The deployment of companies and trusts within the context of investment and a discussion revolving around which vehicle is best suited for such triggers a thought process which should kick itself off through a description of what constitutes investment.
The concept of ‘investment’ comprises of two broad categories: speculative financial investment and social investment. Hence, investment need not only be about ‘making money’ and ‘profit’ but, conceptually, also comprises of activities and committed assets which are undertaken and utilised to reach an ‘end goal’. Therefore, conceptually, the notion of investment involves the management (self or otherwise) of one’s assets.
The execution of investment may of course occur directly, in one’s own personal name, or, alternatively, it may occur through vehicles such as companies and trust. Opting for one over the other is dependent on a multitude of factors of a personal, financial and operational nature. What is certain is that the use of both trusts and companies presents investors with a forum through which they may opt to invest in an indirect manner.
It could be said that company law had always chased market practice in this area and was only given a lead upon the inception of the Companies Act in the late 20th century. The extension of legal personality to the company has elevated the use of companies for investment purposes, offering entrepreneurs the possibility to raise money for a business undertaking with the added protection of limited liability for both the entrepreneurs. From an investor perspective, it is safe to say that, generally, the company offers a medium through which investment can be conducted by any person who wants to shy away from the responsibility attached to the activities of the company, the latter of which is assumed by the directors. Therefore, for an investor, all that is at risk is the investment stake in question.
Historically, the company began life via contract i.e. through a partnership of persons within a trust element, however, the emergence of separate personality has allowed shareholders to sink into the shadows. Companies could be best described as ‘a nexus of contracts’ wherein a shareholder does not acquire property rights but at best, a right characterised as democratic control over property. Even though shareholders do not have property rights over the company’s assets, they do have rights which would allow them to control the company’s assets! These rights arise from, inter alia, voting power or minority shareholding protection provisions in the law.
What a share is defined as is indeed a complex issue. The Companies Act denotes that a share “includes stock except where a distinction between stock and shares is expressed or implied”, stopping short from defining the specific elements which would render an asset to be positively determined as a share.
Saying that a share is a ‘bundle of rights’ only scratches the surface as to what shares really are and represent. It is perhaps safe to say that a share, in commercial terms, is a receipt for the investment however, naturally, it goes beyond this in legal terms. In the latter’s regard, a share could be said to be more of an expression of a proprietary relationship, rather than the constitution of one, since shareholders may only exert their proprietary rights in the form of a personal claim against the company. The type of right a shareholder has can be said to be vested in value, rather than specific property of the company. This is very evident upon winding up, whereby the shareholders, more often than not, take up a sum of money representing value of the liquidated property of the company.
Therefore, the shareholder finds himself in a position whereby he is subject to a return on the investment stake where all the shareholder risks is loss of investment.
A director of a company has no legal title to any of the company’s property and hence, has no vested interested in such. Therefore, even though directors manage the affairs of a company, shareholders who have an expression of a proprietary right in the company can rest assured that no director has legal title or a claim over the company’s property.
The articles of association maintain the traditional form and element of the ‘association agreement’ between all shareholders of the company and the company itself. Such a document stipulates the manner the company’s internal procedures function and the rights of different shareholders. Hence, shareholders, apart from investment rights as noted above, also acquire contractual rights.
As a point of departure, it is appropriate to point out that even though a trust provides a vehicle through which one may channel his or her investment, it in no way presents as a vehicle with separate legal personality. Therefore, the trust can be said to be an ‘arrangement’ between different parties which ultimately devises responsibility and apportions proprietary rights in accordance with a written instrument known as the ‘trust deed’.
Within the trust ecosystem, the investor is considered to be the settlor, whereas the person/s who benefit from the fruits of the investment are considered to be the beneficiaries.
Generally, trustees are subject to negative obligations (i.e. not to do something), however, within the context of investment, trustees are subject to positive obligations. In this respect, the Trust and Trustees Act prescribes that “Where the terms of the trust direct or authorise that accumulation for a period of all or part of the income of the trust, the trustee shall distribute the income of the trust which is not accumulated as required or authorised by the terms of the trust.” It is to be noted, however, that a trustee may, in terms of law, delegate investment functions to an investment manager and employ an investment advisor to advise on the manner the property settled on trust is to be disposed of.
The general rule is that the trustee must act prudently as a bonus paterfamilias and all investments to be made are to be properly recorded and be in accordance with the trust deed in question. All assets held in trust must be segregated from those of other trusts and those of the trustee himself/itself.
Unlike a director in a company, the trustee has legal title to all property held in trust. This renders the trustee as being personally liable for any loss of trust property when the trust deed is breached in general terms, when the investment is in unauthorised investments or when unauthorised investments made a profit but a lesser profit than authorised investments.
| Trustees | Directors | |
| Proprietary rights | Trustees own legal title to trust property with equitable interest vested in the beneficiaries. | Directors don’t have any proprietary rights in company property, and this belongs to the company as a legal person. |
| Obligations owed directly to the investors | Trustees owe fiduciary duties directly to the beneficiaries and can therefore be personally liable for breach of trust |
Directors owe their duties to the company and therefore shareholders cannot activate rights against the directors personally unless they are bringing a:
i. Derivative action or
ii. Claim for unfair prejudice |
| Nature of the investor’s rights | Beneficiary in a trust has equitable interest in the trust fund, the extent of which depends on the trust instrument’s provisions. | Ordinary shareholder has no right to income unless the directors make a profit and declare a dividend. Preference shares do give a form of fixed income, if profit is generated. |
| Extent of statutory oversight of the entity | Trusts are not subject to a registration requirement and can be secret due to lack of reporting obligations | Companies are subject to registration requirements and ongoing reporting obligations |
Opting for one vehicle over the other largely depends on the investment strategy which fits the risk appetite of the investor in question. Over time, the company has emerged as a leading vehicle of choice due to, namely, the following factors:
As a law firm based in Malta, novolegal’s corporate, capital markets and financial services practitioners are well equipped to guide private clients as to the most suitable vehicles appropriate for the venture they are seeking to pursue.
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