During this decade of increased standards of corporate governance, the use and popularity of income trusts has led to criticism of the absence of good governance practices and investor rights and remedies from income trusts that are otherwise applicable to corporate entities under corporate laws.
Critics and regulators, including the Bank of Canada, the Canadian Securities Administrators (CSA), the Uniform Law Conference of Canada (ULCC), the Canadian Coalition for Good Governance (CCGG) and the Public Interest Advocacy Centre, have observed or expressed concern about these differences. Consequently, they have made proposals or issued guidelines or recommendations to address the differences and perceived shortcomings in governance practices of income trusts.
In early 2006, the CCGG undertook a study that identified that Canadian public entities structured as trusts (including income trusts and real estate investment trusts) do not have uniform provisions in their constating documents (called declarations of trust) relating to investor rights and governance. The CCGG noted that, in some cases, these entities, in its view, have inappropriate provisions or significant gaps in investor protection. In the CCGG’s view, investor rights and remedies in public trusts should be standardized, as has long
been the case for corporations. The CCGG urged that such rights and remedies should mirror the governance provisions of the Canada Business Corporations Act (CBCA) to the extent legally possible, with the result that, as far as is practicable, an investor would be indifferent from a governance perspective whether it purchased units of an income trust or shares of a CBCA corporation.
On December 10, 2007, the CCGG published for comment draft model governance provisions for the declarations of trust of public trusts, based on its prioritization of the most important investor rights.
At the outset, the model provisions provide for dissent and appraisal rights and an oppression remedy. Other model rights and remedies include requisitioning unitholder meetings, making unitholder proposals, appointing an auditor, fixing the auditor’s remuneration, and removing trustees. The model provisions address unitholder meetings and voting, including voting rights, voting of units held by the trust, the requirement to call unitholder meetings, required notice for unitholder meetings, right to appoint a proxy, quorum, election of trustees, fundamental changes, and resolutions that are ordinary or extraordinary and in writing. Other provisions cover records of the trust, items that may and may not be delegated, the qualification and duties of the trustees, conflicts of interest, unitholder immunity and non-liability, and compulsory acquisition in the event of a take-over bid.
McCarthy Tétrault Notes:
It is commendable that the CCGG pressed ahead with its project, notwithstanding the announcement on October 31, 2006 by the Federal Minister of Finance of proposed changes in the taxation of all income trusts, other than real estate investment trusts, such that as of January 1, 2011, income trusts will be taxed like corporations. The CCGG’s model provisions for the declarations of trust address areas that the ULCC had proposed for coverage in the Uniform Income Trusts Act, which the ULCC released for discussion in August 2006, prior to the Finance Minister’s Halloween announcement. To the extent that real estate investment trusts and other public income trusts will continue to exist after the implementation of the changed tax treatment in 2011, those public trusts might consider amending their declarations of trust by adopting the model provisions.
By virtue of National Policy 41-201 Income Trusts and Other Indirect Offerings, the CSA does require that trust issuers provide disclosure in the issuer’s annual information form and any prospectus filed by the issuer that sets forth the material protections, rights and remedies that would be afforded to a shareholder under the CBCA, but which are not available to a unitholder of the trust issuer.
Both the CSA in this National Policy and the CCGG in its proposal have limited their point of reference to the CBCA, which overlooks differences available to a corporation that is unincorporated under a provincial statute