– W does not control the Trust. K Walsh concurs.
Thursday, March 15, 2012 7:25 PM
Verne, B. Michael
Your name was given to meas the person that would best be able to assist on a question of whether or nota trustee controls a trust. The filing of a HSR application depends on theanswer. At this point, we believe that the research supports no filing, but wewant to be very cautious because the rule is not explicit on our question.
To give you some verybroad background, we are working on a transaction where several differentcompanies are being sold that have a similar business. Half of these companiesare owned by two individuals (or that individual and spouse) on a 50/50 basis.The other set of companies being sold are owned, in part, by these sameindividuals and one or more trusts created by these individuals. It thecompanies that are owned, in part, by the trusts, are not included inaggregating the individuals (the UPEs) stock/assets sold, then we no longermeet the dollar threshold with only the companies owned solely by theindividuals (i.e. excluding the ones owned in party by the trusts), and likewise,the ones owned, in part, by trust do not individually (or in the aggregate)meet the dollar threshold.
To simplify, we can takeone entity. In that entity, the individual ("H") owns 40% of thestock of the issuer. H created an irrevocable trust several years ago, and as aresult of a contribution made at that time, the trust owns 10% of the stock. (Hstill owns 40%.) H did not retain a reversionary interest in the trust, and hehas no power to appoint the trustee after his initial appointment was made inthe trust instrument.
H's wife ("W') is thesole trustee of the trust. W, as the trustee, has the power to resign andappoint her successor. The key language in the trust document to this effect isas follows:
"Upon assumingoffice, [H} authorizes and directs [W], and any other successor Trusteeappointed in the manner herein provided, to nominate and appoint by aninstrument in writing duly executed, acknowledged and filed in the mannerhereinafter provided (with the right to change such nomination and appointmentat any time until such person ceases to serve as Trustee hereunder), asuccessor Trustee to act in such person's place and stead in the event suchperson shall fail or cease to act for any reason. Notwithstanding the foregoingprovisions of this Paragraph A(1), if any Trustee is removed from office asTrustee hereunder, his or her nomination and appointment of a successor Trusteeshall be automatically revoked."
As you can see from theabove language, W's power as trustee to appoint her successor trustee exists,but it is not absolute. The trust identifies a "Protector". TheProtector is not a member of the family of Hand W. This Protector is in chargeof appointing the successor trustee in the event that the existing trusteefails to do so (and if the Protector doesn't do it, we go to the Clerk ofCourt). More importantly, the Protector is granted the authority to remove anytrustee and designate his/her successor. Here is the key language: " TheProtector, as hereinafter designated, shall, from time to time, review theperformance of the Trustee and shall have the power to remove any Trustee withor without cause and to appoint a successor Trustee. Said removals andappointments under this Paragraph B of this Article VI shall be made bydelivering an instrument, signed and acknowledged by the Protector, to theTrustee so removed (or to the conservator or guardian of any Trustee who isremoved by reason of such Trustee's incapacity), to any other Trustee then servinghereunder, and to the successor Trustee, if applicable, who shall signify hisor her acceptance of the appointment in writing. Such removal powers shallcontinue after termination of the Trust until the Trustee have made actualdistribution of all property held in the Trust."
Finally, the Protector'spower is not absolute. The Protector can also be removed from office "forcause" and replaced with the consent of (i) the trustee(s), (ii) thebeneficiaries of the trust and (iii) our law firm. All have the authority tostop this removal and replacement. Thus, neither the trustee nor anybeneficiary has the authority to remove the Protector. Here is the keylanguage:
"With respect to eachtrust created hereunder, the Trustee and the income beneficiary orbeneficiaries (or the parent or guardian of the estate of each minor incomebeneficiary) of such trust, with the consent of the (redacted) shall have the power, exercisable byunanimous vote, to remove the Protector of such trust for cause and to appointa successor. For purposes of this Paragraph C(3), removal of a Protector shallbe deemed to be made "for cause" if such removal is on account of theProtector's incapacity (as defined in Paragraph D of this Article VI),negligence, or wrongful or willful acts or misconduct."
(Note: a beneficiary isnot allowed to serve as a trustee or the Protector under the terms of the trustdocument.)
As a result of theforegoing, we had two questions / confirmations:
1. It appears that under the definitionof "control" in 801 (b), W, as the trustee, may not be deemed to have"control" even though, in some respects, she does have the authorityto resign (i.e. remove herself) and appoint her successor(s) (i.e. appoint 50%or more of the trustees). Her power is not absolute. It can be easily takenaway ("with or without cause") by the Protector. The Protector maynot be removed solely under the authority of the Trustee. If W, as trustee,does not have control of the trust and its 10% of stock, then Hand W togetherdon't collectively have control of 50% of the stock, and this entity is removedfrom our consideration.
[Note: if you agree thatW does not control the trust and, thus, its 10% holdings of the issuer, youdon't need to address the second question.]
2. If W is deemed to have control of thetrust, then I still have a question as to whether that 10% is aggregated withH's 40%. In 801 (c)(2), the "holdings of spouses and their minor childrenshall be holdings of each of them."801 (c)(8) states that: "A personholds all assets and voting security held by the entities included within it;... an entity holds all assets and voting securities held by the entities whichit controls directly or indirectly." So, by controlling the trust (andthus its corpus), W would be deemed to hold the 10% which would be aggregatedwith H's 40%, and they would have control of the issuer.
However, I have a hardtime reconciling that reading with the Example given in the rules under 801(c)(3), which seem to indicate that a trustee's "control" of a trustdoes not equal a trustee's "holding" of the voting securities thatmake up the corpus of that trust. It specifically says that the trustee neednot aggregate the holdings of the trust for determining whether therequirements of the act apply.
So, how should I readthis? I apologize for the length of this email. Feel free to call me if thatwould help.