“Lights. Camera. Action!” – Re Motion Picture Capital and standing for minority shareholders to bring unfair prejudice petitions
This article was first published on Lexis®PSL Private Client on 5 June 2018. Click for a free trial of Lexis®PSL.
South Downs Trustees Ltd v GH and others  EWHC 1064 (Ch)
This case highlights the risk of trying to restrict trustees by attempting to prevent them from responding to changing market conditions which are unforeseeable when a trust (in this case, an employee benefit trust (EBT)) is established.
Rather than entering an express provision in the trust deed that restricts the trustee from dealing with a trust in a specific way, it may be preferable to establish a trust which prohibits the trustee from accepting an offer without the consent of the employees or their representatives. This is something practitioners should consider when establishing trusts of this nature.
Although in this case the court felt that it was appropriate, taking into account all of the circumstances, to override the provisions set out in the trust deed, in other cases the court is unlikely to be willing to involve itself in overriding a trust deed.
This judgment does not pave the way for overruling the provisions of the trust deeds in all situations, and going forward it should be remembered that each case will turn on its own set of facts.
The trust was an EBT, whose beneficiaries were former and current employees (and their dependants).
The EBT was created to hold shares in the company (referred to in the judgment as ‘the utility’) as part of a management buy-out (MBO) in 2001. The MBO was funded in part by a subordinated debt. The debt was repaid by 2011 from the utility’s profits, at which point the shareholdings in the utility changed so that the trustee’s shareholding amounted to 73%.
From 2011, the trustee and other shareholders received regular dividends and payments which were paid by the trustee to the beneficiaries of the EBT.
In 2017, an unsolicited offer was made to buy the utility’s share capital. The trustee took financial and legal advice before entering into a sale and purchase agreement.
The beneficiaries of the EBT were divided into three groups for the purposes of deciding how to distribute the sale proceeds (depending on when they joined and/or left the utility, and their reasons for leaving).
The EBT’s object was to facilitate the holding of shares by the beneficiaries, or for their benefit. The trust deed gave the trustee discretion over how to achieve the trust’s objects by applying trust capital or income for the beneficiaries’ benefit.
However, the trust deed expressly prohibited the trustee from disposing of its beneficial interest in the shares if doing so would result in a loss of control of the utility. In addition, this clause was entrenched by including a prohibition on amendments to that clause.
The trustee applied to the court under section 57(1) of the Trustee Act 1925 (TA 1925) for permission to override the terms of the trust deed and sell the trust’s entire shareholding, and relied on the principles set out in Public Trustee v Cooper  WTLR 901.
Under TA 1925, s 57(1), the court needs to be satisfied of three matters to make an order:
In this case, the court also considered a fourth point, which was that the court must be satisfied that the course of action the trustee wished to take was one which could properly be regarded as the ‘management and administration’ of property.
The trustee sought the court’s approval or blessing for its decision to enter into the transaction under the second limb of the Public Trustee v Cooper test, which states that the decision taken by the trustees must fall within a range of reasonable decisions.
In this case, the decision to be taken by the trustee was a ‘momentous’ one, as it would lead to the EBT being wound up.
The court had to consider two elements when making the decision regarding the desirability to sell the holding of shares. First, whether the decision to sell the assets of the EBT was reasonable, and second, was the manner in which the proceeds of sale were to be distributed reasonable (ie between the proposed groups of beneficiaries, depending on whether they were current or previous employees, and the reason for their departure).
The court granted an order under TA 1925, s 57(1), allowing the trustee to sell the trust’s entire shareholding in the company, even though the trust deed expressly restricted its power to sell where it would lead to a loss of control over the company.
In respect of the three points listed above, the court found that:
The court found that the trustee was right to take a flexible view of its role in relation to the initial purpose of the EBT and the need and benefit of continuing the EBT in what was likely to be a less
beneficial era for the company.
The evidence showed that care had been taken by the trustee in reaching the decision to sell its shareholding (by taking advice from a financial advisor). The trustee’s decision could not be said to be unreasonable. Having made that finding, the court found that it was unnecessary to go further into examination of this issue.
Interviewed by Alex Heshmaty.
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