Unitholders of the recently established Royal Utilities Income Fund explicitly given additional protections commensurate with those typically enjoyed by corporate shareholders.
Corporate governance issues arising from the income trust structure have been the subject of some debate in recent years, with trust governance, particularly in the key area of unitholder protection, becoming a growing concern in the absence of a clear legislative framework. The recently established Royal Utilities Income Fund has addressed some of these issues by explicitly providing for certain protections in its trust documentation which puts unitholders on a similar footing to the shareholders of a corporation in terms of some of the rights and remedies they enjoy.
Background – Income Trust Governance Issues
Several commentators have compared the rights and remedies afforded to unitholders of income trusts with those afforded to shareholders of Canadian corporations. These comparisons have found that, generally, income trust instruments provide protections to unitholders that are similar to the protections afforded to shareholders u,nder applicable provincial and federal corporate statutes. In most cases, income trust instruments contain provisions such as those dealing with the duties and liabilities of trustees, the standard of care, disclosure of conflicts of interest and disclosure and communication with unitholders, all of which are similar to the corporate statute provisions.
Notwithstanding these similarities, a number of governance experts have been critical of income trusts for the absence of certain rights and remedies being specifically afforded to unitholders that are available to shareholders under applicable corporate statutes. The most notable rights and remedies not afforded to unitholders in income trust instruments are those of: (i) dissent; (ii) derivative action; and (iii) oppression. Although some of these rights and remedies may arguably be broadly similar to those available to unitholders under common law - based on equitable principles, the omission of these protections in trust instruments has been of concern to some proponents of good governance. These proponents note that, in the absence of a statutory authority that explicitly provides for such protections to unitholders, income trust instruments should specifically provide unitholders with similar protections to those afforded to shareholders under corporate statutes.
The Royal Utilities Income Fund
The governance disparities between the income trust structure and the corporate structure described above have recently been addressed in the documents establishing the Royal Utilities Income Fund (the "Fund"). Under the Fund’s governing instrument, or declaration of trust, unitholders may exercise their right of dissent in respect of certain fundamental matters such as a sale of substantially all of the assets of the Fund or its affiliates (other than in connection with an internal reorganization), or an amalgamation, arrangement or merger involving the Fund or its affiliates. The declaration of trust also provides that unitholders may apply to the courts for leave to exercise certain derivative rights in the name and on behalf of the trustees of the Fund or the Fund’s affiliates, or for an order, with which the Fund and its affiliates agrees to comply, in respect of oppressive or unfairly prejudicial acts or unfair disregard for the interests of any unitholder.
The declaration of trust makes it clear that these rights and remedies do not limit any other rights and remedies available at law or in equity, and that the intention is to provide unitholders with at least the same rights and remedies as are enjoyed by shareholders of corporations under corporate statutes. The only limitation to these rights and remedies is that a unitholder cannot apply or enforce an order which would have the effect of changing the Fund’s status as a "unit trust" or as a "mutual fund trust" for purposes of the income tax statute.
This development towards explicitly providing unitholders with increased protections may signal a greater sensitivity on the part of income trusts in addressing governance concerns. It will be interesting to see if other income trusts follow suit over time.
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