TORONTO -- Investors need new regulation to clarify and standardize the legal rights of income trust investors, a major Canadian shareholder said yesterday.
Catherine Jackson, manager of corporate governance for the giant Ontario Teachers Pension Plan, told a conference yesterday that Teachers has found significant differences in the legal rights of unitholders at different trusts.
"We are keen to see transparency within trusts themselves and some consistency among trust structures," she told the governance seminar.
"We welcome some form of regulation, whatever form that takes."
Unlike corporations, income trusts are not covered under some of Canada's key pieces of business legislation, including the Canada Business Corporations Act (CBCA) and similar provincial legislation such as the Ontario Business Corporations Act. Those acts outline the rights of shareholders and the obligations of corporations.
Trusts, in contrast, define the rights of unitholders in trust declarations, which are prepared by each trust when it is created. The declarations vary among trusts, and features of the CBCA can be excluded.
Ms. Jackson said that Teachers studies trust declarations carefully when deciding to make investments, and looks for variations from standard legal rights.
In some cases, Ms. Jackson said, sections of trust declarations are copied verbatim from the CBCA, but key pieces are simply omitted. Some omissions relate to legal remedies available to disgruntled unitholders, while others relate to disclosure obligations of the trust.
In at least one case, Teachers prepared a legal challenge to persuade a trust to amend its declaration, but the matter was resolved before it went to court.
The Canadian Bar Association has set up a committee to create draft legislation for income trusts to make some of their features more like those of corporations. It is focusing on governance issues and the liability of trustees, but is still reviewing what sorts of issues should be covered in the legislation.
Stephen Pincus, a lawyer at Goodmans LLP who specializes in income trusts, told the conference that trust declarations generally give unitholders the same rights as shareholders. He did a study for Industry Canada looking at the declarations of 54 trusts, and concluded most have provisions "substantially similar" to CBCA provisions.
However, the study found declarations usually omit some key rights of investors, including the right to table shareholder proposals for a vote at annual meetings and the right to dissent to a fundamental change and receive fair market value for an investment. Unitholders also cannot access a legal challenge known as the oppression remedy.
Mr. Pincus said there is already a requirement that trusts disclose the areas in which the rights of unitholders vary from the rights of shareholders. He said a further solution could be industry self-regulation, in which models of the best declarations could be promoted for others to copy. Alternately, he said, legislation may be the best route.
"There's a possibility that a broader statute dealing with some of these things might ultimately evolve," he said. "But one doesn't want to turn a trust into a corporation. So there's a fine balance here."
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