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A COMPARISON OF THE LAWS GOVERNING
VIRGINIA BUSINESS TRUSTS AND VIRGINIA CORPORATIONS

A COMPARISON OF THE STANDARD OF CARE OF TRUSTEES OF VIRGINIA BUSINESS TRUSTS AND DELAWARE BUSINESS TRUSTS

A Summary of the
Virginia Business Trust Act

Randall S. Parks
Santiago F. Alvarez
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, VA 23219

Introduction

With the adoption of the Virginia Business Trust Act (the “VBTA”), Virginia established a statutory framework for the formation and operation of Virginia business trusts. Virginia business trusts are unincorporated, perpetual, limited liability legal entities that may be formed to conduct any lawful business. The provisions of the VBTA will become effective on October 1, 2003.

The VBTA provides basic mechanisms for the formation of the business trust and its internal governance. While the VBTA provides statutory certainty and protection to business trusts and their trustees, it also maximizes the flexibility of business trusts by deferring most of the details of governance to the organizing documents. In fact, the VBTA expressly states that “this chapter shall be construed in furtherance of the policies of giving maximum effect to the principle of freedom of contract and of enforcing governing instruments.” Because of the VBTA’s flexibility, parties to a Virginia business trust can structure their particular transaction with the equivalent of a blank slate.

A business trust has often been the entity of choice for mutual funds (usually Massachusetts or Delaware business trusts), real estate investment trusts (often Maryland REITs), and mortgage and other finance entities that securitize assets (often New York common law trusts). The VBTA offers businesspersons and finance professionals an unincorporated, perpetual, limited liability Virginia entity which may serve these and any number of other businesses with a great degree of flexibility.

Formation and General Filings

The technical provisions of the VBTA conform to the similar provisions in the Virginia Stock Corporation Act and the Virginia Limited Liability Company Act. A Virginia business trust is formed when the articles of trust are signed and filed with the State Corporation Commission of Virginia (the “Commission”). Unless the articles of trust provide otherwise, the existence of a Virginia business trust begins at the time the Commission issues a certificate of trust. The articles of trust must set forth the name and address of the business trust and the name and address of the initial registered agent, and may set forth any other matter permitted under the VBTA. An initial filing fee of $100 is payable to the Commission, and an annual registration fee of $50 is due by September 1 each year thereafter.

The name of a business trust must be distinguishable upon the records of the Commission from the name of any other business trust or other business entity name registered or reserved under Virginia law and may not contain words such as corporation, incorporated, limited liability company, limited partnership, etc. The name may contain words such as company, association, club, foundation, fund, institute, society, union, syndicate, trust, or abbreviations of like import. The exclusive right to use a particular name may be reserved for up to 120 days upon application and payment of $10. The owner of a reserved name may transfer the reservation to another person and may renew the reservation for 120 day periods.

A Virginia business trust’s registered agent must be (i) a resident of Virginia who is (a) a Trustee or officer of the business trust, (b) an officer, director, general partner, member or trustee of an entity that is a Trustee of the business trust, or (c) a member of the Virginia State Bar; or (ii) a domestic or foreign entity authorized to transact business in Virginia.

Except to the extent otherwise provided in the articles of trust or in the governing instrument of the business trust, the sole trustee or a majority of the trustees may amend or restate the articles of trust at any time by filing articles of amendment or articles of restatement with the Commission. Among other requirements, articles of amendment and articles of restatement must include a statement that the amendments were adopted in accordance with the articles of trust and the governing instrument of the business trust. The filing fee for articles of amendment is $25. If a change in plans or mistake results in an erroneous filing with respect to a name or address specified in the articles of trust, articles of correction may be filed by a trustee or officer of the business trust correcting such name or address. The filing fee for articles of correction is $25.

Upon the winding up of the business trust, articles of cancellation must be filed with the Commission. Unless otherwise provided by the articles of trust, the articles of cancellation are effective when accepted by the Commission. The filing fee for articles of cancellation is $25.

Governing Instrument

Many provisions of the VBTA regulate a business trust’s governance only to the extent not addressed by the business trust’s articles of trust or governing instrument. A business trust’s governing instrument may provide any details with respect to the business trust’s governance so long as such provisions are not inconsistent with law or with the articles of trust. The VBTA therefore provides a great deal of flexibility with respect to a business trust’s internal governance.

Liabilities of Beneficial Owners

Beneficial owners of a business trust are afforded limited liability to the same extent as shareholders of a Virginia corporation. In addition, the VBTA provides that, unless otherwise provided by the governing instrument, neither the power to direct the trustees nor the exercise by any person of a direction, shall cause that person to have duties or liabilities relating to the business trust nor to be a trustee. Therefore, the VBTA permits beneficial owners or other persons to participate in the management of the business trust without incurring personal liability for the obligations of the business trust.

A business trust’s assets are immune from creditors seeking to enforce a claim against a business trust’s beneficial owner. Beneficial owners of a Virginia business trust have an undivided beneficial interest in the property of the business trust and have no interest in specific trust property, unless otherwise provided in the governing instrument of the business trust. Further, unless otherwise provided by the governing instrument, a creditor of a beneficial owner does not have the right to obtain possession or otherwise exercise legal or equitable remedies with respect to the property of the business trust. Therefore, creditors of a beneficial owner of a Virginia business trust may not seize business trust property to satisfy claims against beneficial owners and may only reach property that the beneficial owner could reach under the governing instrument.

Duties and Liabilities of Trustees

Trustees are appointed in the manner provided by the business trust’s governing instrument. The governing instrument dictates the trustees’ duties, rights, and powers and may provide for one or more series of trustees with different duties and powers. Therefore, the VBTA provides a great deal of flexibility with respect to a trustee’s role in the management of a business trust. A trustee may be a natural person or another entity, and may include a beneficial owner. If a governing instrument does not provide otherwise, a trustee shall choose and supervise the officers and employees of the business trust, and shall direct the management of the business trust’s business and affairs.

With respect to trustee liability, the VBTA provides that the standard of care of business trust trustees shall be the same as the standard of care provided for directors of a Virginia corporation. The VBTA states that except as otherwise provided in the governing instrument, a trustee is not personally liable to third parties when acting in his capacity as trustee. In addition, a trustee’s liability to the business trust and its beneficial owners is limited to that of directors or officers of a Virginia corporation, and may be further limited by the articles of trust or governing instrument. A business trust may purchase insurance for and indemnify a trustee, and such trustee is entitled to mandatory indemnification to the same extent as a director of a Virginia corporation.

“Series” of a Business Trust

In much the same way as a Delaware business trust, a Virginia business trust may create one or more series of beneficial interests whose obligations may only be enforced against the assets of such series. Unless otherwise provided by the governing instrument, the obligations of the business trust generally or those of other series are not enforceable against the assets of a separate series. Separate and distinct records must be maintained with respect to any such series and the assets of such series must be held and accounted separately in order to be afforded separate liability. The ability to create separate series within a business trust may be particularly useful to investment companies, which are often structured as a primary or master trust with several series of sub-trusts. Such sub-trusts may have varying investment objectives and may reduce their expenses due to economies of scale attained by being part of a single investment company.

Derivative Actions

The VBTA provides that a beneficial owner of a business trust may bring a derivative action or proceeding in the right of a business trust to the same extent, and in the same manner, as a shareholder of a Virginia corporation. A beneficial owner who is successful in prosecuting a derivative action is entitled to reasonable attorney’s fees if the court finds the proceeding resulted in a substantial benefit to the business trust. A business trust that is successful in defending a derivative proceeding is entitled to reasonable attorney’s fees if the court finds the proceeding was not commenced or maintained in good faith.

Access to Reports and Records

A business trust must keep minutes of all meetings of its beneficial owners and trustees, and records of all actions taken by the beneficial owners or trustees without a meeting. A business trust must also keep appropriate accounting records, a record of its beneficial owners and current trustees, a copy of its articles of trust, and a copy of its governing instrument. Further, a business trust must keep records of all written communications to the beneficial owners generally for the past three years.

Subject to certain limitations, a beneficial owner is entitled to inspect and copy the above mentioned records from the business trust’s principal office. The right of inspection granted by the VBTA may not be abolished or limited by the business trust’s articles of trust or governing instrument.

Merger

Under the VBTA, a business trust may merge with or into another entity by executing and filing articles of merger. Unless otherwise provided by the governing instrument, a merger must be approved by an affirmative vote of the trustees and the holders of two thirds of the outstanding beneficial interests of the business trust. A governing instrument or an agreement of merger may provide for contractual dissenter’s rights to beneficial owners of the business trust in connection with a merger or a sale of all or substantially all of the business trust’s assets.

Conversion

A domestic entity, other than a domestic business trust, may convert into a Virginia business trust pursuant to a plan of entity conversion and the filing of articles of entity conversion with the Commission. If the converting entity is a corporation, an affirmative vote by more than two thirds of all shares entitled to vote is required, unless a greater vote is required by the board of directors of the corporation. If the converting entity is a limited liability company, an affirmative vote by all of its members is required, unless otherwise provided by the limited liability company’s operating agreement or articles of organization. If the converting entity is a partnership or a limited partnership, an affirmative vote by all of its partners is required, unless otherwise provided by the partnership or limited partnership’s partnership agreement. If the converting entity is any other type of entity, a unanimous affirmative vote by the authorized persons is required, unless otherwise provided by the governing instrument of the other entity.

Domestication

A foreign entity may become a Virginia business trust pursuant to a plan of domestication and the filing of articles of domestication with the Commission. Although the VBTA provides that such domestication is permitted if the laws of the foreign jurisdiction in which the foreign entity is formed authorize it to domesticate in another jurisdiction, the domestication must nevertheless be approved in the manner provided by the VBTA. A domesticated entity retains the assets and liabilities of the domesticating entity as if the domestication did not occur.

If a Virginia business trust wishes to domesticate to a foreign jurisdiction, the plan of domestication must be approved by the sole trustee or a majority of the trustees, unless otherwise provided in the governing instrument. When a Virginia business trust has approved a plan of domestication to a foreign jurisdiction, it must file articles of trust surrender with the Commission.

Dissolution

A business trust may be dissolved upon (i) the occurrence of any event specified in the articles of trust or governing instrument, (ii) upon unanimous written consent of the beneficial owners, (iii) upon the entry of a decree of judicial dissolution, or (iv) upon automatic cancellation due to nonpayment of annual registration fees. Unless otherwise provided in the articles of trust or in the governing instrument, the trustees may wind up the business trust’s affairs. Upon the winding up of the business trust, the assets of the business trust are distributed in the following order: (a) to creditors in satisfaction of the business trust’s liabilities; (b) unless otherwise provided by the articles of trust or the governing instrument, to beneficial owners in satisfaction of liabilities for distributions; and (c) unless otherwise provided by the articles of trust or the governing instrument, to beneficial owners in the proportions in which the beneficial owners share distributions.

Once the winding-up process is completed, articles of cancellation must be filed with the Commission.

Foreign Business Trusts

The VBTA provides that foreign business trusts must register with the Commission before transacting business in Virginia. A foreign business trust’s internal affairs are governed by the laws of the jurisdiction where the foreign business trust is organized, and its registration with the Commission may not be denied because of a difference between the laws of the foreign business trust’s governing jurisdiction and the laws of Virginia.

Existing Virginia Real Estate Investment Trusts

The VBTA repeals the Virginia Real Estate Investment Trust Act, § § 6.1-343 through 6.1-351 of Title 6.1 of the Code of Virginia. After the effective date of the VBTA, Virginia REITs formed under that Act will be governed by the VBTA, but existing rights and proceedings will not be affected.

Certificate of Trust
• A VBT is formed with the filing of Articles of Trust with the State Corporation Commission (SCC). Existence begins when a certificate is issued by the SCC.
• One-page document, includes only name and address of trust and the name and address of the initial registered agent.

Articles of Incorporation
• A Virginia corporation is formed with the filing of Articles of Incorporation with the SCC. Existence begins when a certificate is issued by the SCC.
• Detailed information must be included.

• A VBT provides a great deal of flexibility. The freedom to establish by contract the rights and obligations of the parties is subject to very limited exceptions.
• A VBT requires no public filings other than one-page Certificate of Trust.

• Shareholder approval is required to change the terms of any existing series or class or to create new series or class — can grant authority to board of directors to increase or decrease total authorized shares or shares of any class without shareholder approval.
• Shareholder approval required to amend rights, powers and authority of existing shares.
• Any change requiring amendment to Articles of Incorporation must be filed with the SCC.

• Statute mandates voting rights for shareholders.
• Statute permits 20% of shareholders of corporations with 35 or fewer shareholders to call special meeting.
• Statute mandates that significant actions such as amendments to Articles of Incorporation, mergers and sales of assets require two-thirds shareholder vote unless Articles of Incorporation require otherwise.
• Statute mandates annual shareholder meetings.
• Statute mandates shareholder meeting notice and record date requirements.
• Generally, statute requires [a majority] of shareholders to establish quorum.

• A VBT can restrict or even eliminate the right of investors to vote on any and all issues.

• A VBT has no mandated shareholder meetings.
• A VBT has no statutory requirements for calling and holding shareholder meetings.

Corporate Law Applies
• The VBTA provides that the standard of care of a VBT is the same as the standard of care provided for directors of a Virginia corporation.

Trust Law Applies
• The DBTA does not specify the standard of care of trustees.
• Delaware trust law is generally applicable.
• The applicable trust law provides that a fiduciary act with the care, skill, prudence and diligence under the then-prevailing circumstances that a prudent person acting in a like capacity and familiar with such matters would use.
• Delaware corporate law has also been applied by courts (see below).
• Heightened standard, little certainty.