Funds Investing

B. Rights in a Unit: A Preliminary Analysis and Three Propositions

A modern trust deed invariably provides that the trustee will hold the unit trust assets for the unitholders ‘on and subject to the terms and conditions of the trust deed‘ and in the case of an authorized unit trust, the regulations made under section 81 of the Financial Services Act 1986.It is always possible for the trust deed or the relevant regulations to contain hundreds of covenants or terms that may alter or add to the rights in the beneficial interests of the trust assets. With the varieties of unit trusts and the varieties of units in the market today, the significance of the qualifying statement ‘on and subject to the terms and conditions of the trust deed‘ may easily be overlooked.

Units in today’s unit trusts are far more complicated than mere entitlement of beneficial interests. In broad terms, modern innovations are along the path of enhancement of the inherent advantages of unit trusts: risk-minimization and liquidity.

The core purpose of unit trusts is to enable investors with small capital to spread risk in a large portfolio. Modern trusts are structured in the direction of enlarging the investment base in terms of types of assets, industrial or commercial sectors, and geographical regions that the trust can invest. The effect is more than an extension of the manager’s power. It necessitates a set of valuation principles for the calculation of the value of a variety of assets. The trustee may have to enter into custodian contracts, appointing custodians to take custody of assets overseas or in some specialized markets, as well as advisory or management contracts as dictated by the specialized nature of assets. Risk-minimization is also achieved in some cases by conferring on units the benefit of a guarantee of the level of income or of the return of capital, with or without a guaranteed appreciation. The guarantee could be given by the manager, in which case the provisions can form part of the trust deed constituting the unit trust. Alternatively, where the guarantee is given by a third party, a separate guarantee may be executed by the trustee for the benefit of the unitholders. A third direction is to let the unitholders assess for themselves the risks in each sector and to let them determine the necessary adjustment. This is the umbrella trust. An umbrella trust is in reality a group of different trusts, with different risk profiles or objectives, under the common management of the same trustee and manager. The trust assets are separate but they are set up under one trust deed. Under the trust deed, unitholders have the right to switch between different trusts constituting the umbrella trust.

On the liquidity side, redemption arrangements have been enhanced by contractually permitting unitholders to liquidate units by means of modern communication such as telephones, facsimiles, telexes, and automatic teller machines. To facilitate this kind of arrangement, uncertificated units emerge in open-ended trusts to enable the manager to remit redemption money immediately without waiting for the return of unit trust certificates. The stock market has also been used to achieve the liquidity objective for closed-end trusts in which the number of units is fixed.The single property trust is a modern example. Techniques used are similar to those of public issue of shares. Purchase of the underlying properties may have been negotiated and contracts conditional upon the subscription of a fixed percentage of units are usually entered into. Underwriting contracts may also be arranged.

It appears from the above discussion that units are made up of interests in the following:

• all capital contributions by unitholders, income and investments for the time being representing such moneys, the value of which being the difference between assets and liabilities;
• the benefit of contractual promises made by third parties to the manager (or the trustee) for the benefit of individual unitholders, for example an income or capital guarantee;
• the benefit of contractual promises made by third parties to the manager (or the trustee) in the normal course of administration of the trust or investment of the trust fund, for example contracts appointing brokers or other agents or for sale and purchase of assets;

• the benefit of promises made by the manager to the trustee for the benefit of unitholders;

• the benefit of promises made by the trustee to the manager for the benefit of unitholders;

• the benefit of promises by the trustee, the manager, and other unitholders to a unitholder where that unitholder is a direct party, for example provisions relating to redemption, voting, proxies, and meetings.

In analytical terms, the interests mentioned in paragraph (a) form the trust corpus of the unit trust that the trustee holds. Interests in paragraphs (b)—(e) are interests of unitholders only when trusts of the promises are established. If the relevant promise in paragraph (b) or (c) is made to the manager, it is of the same character as those in paragraph (e), which are hybrid in nature in that the manager is in the eye of equity the trustee of that promise. There is no impediment to classifying that as a kind of trust interest. The contractual interests of paragraph (f) cannot be classified as trust interests but they are interests forming part of a unit.

Units therefore are bundles of such rights as the manager and the trustee may incorporate at the time of the drafting of the trust deed.This bundling is to achieve the single objective that these units will attract investors. To all investors, each unit is an item of property that is freely transferable.The common perception is that units are a kind of property analogous to shares. And it is the submission of this work that this perception is justified. This position is best understood from their legal attributes, which will be examined in terms of the following three propositions:

• Unless the trust instrument provides specific interests in the underlying assets, a unit does not confer any interest in individual assets. It only confers a proportion of the net value of the trust fund, measured as the difference between its assets and liabilities, calculated and realizable in manner provided by the trust instrument. It is a kind of personal property.
• A unit is a chose in action comprising (a) an interest in the net value of the trust fund as aforesaid, (b) rights to due administration by the trustee and the manager of the trust of the underlying assets and contractual rights amongst or between the trustee, the manager, and unitholders, (c) benefits of contractual promises by third parties, and (d) statutory rights for enforcing the instrument constituting the unit trust.

It is an indivisible chose in action that is redeemable and transferable in manner provided by the trust instrument.

• The first proposition is a statement of the relationship between a unitholder’s right and the underlying investment assets. This proposition produces the result that the proprietary nature of the underlying assets will not have any bearing on the characterization of a unit as real or personal property. The second proposition is a positive proposition as to the component rights in a unit. The third suggests the character of a unit as a single item of property.

Possibly related posts: (automatically generated)
The Nature of the Trust Corpus and the Rights in a Unit (B)

• The Nature of the Trust Corpus and the Rights in a Unit (A)
• Split of Trusteeship in Private Trusts
• The Manager-Unitholders Relationship
• The Relationship of Unitholders INTER SE
• The 'No-Profit' Rule
• Unit Trust Delegation Must Know part A
• Trust Law Approach and the Unit Trust Trustee continue…
• Splitting Powers of Management in the Unit Trust continue...
• Position of the United Trust Manager Powers and Investment Decisions
• The Rights of a Unitholder in Underlying Assets (the first proposition) (A1)