July 29, 2016
Delaware Statutory Trust Amendments Signed into Law
By Marla H. Norton
On July 13, 2016, Delaware Governor Jack Markell signed into law Senate Bill 243, with House Amendment 1 (a technical amendment to correct a transcription error). The legislation, which was introduced in early May, updates the Delaware Statutory Trust Act (the “DST Act”). The legislation is effective August 1, 2016. The highlights of DST Act amendments follow:
The 2016 amendments revise the definition of “statutory trust” in Section 3801(g) of the DST Act to permit a statutory trust to opt out of entity status. In order to create a DST that is not a separate legal entity, the parties must include language in both the certificate of trust and the governing instrument of the trust specifying that the trust will not be a separate legal entity. The amendment also adds conforming language to Section 3810(g)(2) of the DST Act providing that entity status continues until cancellation of a DST’s certificate of trust, unless the certificate of trust and governing instrument provide otherwise.
The series concept under the DST Act has not evolved over the years to include the entity-like characteristics bestowed by amendments to the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) on series of LLCs and limited partnerships. However, the 2016 updates add language to Section 3804(a) of the DST Act confirming that a statutory trust with series created under that section may contract, hold title to assets, grant liens and security interests and sue and be sued in the name of the series, unless the governing instrument of the trust provides otherwise. While new language does not affirmatively vest a series of a statutory trust with the independent power or authority to contract, hold title, grant liens or sue and be sued, it does legitimize the practice of titling assets and executing contracts in the name of a series to bolster the “separate and distinct” recordkeeping requirements of the DST Act. In addition, consistent with the 2016 amendment to the LLC Act and the LP Act, the DST Act amendments add language confirming that the general partitioning language in the DST Act or a governing instrument, segregating liabilities of individual series and the statutory trust and shielding each from the obligations and liabilities of the others, does not prevent a series or the trust from affirmatively agreeing to undertake liability for any or all of the obligations or liabilities of another series or the trust generally.
Consistent with the 2016 amendments to the LLC Act and the LP Act, the DST Act legislation amends Section 3806(i) to confirm that a delegation by a trustee may be irrevocable, if and to the extent provided therein.
The legislation adds a new section 3806(l) to the DST Act, which provides that a trustee of a statutory trust that is registered as an investment company under federal law has the same fiduciary duties as the directors of a for-profit corporation organized under the Delaware General Corporation Law, unless the trust agreement or other governing instrument provides otherwise. This amendment makes applicable to trustees of a registered investment company organized as a trust the so-called business judgment rule, and its presumption that decision-makers act in good faith, on a fully-informed basis and in the best interests of the organization for whom they act. The synopsis notes that the express adoption of corporate fiduciary duties with respect to registered investment companies is not intended to imply that these standards are not applicable to trustees or other representatives of statutory trusts that are not registered investment companies.
On July 13, 2016, Delaware Governor Jack Markell signed into law Senate Bill 243, with House Amendment 1 (a technical amendment to correct a transcription error). The legislation, which was introduced in early May, updates the Delaware Statutory Trust Act (the “DST Act”). The legislation is effective August 1, 2016. The highlights of DST Act amendments follow:
Legal Entity Status
The 2016 amendments revise the definition of “statutory trust” in Section 3801(g) of the DST Act to permit a statutory trust to opt out of entity status. In order to create a DST that is not a separate legal entity, the parties must include language in both the certificate of trust and the governing instrument of the trust specifying that the trust will not be a separate legal entity. The amendment also adds conforming language to Section 3810(g)(2) of the DST Act providing that entity status continues until cancellation of a DST’s certificate of trust, unless the certificate of trust and governing instrument provide otherwise.
Series Provisions
The series concept under the DST Act has not evolved over the years to include the entity-like characteristics bestowed by amendments to the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) on series of LLCs and limited partnerships. However, the 2016 updates add language to Section 3804(a) of the DST Act confirming that a statutory trust with series created under that section may contract, hold title to assets, grant liens and security interests and sue and be sued in the name of the series, unless the governing instrument of the trust provides otherwise. While new language does not affirmatively vest a series of a statutory trust with the independent power or authority to contract, hold title, grant liens or sue and be sued, it does legitimize the practice of titling assets and executing contracts in the name of a series to bolster the “separate and distinct” recordkeeping requirements of the DST Act. In addition, consistent with the 2016 amendment to the LLC Act and the LP Act, the DST Act amendments add language confirming that the general partitioning language in the DST Act or a governing instrument, segregating liabilities of individual series and the statutory trust and shielding each from the obligations and liabilities of the others, does not prevent a series or the trust from affirmatively agreeing to undertake liability for any or all of the obligations or liabilities of another series or the trust generally.
Irrevocable Delegation
Consistent with the 2016 amendments to the LLC Act and the LP Act, the DST Act legislation amends Section 3806(i) to confirm that a delegation by a trustee may be irrevocable, if and to the extent provided therein.
Fiduciary Duties of Trustees
The legislation adds a new section 3806(l) to the DST Act, which provides that a trustee of a statutory trust that is registered as an investment company under federal law has the same fiduciary duties as the directors of a for-profit corporation organized under the Delaware General Corporation Law, unless the trust agreement or other governing instrument provides otherwise. This amendment makes applicable to trustees of a registered investment company organized as a trust the so-called business judgment rule, and its presumption that decision-makers act in good faith, on a fully-informed basis and in the best interests of the organization for whom they act. The synopsis notes that the express adoption of corporate fiduciary duties with respect to registered investment companies is not intended to imply that these standards are not applicable to trustees or other representatives of statutory trusts that are not registered investment companies.