Thinking Through The Role of Private Directors & Trustees In Business Succession Planning.

After spending a career in law and business creating trusts and estates, resolving conflicts between trustees and beneficiaries, serving as a trustee and working with closely held manufacturing, high technology and real estate businesses both as an attorney, CEO, COO and board member, I have some insights and ideas I think you might find useful.

Defining and discharging a trustee’s “duty of care” over special assets (closely held businesses and real estate) may pose a growing risk to institutional trustees in the coming years. Trustee liability under court decisions finding breaches of the duty of care in the management of financial investments and investment fees may pale in comparison to cases involving special assets when the next recession occurs. Trust departments policies against sitting on boards close off the trustee from knowledge of critical business issues and risks. The very policy itself may violate a trustee’s duty of care.  

Directed trusts and other new forms of succession planning advanced to address special assets should offer little comfort to trust departments. Even where one trustee is relieved of the duty to manage a special asset, the co-trustee delegated with that responsibility is usually an individual who in time will suffer from a physical or mental impairment due to sickness or age.  Trust protectors and trustee removers suffer from the same inherent flaw. Accordingly, is there a legal duty by the institutional trustee to monitor the performance or health of an individual trustee?

Utilizing private directors can close the “duty of care” gap that may exist in many trust departments. Where a trust holds a controlling interest or a substantial minority interest in a business, the trustee can insist as a contractual condition to its agreement to serve, that the corporation retains private directors selected by the trustee that are paid for by the corporation. Private directors can then contribute their expertise to the success of the business while communicating to the trustee regarding important matters. Reliance on internally prepared financial statements is risky since they rarely disclose emerging business problems.  Audited financial statements containing “going concern” and other notes provide greater disclosure but still place a trustee in a reactive posture rather than allowing proactive action. 

Private directors offer institutional trustees the following benefits:

1.    Private directors can provide expertise in governance, legal, strategic planning, and finance-accounting where a trust department lacks an in-house team of experts to fill this role.

2.    Private directors owe a fiduciary duty and can, therefore, discharge the trustee’s duty of care by participating at the board level and reporting back to a trustee as to problems that require action by the trustee as a shareholder.

3.    Private directors relieve the trust department from the travel burdens, time constraints and costs incurred if trust officers serve on boards. 

4.    Private directors can aid in communications with the beneficiaries regarding the status of the special asset, emerging risks and opportunities, and help answer other questions concerning the business.

5.    Private directors can aid in the resolution of disputes between beneficiaries regarding special assets. By requiring binding arbitration using a professional arbitrator and two private directors, family disputes can be resolved without costly, time-consuming litigation and without actively involving the trustee. 

The benefits of utilizing private directors also extend to businesses operating as limited liability company.  LLC operating agreements can provide or be amended to require a corporate form of governance with a Board of Directors and Officers. This structure curbs the power of managers and provides for a more orderly management process consistent with the fiduciary duty of the trustee.

I would welcome your thoughts and comments regarding this letter and any experiences you can share. If you would like to discuss these issues in greater detail or if you have any business situations you need reviewed, please feel free to contact me.