The dangers of “Alternate Trustees”

Many investment funds are formed as trusts. The participants in these trusts (often pension funds, banks and long term insurers) make capital contributions to the trust, and these capital contributions are then used by the trust to acquire investments.

The trust deeds of these trusts often entitle the participants to appoint at least one trustee of the trust since the trustees will normally be the persons who will, whether on the recommendation of an investment committee or otherwise, take the final decision as to whether the trust will acquire or dispose of an investment (or take other decisions relating to the management of the trust’s investments).

It is not then uncommon for the participants to require that the trust deed has a provision stating that a quorum for any meeting of the trustees will not exist unless the trustee appointed by that participant is present. This makes sense as a participant may otherwise have concerns that a meeting could be held to consider the acquisition or disposal of an investment (or other material issue), and its interests, via the trustee appointed by it, are not represented during that meeting and in any vote taken by the trustees at that meeting. This could influence its willingness to be a participant in the trust. At the same time, a participant cannot be allowed to frustrate the running of the trust, which is why the trust deed would then usually have a provision allowing for the meeting to be adjourned until another day and the trustees then present at such a reconvened meeting would constitute a quorum.

A difficulty arises, however, when the trustees need to meet to consider an issue (which in some instances may be under urgent circumstances), and take a decision in respect of that issue and a trustee appointed by a participant is not available for whatever reason to attend that meeting.

A possible seeming solution to this problem would be for the trust deed to allow for a trustee to appoint an alternate trustee to attend the meeting and to vote in their stead, much in the same way that a director of a company may appoint an alternate director to attend and vote at a board meeting in his or her stead.

Participants in funds structured as trusts should in fact ensure that the trust deed does not contain such a provision as South African common law requires that decisions regarding the attainment of trust objects must be made by the relevant trustees of that trust and no one else. A trustee cannot empower another person to exercise a general discretion that the law vests in him (see Hoosen NO v Deedat 1994 (4) SA 425 (SCA)).

The risk then of a provision in a trust deed allowing for the appointment of alternate trustees, is that a decision taken by trustees of that trust, including such an alternate trustee, would be invalid and of no force and effect.

Very often, however, the relevant participant may be comfortable for the trustees to meet and to take a decision without its appointed
trustee being present, but the other trustees would first have to hold a meeting (knowing already that it won’t be quorate), before being able to hold the reconvened meeting (which would then be quorate).

A way of getting around this problem is for the trust deed to provide that a quorum for a trustees meeting would not exist without the trustee appointed by a participant being present (so that in the first instance the participant has the comfort that a meeting cannot proceed without its appointed trustee being present), but for the trust deed to then go on to say that the participant may, however, consent to a meeting proceeding without their appointed trustee being present.

This mechanism still affords the participant protection (since only the participant would have the power to consent to the meeting proceeding) but still allows the flexibility of the trustees meeting as initially planned without delay, if the participant basically waives its quorum protection.

A participant may be willing to waive this protection for any number of reasons, and it would be useful for the trust deed to be sufficiently flexible to allow for this, but not for the appointment of alternate trustees.