January 11, 2006
New provincial legislation may be applied to income trusts to bring their governance provisions more closely in line with publicly traded corporations.
The Canadian Bar Association's Uniform Law Conference of Canada, a panel of eleven lawyers, is preparing a national initiative that can be put before the provinces as draft legislation.
"We hope to see uniform legislation across Canada in every province that deals with income trusts," says John Cameron, a panel member. "What we're doing right now is preparing a report on what issues should be covered by that legislation. It's a two-stage process. There wouldn't be draft legislation before August 2007."
"All this is coming about as part of the evolution of income trusts. As more and more money flows into these kinds of vehicles, there's more and more attention paid to how they operate, and to the laws in this area, most of which stem from nineteenth-century trust law and were never designed to operate in this business environment."
While nothing has been decided yet, John says the group is looking at enshrining governance measures and extending trustees the same legal protections as directors who sit on corporate boards. They currently have much greater potential liability.
He says that the panel, aware of the speculation before Christmas that there could be changes to the tax treatment of trusts, will not touch on that area.
"We do not want to affect the tax status of income trusts. That would be a step backwards if we were to make changes and, as an inadvertent consequence, that happened. We're watching that issue. What we're trying to do is deal with a couple of areas in the corporate governance area that will put public trusts and public business corporations on the same ground."
They are already close, according to a recent Industry Canada report. The report, a comprehensive snapshot of income trust governance, shows that investors in publicly traded income trusts already have most of the same protections as regular shareholders, but not all the same legal remedies. The report identifies and analyzes the difference between obligations under the Canada Business Corporations Act and three major areas concerning trusts: disclosure and communication with unitholders; rights and remedies available to investors; and trustees' duties and liabilities.
The results suggest that most trusts have governance provisions similar to, and occasionally better than, the CBCA in many areas. But trusts do not generally provide equivalents to the CBCA for either shareholder proposals or dissent rights, and unitholders do not have the use of the oppression remedy or derivative actions if they feel managers or trustees have somehow abused their position.
The panel drafting the provincial legislation may address some of those differences.
Governance is a key issue because although publicly traded income trusts are subject to securities laws and stock exchange rules, their governance requirements are arbitrary. Provisions covering things like the standard of care imposed on trustees, disclosure of a material interest, removal of a trustee and the right to examine financial statements can vary from one trust to the next. This is because while corporations are governed by a statute such as the CBCA, trusts are ruled only by their declarations of trust, which are essentially private agreements. So protections are whatever is negotiated between the company and the underwriters at the time the trust is created and taken public.