Uses Of Star Trusts For Holding Shares In Corporate Entities
The Special Trusts (Alternative Regime) Law, 1997 (the "STAR Law") was introduced in late 1997 and is now incorporated into Part VIII of the Trusts Law (2001 Revision). The idea of the law was to create an alternative regime under which a trust for non-charitable purposes could be created.
The law does not affect existing ordinary trusts or powers and for the STAR Law to be applicable to a trust it must be expressly stated within the Trust Deed. A trust set-up under the STAR Law is commonly referred to as a "STAR Trust". Objects of a STAR Trust can be persons or purposes (charitable and/or non-charitable) or both. The ability to create a STAR Trust for purposes has made STAR Trusts attractive for many types of commercial transactions, particularly in relation to investment funds and structured finance transactions.
Using Star Trusts For Holding Shares
In the mutual fund context STAR Trusts are often created to enable an independent trustee to hold non-participating management shares with voting rights in a corporate fund when a promoter of the fund does not wish to hold such shares. Investors in the funds are generally issued with non-voting or limited-voting participating shares.
Because a STAR Trust can be established to hold assets for the purpose of a particular transaction and specifically drafted to meet the requirements of a transaction they are proving increasingly popular. STAR Trusts may be used in place of the traditional charitable trust in international asset and structured finance transactions to effect "off balance sheet" financing. The transactions often involve a Cayman Islands company, generally referred to as a "special purpose vehicle" or "SPV", that has been incorporated specifically for the transaction. The Trustees of the STAR Trust will hold the shares of the SPV as the sole asset of the trust property.
STAR Trusts can be used to create mirrors of other entities or trusts in other jurisdictions. One such example is a "voting trust" which is common in the United States under which shareholders in a corporation transfer their shares to a trustee who is authorised to vote the shares on their behalf. This is particularly useful in insolvency cases as vesting and centralizing the voting rights in the trustee significantly reduces logistical difficulties in the winding up.
It should be noted that where a STAR Trust is used in this type of transaction, the purpose of the trust should not be stated simply as being to hold the shares of particular company. This is because the language is directed towards the form in which the assets of the Trust will be held rather than how the assets are to be applied, and could cause the trust to fail for lack of a proper purpose.
A trustee of a STAR Trust must be or include a Cayman Islands licensed trust corporation. That trustee must keep certain records at the office of the trust corporation in the Cayman Islands. These records must include the terms of the STAR Trust, the identity of the trustee and the enforcers, all settlements of the property held under the STAR Trust at the end of each of its accounting years and all distributions or applications of the trust property.
Walkers SPV Limited is a licensed trust corporation in the Cayman Islands and can provide trustee services for a STAR Trust used for commercial purposes.
Unlike an ordinary trust, a beneficiary of a STAR Trust does not (in its capacity as a beneficiary) have standing to enforce the trust or take action against the trustee or an enforcer or have an enforceable right to trust property. The trust deed must specify who will have the standing to enforce the STAR Trust (an "Enforcer"). An Enforcer need not be a beneficiary but if there is no Enforcer that is a beneficiary there must be an Enforcer who specifically has a duty to enforce the trust under the trust deed. To avoid any situation whereby there is no Enforcer with a duty to enforce the trust, the trust deed should provide for successor Enforcers and under certain circumstances the court has jurisdiction to appoint Enforcers. If there is no Enforcer who is of capacity and is willing and able to enforce the trust the trustee has a duty under the STAR Law to apply to the court within 30 days for the appointment of another Enforcer.
Usually the only issue in relation to whether or not to use a STAR Trust in a commercial transaction is who will be the Enforcer. STAR Enforcer Limited is a Cayman Islands company that specializes in providing independent enforcer services.
For further information on services offered by Walkers SPV Limited and STAR Enforcer Limited please contact:
For further information please refer to your usual contact or:
Grant Stein, Partner
Sara Collins, Partner
Andrew Miller, Associate
David Whittome, Partner
British Virgin Islands
Christopher McKenzie, Partner
Hugh O'Loughlin, Partner
Rod Palmer, Partner
Peter Harris, Partner
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.