuous
disclosure for a business income trust includes timely disclosure of material
information concerning the operating entity, as well as the trust.213 It should also be
clear that proper continuous disclosure includes financial information concerning the
operating entity, and management discussion and analysis focusing on its business.
Information circular disclosure requirements should cover the operating entity as well
as the trust, so that unitholders have information about such matters as the
backgrounds of the directors of the operating entity and their executive compensation.
National Policy 41-201 provides some clarification in this respect.214
212 Supra note 2.
213 In 2003, I canvassed material change reports of several business income trusts filed on SEDAR
(ibid.). In some cases, there are numerous reports and the nature of the reports suggests that the
reporting issuer (the trust) is taking the broader view that anything that would be material information
for the operating entity is also material for the trust. In other cases, there are relatively few reports.
These reports mostly relate to distributions of units or regular distributions of trust income to
unitholders. It may be that there was little or nothing to report on the activities of the underlying
operating entity (perhaps because the business was a relatively stable business, as is often the case
with businesses restructured as income trusts). It might also be that disclosure for these trusts has
focused on material changes involving only the trust and has not considered changes at the operating
entity level.
214 Supra note 64 at para. 3.1. See also the discussion in Part IV.A.2, above.
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B. Requirements to Requisition a Security Holder Meeting
The CBCA requires five per cent of shareholders entitled to vote on the matters to
be considered at the meeting to support a shareholder-requisitioned meeting.
Although there are corresponding provisions in income trust declarations of trust,
they typically require a ten per cent threshold. The difference raises several questions,
many of them empirical. Is there a reason for this difference? Do shareholders of
CBCA corporations overuse the shareholder meeting requisition process? Will a ten
per cent threshold so restrict unitholder-requisitioned meetings that they are unlikely
to occur? If so, what is the point in providing for unitholder-requisitioned meetings?
Are issuers of income trust units simply giving the appearance of a right, but doing so
in such a way that in all likelihood it will never be exercised?
C. Unitholder Proposals
Corporate statutes typically provide shareholders with a right to make
shareholder proposals. Presumably shareholders could always have made proposals to
management, asking that management include the proposal on the shareholder
meeting agenda. Management might not have agreed and might have exercised its
power to call a meeting without putting the shareholders proposal on the agenda. A
shareholder might requisition a meeting. This procedure, however, could be difficult
and costly. It would discourage many shareholder proposals. The unique feature of
the corporate statute shareholder proposal provisions is that they require management,
subject to certain exceptions, to put the proposal on the meeting agenda and allow the
shareholder to put a statement in the management proxy solicitation materials
concerning the proposal.
Declarations of trust for income trusts generally do not provide a corresponding
unitholder proposal right. Shareholder proposals are no doubt annoying to
management. They no doubt often complicate shareholder meetings and perhaps do
so unnecessarily, given that they rarely garner enough votes to carry a resolution in
favour. Should we allow the use of a business income trust structure to bypass a
shareholder proposal requirement of corporate statutes, which is presumably intended
to increase shareholder democracy by allowing them an easier means to bring matters
of concern before their fellow shareholders?
D. Remedies
Key remedies in corporate statutes not replicated in business income trusts are the
derivative action, the oppression remedy, and the appraisal remedy. While it seems
possible to draft a version of an appraisal remedy in a trust instrument, it may not be
possible to recreate either a derivative action or oppression remedy. These remedies
involve conferring powers on a court that it might not otherwise have and that could
not be conferred by an agreement or trust instrument.
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369
1. Derivative Action
As noted above in Part IV.C.1, it is possible that a unitholder in a business income
trust could be a complainant as either a beneficial owner of securities or as a proper
person to apply for leave to bring a derivative action. It is not entirely clear that
unitholders would have such a right. As noted in Part IV, the right of unitholders to
address breaches of fiduciary duties by managers of the operating entity become more
complex where the operating entity is not a corporation and where the income trust
structure becomes more complex.
The situation might be clarified by legislation that allowed unitholders a means of
addressing breaches of fiduciary duties at the operating entity level if the trustees
choose not to address them. Clarifying this right would put unitholders in a position
corresponding more closely to the rights of shareholders in a corporation or, indeed,
the rights of shareholders in a parent corporation, (which is arguably a more
analogous situation). It seems inconsistent that shareholders of a parent corporation
would have a right to apply for leave to bring a derivative action while unitholders
would not. If the income trust structure is a conduit for distributing operating
corporation profits to investors in a tax-efficient way, unitholders should be in a
position consistent with that of shareholders. They should have a right to apply for
leave to bring a derivative action.
In the corporate law context, the derivative action has become relatively
insignificant. Claims that might be described as derivative in nature can normally
be addressed in the procedurally simpler and cheaper oppression application.215 If
business income trust unitholders are to be treated on a par with corporate
shareholders, a simple approach might be to provide a statutory form of oppression
application provision that clearly extends to breaches of fiduciary duties throughout
the income trust structure. It should also extend to corporate actions by any
corporation in the structure.
2. Oppression Remedy
As noted above in Part IV.C.3, unitholders may have difficulty pursuing an
oppression remedy if they have to establish that the conduct of the affairs of the
corporation or the exercise of the powers of the directors was oppressive, or unfairly
prejudicial to, or unfairly disregarded their interests as a security holder, creditor,
director or officer.216 The operating entity may not be a corporation. An attempt to
extend the oppression remedy to oppression in capacities other than as a security
holder, creditor, director or officer may not be sufficient. It may be necessary to have
a statutory provision that deals directly with business income trusts. The oppressive
215 See supra note 181 and accompanying text.
216 CBCA, supra note 12, s. 241(2).
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acts might arise at the level of the income trust itself,217 or at other levels of the
income trust structure. Consideration should be given to a mandatory statutory
provision for business income trusts that allows unitholders to apply to court for relief
from oppression in the conduct of the affairs of the trust or at any level of the income
trust structure.
As discussed with respect to the derivative action above, to the extent that the
income trust structure is a conduit for distributing operating corporation profits to
investors, unitholders, as investors, are in essentially the same position as
shareholders. There is no reason to treat them differently. Consideration should be
given to providing unitholders with rights equivalent to an oppression remedy.
3. Appraisal
As noted in Part IV.C.4, unitholders in a business income trust generally do not
have an appraisal right relating to fundamental changes at either the trust level or the
level of the underlying operating entity. Since business income trusts are structured to
replicate a corporate form of organization, and replicate many of the rights provided
under corporate statutes, the same concerns that led to the adoption of an appraisal
right in corporate statutes also apply in the context of business income trusts.
Consideration might be given to a statutory provision that provides appraisal rights to
unitholders in business income trusts.218 Since fundamental changes at the operating
entity level are arguably as important to unitholders in business income trusts as they
are to shareholders in corporations, the appraisal right, if provided, should extend to
cover fundamental changes, not only at the trust level, but also at the operating entity
level (and perhaps also for fundamental changes occurring anywhere in the overall
income trust structure).
VI. Other Governance Concerns
Other governance problems may arise in the context of business income trusts. In
particular, there may be concerns over the use of external management contracts,
methods of executive compensation, the obtaining of and disclosure of stability
217 While oppressive, unfairly prejudicial, or unfair disregard of a unitholders interests might
be addressed through a modified approach to the trust law duty of impartiality, it could be waived by
the trust instrument. A statutory form of oppression provisions would be necessary to make it
mandatory.
218 This is not to say that an appraisal remedy should necessarily be adopted. It might be time to
review the appraisal remedy in the CBCA (supra note 12) and similar corporate law statutes. It
involves a complex procedure that can be expensive to comply with if a substantial number of
minority shareholders opt to use it. It also can create considerable uncertainty for the corporation
doing a transaction that creates such a right, since it may be difficult for the corporation to anticipate
the number of shares on which the dissent right will be exercised. The cost of payments for shares will
be unknown until after the shareholder meeting.
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ratings, the calculation of distributable cash, and difficulties the income trust structure
might encounter in an economic downturn.
371
A. External Management Contracts
In some income trusts, the operating corporation has entered into a management
contract with another corporation to manage the affairs of the operating corporation.
If the management contract gives the management corporation substantially all the
powers relating to the management of the operating corporation, the ability of
unitholders to address concerns about the management of the operating corporation
will be effectively neutralized. Unitholders may be able to replace the trustees of the
trust and, through the new trustees, replace the directors of the operating corporation.
This action will be to no avail, however, if the new directors have no management
powers because they have been given away in a contract.
While extensive management contracts are used in some income trusts,219 their
use is not limited to income trusts. Any corporation might enter into a management
contract and might attempt to transfer essentially all of its management powers to
others. The problem of extensive management contracts is not unique to income trusts
or to business income trusts. There will be situations where it makes sense for the
corporation to contract out certain parts of its management. The law should not
preclude these sorts of contracts, but it should constrain the use of management
contracts that confer essentially all management powers to others. Such contracts can
completely neutralize the control shareholders would have over management. There
are American cases that have held contracts that purport to convey all, or substantially
all, of the management powers of a corporation to others to be void on the basis that
they are contrary to public policy.220 A limitation on contracting out management
powers is at least implicit in our corporate statutes. The statutes give the power to
manage or supervise management to directors221 and limit the extent to which
219 It has been noted that external management contracts were common in earlier income trusts but,
while still used occasionally, are less common in more recently created income trusts. See Michael J.
Johnson, Survival of the Fittest: The Corporate Governance of Income Trusts in Poonam Puri &
Jeffrey Larsen, eds., Corporate Governance and Securities Regulation in the 21st Century (Toronto:
Butterworths, 2004) 293 at 302-303.
220 See e.g. Sherman & Ellis v. Indiana Mutual Casualty, 41 F.2d 588 (7th Cir. 1930); Kennerson v.
Burbank Amusement Co., 260 P.2d 823 (Cal. C.A. 1953). The key factors appear to be the extent of
management powers conveyed and the length of time for which they are conveyed. The greater the
extent of management powers conveyed and the longer the time for which they are conveyed, the
more likely it is that the contract would be void. If the contract is valid, it can be breached and
management powers reassumed by the directors of the corporation. If the contract is valid, however,
payment of damages will be required. The longer the contract is for, the greater the damages are likely
to be. The greater the damages, the more costly it will be for investors to reassert control over the
management of the corporation.
221 See e.g. CBCA, supra note 12, s. 102.
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directors can delegate those powers.222 There may be some doubt as to the validity of
management contracts in which a business income trust corporate operating entity
severely constrains the management powers of directors.
There are also ways other than a management contract to effectively freeze
unitholders from control over the operations of the entity that generates the returns.
For instance, one technique is to first create a corporation, and then to transfer to it
the title to the name under which the operating entity carries on business. That
corporation then licenses the use of the name back to the operating entity in return for
royalties. This royalty corporation is the source of the funds for unitholders. While
unitholders can, through the trustees, replace the directors of the royalty corporation,
the royalty corporation does not carry on the underlying business that generates the
revenues. The only control the royalty corporation has over the actual operating
corporation is through the royalty contract. That control may be quite limited.
As it may make sense for some aspects of corporate management to be contracted
out, it would be difficult to create a statutory or regulatory provision that draws the
proper line between valid management contracts and those that transfer too many
management powers. It is probably a matter that should be left to courts. The existing
contract law notion of contracts contrary to public policy may be sufficient to provide
courts with the discretion to control against overly extensive management contracts.
Where the operating entity of the business income trust is not a corporation, the
validity of an extensive management contract may not be as dubious. The market for
income trust units should address loss of control over management by pricing the
units accordingly. Price adjustments are more likely to occur if institutional investors
become a more significant part of the market for income trust units. Otherwise, it may
be something stock exchange and securities regulators should monitor. Regulators
could also set guidelines on the extent of management powers conveyed in external
management contracts and the time periods for which such contracts can operate.
Investors must be made aware of significant management contracts. These
contracts would normally be disclosed in a public offering of securities.223 Securities
regulators should be careful in their reviews of business income trust offerings to
ensure that significant management contracts are disclosed and discussed in the
prospectus. Securities regulation of income trusts should provide that any external
management contract entered into after the public offering be disclosed as part of
timely disclosure, even though it might not strictly be considered a change in the
business, operations, or capital of the trust itself. If the market is aware of the details
of management contracts, it should price income trust units accordingly. One might
222 See e.g. ibid., s. 115(3).
223 Indeed, the CSA expresses this expectation in National Policy 41-201, supra note 64, at paras.
2.14-16. It is expected that disclosure of executive compensation and executive contracts, including
external management contracts, will be made at the level of the operating entity in the prospectus and
on an ongoing basis. It is expected that material contracts in this regard will be filed on SEDAR, supra
note 2.
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
expect (or hope) that the market would apply a discount where a management
contract effectively precluded unitholders from dealing with poor management
performance. Increasing institutional investor investment in business income trusts
may increase the effectiveness of the market in assessing the effects of management
contracts, as long as the management contracts have been properly disclosed.
373
B. Executive Compensation
Executive compensation schemes should provide competitive
levels of
compensation that attract good managers and should be designed to align the interests
of management with the interests of investors. Compensation schemes may need to
vary with the particular circumstances of the issuer of securities. They will rarely, if
ever, provide a perfect alignment of management and investor interests. There will be
advantages and disadvantages to each possible scheme. The promoters of an issuer
will generally determine the initial compensation scheme, and the board of directors
will usually determine changes to it. If governance mechanisms provide weak
controls over management compensation schemes, it may result in a scheme that is
excessive and poorly aligns the interests of management and investors. These
problems affect compensation schemes no matter in what form of organization the
business is carried on. The question in the income trust context is whether the income
trust creates unique problems.
It has been suggested that certain traditional management incentive schemes may
not work well in the income trust context. For instance, an incentive stock option
scheme might not work well where the underlying business has stable earnings and is
intended to provide investors with regular and steady distributions. The value of units
should be relatively stable, since it depends on the expected future stream of cash
flows, which are unlikely to change significantly. Managers may be left with options
on units with exercise prices near market value and little prospect of benefiting from
the option, since the market value of the units is not likely to increase. Management
might have the incentive under such a scheme to withhold distributions and engage in
growth-oriented acquisitions. Such a strategy would be contrary to the interests of an
existing investor clientele primarily interested in steady distributions.224
This problem, however, is not really unique to income trusts. A business with
steady earnings and investors primarily interested in steady distributions might be
organized as a corporation, were it not for the additional taxation of corporate
income. The same concern about using a stock option incentive scheme might arise.
The reason this problem may appear to be unique to income trusts is that the income
224 To deal with the incentives for an income trust intended to create steady distributions of cash
flows, Johnson suggests the use of unit incentive plans in which the exercise price would be reduced
by given percentages for distributions in excess of a target amount, the use of significant management
ownership of units as an alternative to unit options, or some combination of significant management
ownership of units and unit option plans with the exercise price reduction modification (supra note
219 at 313-15).
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trust structure has become common for businesses with steady earnings, as a means of
reducing the effects of the double taxation of corporate income.
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C. Stability Ratings and Disclosure of Stability Ratings
Prior to offerings of income trust units, rating companies may be engaged to
provide a rating of the stability of the cash flows that the income trust is expected to
generate. Occasionally when the rating was unfavourable, those involved in issuing
the income trust units have chosen not to disclose the results. For sophisticated
investors, failure to disclose might not be much of a problem; they may be able to
assess the likely stability of cash flows to be generated by the underlying business.
Where the investors are retail investors, the failure to disclose a stability rating may
be a greater issue. The issuer has information that could be helpful to retail investors
and which might otherwise be obtained only at significant cost. If a stability rating
has been done, disclosure of it could reduce the costs to investors, both retail and
institutional, of assessing the variability of future returns.
National Policy 41-201 says that if the issuer has received a stability rating the
CSA expects the rating to be disclosed.225 This requirement seems consistent with
existing securities regulatory requirements. The disclosure required in a prospectus is
full, true and plain disclosure of all material facts.226 Material facts are those that
would reasonably be expected to have a significant effect on the market price or value
of the securities. If stability of cash flows is important, as it often is for investors who
invest in income trusts, an unfavourable stability rating would have a significant
effect on the market price or value of the income trust units.
D. Calculations of Distributable Cash
In recent years, there have been high-profile instances of manipulations of
accounting practices by corporations to improve reported net income.227 In the income
trust context, there may be incentives to manipulate accounting treatments, which
may manifest themselves in the calculation of distributable cash. The incentives may
be strong where investors focus on stable distributions. There may be attempts to
influence the calculation of distributable cash to make it appear more stable than
might otherwise be the case. The difficulty with calculations of distributable cash is
that these amounts are not standardized calculations under generally accepted
accounting principles. This fact may make the calculation more susceptible to
manipulation. One might standardize the definition of distributable cash to be used in
income trusts, but such an action would limit flexibility, which may be needed to
225 Supra note 64 at para. 2.12.
226 See e.g. OSA, supra note 19, s. 58; BCSA, supra note 19, s. 68.
227 There was, for instance, the Worldcom case in the United States and the Atlas Cold Storage
situation in Canada. On Atlas Cold Storage, see Ontario Securities Commission, News Release (3
June 2004).
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
respond to different income trust contexts. If the numbers that go into the calculation,
however defined, are properly audited on a regular basis against the definition in the
declaration of trust, it should limit the potential for manipulations. Consideration
should be given to requiring auditors for income trusts to include an assessment of
calculations of distributable cash in their audit report.
375
E. Refinancing in an Economic Downturn
It has been suggested that the structure of income trusts could create challenges
should interest rates go up or should there be an economic downturn. Since the
income trust distributes eighty to ninety-five per cent of its earnings, funds may not
be available to replace aging assets or reinvent the trust as a growth investment.228
The difficulty with this claim is that income trusts have a way to raise funds for
replacement of assets, to invest in new businesses, or expand existing businesses.
They can sell more units to the public. If the proposed use of the funds makes sense,
the market should take up the new offering. The requirement to return to the market
may be an advantage to the income trust, in addition to its significant tax advantages.
The tax treatment of dividends has been said to discourage corporations from paying
significant dividends. This policy increases retained earnings and provides an internal
source of funds for investment. While this policy provides a low-cost source of funds,
it reduces the frequency with which management must return to the market for funds.
A high-payout policy, forcing frequent return to the market, has been said to be an
important corporate governance discipline on management.229 The advantage of the
income trust is that the different tax treatment of distributions encourages a high-
payout policy. Through this policy, management can signal to investors an obligation
to return to the capital market, thus giving an incentive to manage the business in a
way that maximizes securities values.230
228 Johnson, supra note 219 at 326-27.
229 See e.g. Frank H. Easterbrook, Two Agency-Cost Explanations of Dividends (1984) 74 Amer.
Econ. Rev. 650; Richard A. Posner, Economic Analysis of Law, 5th ed. (New York: Aspen Publishers,
1998) 453. See also Vijay Jog & Liping Wang, The Growth of Income Trusts in Canada and the
Economic Consequences (2004) 52 Can. Tax J. 853 at 858.
230 This potential advantage of an income trust is briefly discussed in Paul D. Hayward, Income
Trusts: A Tax Efficient Product or the Product of Tax Inefficiency? (2002) 50 Can. Tax J. 1529. See
also Jog & Wang, ibid. at 858.
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VII. Is There a Need for Legislation?
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A. Introduction
Legislation concerning income trusts has been enacted to respond to potential
unitholder liability in income trusts,231 but is there a need for legislation concerning
governance of income trusts? It has been suggested that the income trust phenomenon
in Canada is just a bubble, or market anomaly.232 If it is a bubble, it will presumably
phase itself out, so any legislation created for income trust governance will become
largely irrelevant. The income trust phenomenon has lasted for several years,
however. With many new income trust IPOs in the first half of 2005,233 it does not
appear to be fading any time soon. Legislation might address potential abuses of
income trust structures. Even if there were no abuses, legislation might be enacted to
reduce costs associated with creating business income trust structures, the regulation
of business income trusts, and investment analysis of business income trusts.
B. Legislation to Control Against Potential Abuse
1. Potential for Management Abuse
While tax motivations may have been significant in the creation of business
income trusts, there is potential for management to use business income trust
structures to restrict investor control. As noted in Part II, the trust law that governs
business income trusts does not contain the kind of mandatory shareholder protection
provisions found in corporate statutes. This leaves scope for management to use
business income trust structures in an abusive way. The move to income trust
structures could be viewed, in the language of the corporate chartering debate, as a
race to the bottom.234 Legislation might set out business income trust governance
provisions to provide protections similar to those in corporate statutes.235
231 Trust Beneficiaries Liability Act, supra note 9; Alberta Income Trust Act, supra note 9; B.C.
Income Trust Act, supra note 9; Manitoba Unitholders Protection Act, supra note 9.
232 Dirk Zetzsche, The Need for Regulating Income Trusts: A Bubble Theory (2005) 63 U. T. Fac.
L. Rev. 45 at 73-99.
233 See Introduction, above.
234 There has been an extensive debate on the corporate charter competition. Some of the early
writing in the corporate charter competition debate saw the competition as a race to the bottom. See
William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware (1974) 83 Yale L.J.
663. The counter-argument was that it was in fact a race to the top. See Ralph K. Winter Jr., State
Law, Shareholder Protection and the Theory of the Corporation (1977) 6 J. Legal Stud. 251. The
debate and empirical evidence is reviewed in Roberta Romano, The Genius of American Corporate
Law (Washington: AEI Press, 1993). In the Canadian context, see Ronald J. Daniels, Should
Provinces Compete? The Case for a Competitive Corporate Law Market (1991) 36 McGill L.J. 130;
Jeffrey G. MacIntosh, The Role of Interjurisdictional Competition in Shaping Canadian Corporate
Law: A Second Look (University of Toronto Law and Economics Working Paper 18, 1993); Douglas
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
377
2. Control of Abuses by the Market, Securities Regulators, or the
Stock Exchange
Potential management abuses might be controlled without legislation. First, the
market might reduce prices for units of business income trusts that have questionable
or restrictive governance features. This kind of control may improve with increased
institutional investor involvement in the market for units of business income trusts.
Second, securities regulators and the stock exchange could impose requirements on
business income trusts to protect investors from potential abuses.
3. Are Existing Differences Abusive?
As the analysis in Part IV suggests, whether as a result of market forces, or
requests from securities regulators or the stock exchange, business income trusts
generally replicate most of the provisions in corporate statutes, such as the CBCA.
There are, however, some differences (such as those summarized in Part V, above).
Are these differences an abusive management use of the business income trust
structure, or do they actually make investors better off?
There are generally significant increases in value when corporations shift to an
income trust structure.236 These increases may be largely due to tax savings.237 We
J. Cumming & Jeffrey G. MacIntosh, The Role of Interjurisdictional Competition in Shaping
Canadian Corporate Law (2000) 20 Intl Rev. L. & Econ. 141; Douglas J. Cumming & Jeffrey G.
MacIntosh, The Rationales Underlying Reincorporation and the Implications for Canadian
Corporations (2002) 22 Intl Rev. L. & Econ. 277.
235 The extent to which legislation should provide mandatory provisions for business organizations
has been extensively debated in corporate law literature. See e.g. Frank H. Easterbrook & Daniel R.
Fischel, The Corporate Contract (1989) 89 Colum. L. Rev. 1416; Robert C. Clark, Contracts,
Elites, and Traditions in the Making of Corporate Law (1989) 89 Colum. L. Rev. 1703; Henry N.
Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians
(1990) 65 Wash. L. Rev. 1 at 7-18; Larry E. Ribstein, The Mandatory Nature of the ALI Code
(1993) 61 Geo. Wash. L. Rev. 984 at 987-98; Melvin A. Eisenberg, The Structure of Corporate Law
(1989) 89 Colum. L. Rev. 1461; Lewis A. Kornhauser, The Nexus of Contracts Approach to
Corporations: A Comment on Easterbrook and Fischel (1989) 89 Colum. L. Rev. 1449; Jeffrey N.
Gordon, The Mandatory Structure of Corporate Law (1989) 89 Colum. L. Rev. 1549; Roberta
Romano, Answering the Wrong Question: The Tenuous Case for Mandatory Corporate Laws
(1989) 89 Colum. L. Rev. 1599; Lucian A. Bebchuk, The Debate on Contractual Freedom in
Corporate Law (1989) 89 Colum. L. Rev. 1395; Bernard S. Black, Is Corporate Law Trivial? A
Political and Economic Analysis (1990) 84 Nw. U. L. Rev. 542. The issue has not been clearly
resolved. One argument in favour of mandatory provisions is that they can protect investors from
opportunistic downstream changes that reduce the value of their investment. See Bebchuk, ibid. A
downstream change is one made after investors have made their investments. Subsequent major
transactions (such as an amalgamation) or changes in the constating documents of the investment
vehicle (e.g., a corporation or a trust) may have a significant, and potentially detrimental, effect on the
value of an investment. Such transactions or changes may be necessary, but investors may need some
means of protecting themselves against transactions or changes that prejudicially affect their interests.
236 See Hayward, supra note 230; Lalit Aggarwal & Jack Mintz, Income Trusts and Shareholder
Taxation: Getting it Right (2004) 52 Can. Tax J. 792.
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may never know whether these tax savings are swamping otherwise negative effects
of the shift to these income trust structures. One problem is that institutional investors
have, at least until recently, avoided investment in business income trusts supposedly
due to a concern over potentially unlimited liability.238 The market for income trust
units has thus been dominated by retail investors who may not appreciate the
governance structure differences and therefore may not have efficiently priced the
units. They may not have properly priced the tax savings either, further complicating
the assessment of the effect of governance structure changes. It is especially difficult
to assess whether these governance structure differences are value-increasing or
value-decreasing. The recent increase in institutional investor involvement may
provide some assistance. Assuming that institutional investors are sufficiently
sophisticated to demand protection, particularly against value-reducing downstream
changes, persistent avoidance of certain corporate statute provisions suggests the
corporate statute provisions are actually value-reducing.
Investors may be better off if they avoid certain corporate statute provisions.
While well intended, these provisions may, in fact, reduce the value of the
investments for the very investors they were intended to protect. The avoidance of
certain corporate statute provisions in business income trusts may highlight
provisions that should be reconsidered. How often are they used, particularly in the
context of publicly held corporations? Can the benefits and costs be quantified?
While such an assessment is beyond the scope of this paper, some preliminary
observations are made here. First, the lack of an appraisal remedy may not be a major
shortcoming in a business income trust with publicly traded units. The unitholders
would have ready access to a rough appraisal remedy equivalentthey could simply
sell their units. This alternative might be simpler and less costly to both the investor
and the trust than a cumbersome procedural appraisal mechanism such as that
provided in corporate statutes. There may be situations, however, where an approved
fundamental change reduces the market value of the interests of some unitholders. It
237 See Hayward, ibid. at 1535-37. See also Aggarwal & Mintz, ibid., who estimate annual tax
benefits from income trusts in the order of $600 million. See also Tim Edgar, The Trouble with
Income Trusts (2004) 52 Can. Tax J. 819, where it is argued that Income trusts are largely tax-driven
structures that offer very little in the way of desirable efficiency or equity effects (Edgar, ibid. at 820
×.).
238 The limited liability concern and the legislative response is addressed in Mark R. Gillen,
Income Trusts Unitholder Liability: Risks and Legislative Response (2005) 42 Can. Bus. L.J. 325.
The paper argues, as have several legal opinions, that the potential for unlimited liability is remote
(probably as remote as the risk of unlimited liability as a shareholder in a public corporation).
Institutional investors may become more inclined to invest in business income trusts now that they are
protected by legislation in Ontario, Alberta, British Columbia, and Manitoba (see supra note 9). The
paper argues that these statutes do nothing to alter the main basis (the agency basis) on which
unitholders in a business income trust might be liable beyond the amount of their investment.
379
2006] M. GILLEN BUSINESS INCOME TRUST AND CORPORATE GOVERNANCE
may be worthwhile to have a method that allows them to sell their units at a price that
does not include a reduction for the fundamental change.239
Second, the lack of a derivative action provision or an oppression provision may,
in part, be due to the difficulties that would be encountered in creating precise
equivalents in a trust instrument, given the need to confer certain powers on a court.
The conferral of powers may require legislation. In the case of the derivative action,
its current limited use suggests that it might be either abandoned (leaving only an
oppression remedy), or given a more limited role.240
Third, the oppression application provides its greatest benefit where there is no
public market for the investment interests. Investment interests may be locked in,
even in the face of changes that significantly reduce their value. Publicly traded
income trust units can be sold in the market, which responds to proposed negative
downstream changes. There may nonetheless be situations where value-reducing
downstream changes have not been anticipated by provisions dealing with
fundamental changes. These changes may reduce the market value of the units before
they can be sold. The value of the units may be greater with the protection that an
oppression provision provides against unanticipated downstream changes.
4. Minimum Standards That Might Be Adopted
If the differences make investors worse off, a statute might set minimum
standards.241 For instance, the statute might mandate certain unitholder rights and
remedies. These remedies might include an oppression remedy provision that clarifies
the availability of the oppression remedy to unitholders at the trust level and perhaps
239 Possible benefits and costs of the appraisal remedy were reviewed in Jeffrey G. MacIntosh, The
Shareholders Appraisal Right in Canada: A Critical Reappraisal (1987) 24 Osgoode Hall L.J. 201.
Market forces may discourage opportunism where the issuer has to return to the market on a regular
basis for further infusions of capital. Businesses that are converted to income trust structures are often
relatively stable businesses that may not return to the capital market often. The market for income
trust units has also been, at least until recently, primarily a retail market in which the holdings of trust
units are likely to be widely dispersed. This fact may cause collective action problems, limiting the
degree to which the market may control opportunism, suggesting that the benefits of an appraisal
remedy may be sufficient to yield benefits net of costs.
Statutory appraisal remedy provisions may provide for a calculation of fair value that does not
include the effect of the fundamental change. Provisions normally require that fair value be calculated
as of the day before the approval of the fundamental change. See e.g. CBCA, supra note 12, s. 190(3).
They may also provide that the fair value not include gains or losses in the value of shares that were
the result of the anticipation of a proposed change. See e.g. Corporations Act, R.S.M. 1987, c. C-225,
s. 184(3). See also Peterson, supra note 181.
240 For instance, claims against directors or officers for breaches of fiduciary duties might be
brought through an oppression claim, leaving the derivative action as a means through which
shareholders or other proper persons might be allowed to pursue actions, on behalf of the corporation,
that the corporation has against persons other than directors and officers.
241 Zetzsche, supra note 232 at 104-105 suggests the adoption of corporate statute provisions as
minimum standards for income trusts.
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also at the level of the underlying operating entity. A provision that clarifies rights for
unitholders to act in the name of and on behalf of the trustees in certain circumstances
might also be included. Consideration could be given to mandatory unitholder voting
rights on fundamental changes, such as amendment of the declaration of trust,
amalgamation of the trust, sale of all or substantially all of the trust assets, or
termination of the trust. It might also require trustees to seek unitholder approval to
exercise voting rights at the operating entity level on transactions such as an
amalgamation of the operating entity, the sale, lease, or exchange of all or
substantially all of its assets, the winding up or dissolution of the operating entity, or
amendments to its constating documents. Consideration could also be given to
mandatory class voting rights where an income trust has different types of units,
similar to classes of shares in a corporation. It might also be useful to have a
provision for trustees to waive any right of indemnification from the beneficiaries. A
provision that ensures the trust will not be treated as a bare trust might be useful in
order to reduce the risk of unitholders being subject to liability beyond the extent of
their investment.
5. Regulatory Competition
If a particular province developed such a statute, what would stop income trust
promoters from creating the income trust under the laws of another province without
a corresponding statute? A province that developed an income trust statute might
prohibit sales of income trust units not established under the statute or corresponding
statutes of other provinces. In practice, such a prohibition might be difficult to
enforce. While one might be able to control sales activities in the province, it would
be difficult to prevent resident investors from buying income trust units outside the
province.
A well-devised statute hopefully would lead over time to a reputation for better
investor protection. This protection might be supplemented with investor education,
indicating that the provincial income trust statute has investor protection provisions
not found in other income trust statutes. Ontario sits in a unique position, since the
promoters of an income trust will likely want to have the units listed and posted for
trading on the TSX. Trading in the trust units would thereby be subject to regulation
by the TSX and the Ontario Securities Commission.
C. Legislation as a Means of Reducing Transaction Costs
Another advantage of a statute is that it can provide a default structure. The
default structure may reduce the cost of setting up a business income trust and the
associated regulatory costs. It may also reduce costs for investors analyzing business
income trust investments.
Many provisions in declarations of trust are identically, or virtually identically,
worded. Declarations of trust might be simplified if many of the terms were contained
in a statute. Although existing declarations of trust are readily available to use as a
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basis for drafting a new declaration of trust, a statute that simplifies these declarations
by setting out default terms may reduce the cost of setting up income trusts.
Declarations of trust might simply set out the ways in which the rules governing the
trust differ from those set out in the statute. Many of the provisions in these
declarations of trust mirror provisions in the CBCA or similar corporate statutes.
These corporate statutes might be a useful model for drafting an income trust statute.
Legislation might also reduce regulatory costs associated with the creation of a
business income trust. Securities regulators need to review business income trust
offerings to ensure that it is not contrary to public interest before issuing a receipt for
a preliminary prospectus. The stock exchange, with a view to protecting its
reputation, might likewise review a potential listing of a business income trust to see
that the provisions provide adequate protections for investors. These reviews might
be simplified if regulators could simply confirm that the business income trust was
created under the legislation and examine the declaration of trust for permitted
deviations. They need not search the declaration of trust for mandated investor
protection provisions once they have confirmed that the business income trust is
established under the legislation.
Legislation setting up a default structure for business income trusts might also
reduce costs for investors analyzing business income trust investments. Instead of
searching through long declarations of trust for particular governance provisions or
investor protection provisions, investors could simply confirm that the trust was
created under the legislation. They could then look through shorter declarations of
trust for the permitted deviations from the statutory structure.
VIII. Tax Neutrality and Legislation That Replicates Corporate
Law Statutes
If a statute for business income trusts replicates corporate law statutes such that
the only remaining difference is the tax advantage of the business income trust, the
issue reduces to a question of tax policy. If the difference is simply the tax
advantage, it would favour one form of business organization over another,
essentially identical, form of business organization. Taxes should be neutralthat
is, they should affect economic decision making as little as possible. Given the
underlying principle of neutrality, it is hard to imagine what the tax policy
justification could be for favouring the business income trust structure. The income
trust structure may be a convenient, non-tax-law institutional innovation that
addresses the double taxation concern.
The tax advantage may also create a governance benefit. It allows management
to distribute free cash flow to investors without the double taxation that arises in a
corporate dividend distribution. Reducing free cash flows can operate as a credible
signal by management to investors that they will act in the interests of investors. It
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does so by forcing management to return to the market for further infusions of
capital, rather than relying on internally generated funds. It gives management an
incentive to perform well in order to maintain and improve the market value of the
firms securities.242 This signalling device243 comes at a cost. Financing with
internally generated funds is cheaper than seeking funds in the capital market. The
double taxation of distributed corporate profits imposes a further cost that may deter
management from using this signalling device in a corporation. Avoiding double
taxation of distributed profits in business income trusts reduces the cost of this
signalling device. While this advantage for income trusts, if it exists, is a governance
advantage, it is one created by the different tax treatment between business income
trusts and corporations. It is not one that arises purely from the structural difference.
An income tax that significantly favours one form of organization over another is not
neutral. The approach to business income trusts should not be to encourage them or
accept them as a way of addressing corporate double taxation, but rather to address
the double taxation of corporate income head on.
Conclusion
Declarations of trust for business income trusts replicate many of the governance
provisions of corporate statutes. There are, however, some notable exceptions. In
particular, they omit the appraisal remedy and unitholder proposal provisions
provided in corporate statutes. They also do not provide equivalents to the derivative
action or the oppression remedy. While there may be some scope for unitholder
derivative or oppression actions at the level of an underlying operating entity, such a
right may not exist if the operating entity is not a corporation or if the shares are held
by an intermediate entity rather than directly by trustees.
If avoidance of certain corporate shareholder rights and remedies is seen as a sort
of race to the bottom in which unitholders may be exposed to detrimental
downstream changes, a statute should be adopted to protect investors. This statute
should mandate rights and remedies corresponding to those in corporate statutes. A
statute might also set out various default provisions for business income trusts,
thereby reducing the costs of creating, regulating, or performing investment analysis
of such trusts. If the statute were to completely replicate corporate statutory
provisions, however, there would be two forms of organization (corporations and
business income trusts) that are virtually identical in terms of governance.244 Tax
treatment would be the only remaining significant difference. If that is the case, the
242 See e.g. Easterbrook, supra note 229; Posner, supra note 229.
243 Distribution of free cash flows by management operates as a signal to investors that
management will return to the market for needed funds. By committing to return to the market,
management gives itself an incentive to perform well so that funds can be raised.
244 The multi-tiered structure of income trusts might remain with a statute that mandated rights to
unitholders identical to those in corporate statutes, since the essential legal governance features would
be the same.
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issue reduces to a tax issue. The response should be a tax policy that better integrates
corporate and personal income taxes by enhancing the dividend tax credit, or
otherwise directly addresses the double taxation concern.
If the avoidance of certain corporate shareholder rights and remedies is seen as
more of a race to the top in which these corporate provisions are avoided because
they actually reduce the value of the equity interests, we would not want to mandate
these rights and remedies in a statute (thereby making investors worse off). If these
rights and remedies reduce equity values, it is time to review their efficacy. In other
words, if certain shareholder rights and remedies are being avoided because they are
value-reducing, the focus should be on amending corporate statutes rather than
creating a special statute for business income trusts.
