Legal Issues Regarding Trustee Shareholdings

As the demand of property management in our country is gradually developed, the trust property is increasingly diversified accordingly. When the trust property is equity in a company, and the trustee for a stake in the company is acting as the shareholder, the definition of the trustee as well as his corresponding rights and obligations become relatively complex. The reason why the rights and obligations will be complex is the rules separately in trust law and company law are mixed to some extent. Hence, the standard for a trustee performing his duty need to be clarified so as to guide the healthy development of professional trustee industry.The first chapter is an overview regarding trustee shareholdings. First of all, it introduces two types of equity trust, i.e. direct equity trust and equity investment trust. Secondly, on basis of introduction of equity trusts, it distinguishes the relationship between the trust relationship and the principal-agent, as well as the relationship between equity trust and dormant shareholders. Again, it introduces the duty of care when the trustee holds equity.The second chapter analyzes the problems caused by the trustee shareholdings. Mainly, two domestic cases lead to the problem regarding trustee shareholding. First of all, trustee holding company equity shall not be regarded as complete shareholders as the role in company law, hence, the rights and obligations of such shareholders shall be primarily analyzed from the perspective of trust law. But such duty of care may involve in the contents of the general company law as well. Secondly, in the dispute of equity trust, even if the court decides that the dispute parties on both sides have trust relationship with each other, the relevant decisions still have multiple explanations in practice, which need to be clarified. Again, there are certain situations in theory and in practice that the settlor reserves and strengthens his rights regarding operation of the company, hence, whether such mode will impact the effectiveness of trust relationship and whether the laws and regulations shall allow the trustee to exempt his duty of care under such specific conditions needs reasonable explanations to guide practice. Summarizing the focus of the theoretical research, it can be concluded three points, namely the duty of care of trustee shareholding, the relationship between the trustee acting as shareholder and the director in the company, and liability exemption of the trustee in such conditions.The third chapter focuses on the duty of care in the conditions of trustee shareholdings. Firstly, explaining the general duty of care under trustee shareholdings from the perspective of comparative law; then, referring to classic precedents to clarify the definition of duty of care, then reasoning by classify regarding the trustee shareholdings. Such discussion is classified under the conditions when the trustee is controlling and non-controlling of the company, at the same time under the conditions the controlling shareholder appointing director or acting as the director on his own. Through theoretical analysis, it can be concluded when the trustee is in a state of control, the standard for the management of the company is based on the diligence of directors, and whether the trustee as a director or not doesn’t impact the extent of duty of care, but the specific contents of the position may yield difference. If the shareholder acting as the director takes more daily business in management, this part for business can be filled by relevant fees. And when the trustee is in a state of non-controlling, he does not need to follow the directors’ duty of care for corporation affairs, but needs to bear the duty regulated in the trust contracts as well as in the case of a designated director qualification for directors. However, when the non-controlling shareholder is under special circumstances by veto power for the board to form the disguised control, it can apply controlling shareholders’ standards for the duty of care.The fourth chapter analyzes the trustee’s liability exemption under the shareholdings. First of all, analyzing whether gross negligence liability can be exempted; Second, putting up with ideas which are commonly used in practice, and the relevant uncertainty of this kind of liability manner; Third, discussing for the trustee liability legislation trend. In general, the premise of the liability for the trustee is with intent of fault in the existing legislation system, and direct intent can’t be exempted. In addition to direct intent, the general negligence and gross negligence may be exempted in accordance to laws and regulations, but whether gross negligence is fundamentally violated the trust law is controversial, and whether such negligence can be exempted is uncertain. To sum up, legislation ought to allow the parties to limit the liability of trustee in the form of trust contract according to the content of the specific role.The fifth chapter is the theoretical supposition for the duty and liability under the trustee shareholdings to China. First of all, analyzing the duty of care and liability exemption in the current legislation; Secondly, in order to promote the development of trustee career, putting forward the idea to perfect the legislation and amend the trust law, including the steps of legislative procedure and theoretical system update under the trustee shareholdings, and clarifying the trustee’s duty and liability. Only in this way could do benefit to the complicated asset management industry in China.