Protecting Corporate Values: The Power of Trust Structures

Trusts have long been a popular means of tax and succession planning in common law jurisdictions. Yet their potential for safeguarding businesses from mission drift remains largely unexplored. In our recent Law Quarterly Review article, we argue that trusts offer far more than mere bespoke property arrangements. Their greatest value lies in providing governance frameworks that support people to commit resources to long-term objectives. This makes trusts uniquely effective as enduring stewardship commitments, protecting the settlor’s founding vision from erosion over time.

This conceptualisation illuminates three key features of trusts. First, the trustee’s commitment is altruistic – they must act in good faith in the best interest of trust objectives or beneficiaries. Trust law enforces this altruistic undertaking through fiduciary constraints on trustees’ powers and liability for those who assist in breaching trust or receive trust property without authorisation.

Second, trust commitments are dynamic, supported by equity's supervisory jurisdiction to guide trustees and authorise actions beyond the trust instrument’s original scope. This enables trusts to adapt to unforeseen circumstances.

Third, trust commitments can be remarkably resilient to interference from both settlors and beneficiaries, giving trusts an unwavering quality. Settlors who reserve non-fiduciary powers to control trust distribution may be found to lack genuine intention to create a trust. Whilst Saunders v Vautier (1841) Cr & Ph 240 states that if all beneficiaries are sui juris and fully entitled to the trust property, they may terminate the trust, the beneficiaries must act unanimously.

This limited scope for altering trust purposes gives trusts a competitive edge over corporations in maintaining long-term social missions that might conflict with profit maximisation. In corporations, shareholders have ultimate control and generally owe no fiduciary duties when voting to amend the corporation’s constitution by special majority. Even entrenched articles may be changed by unanimous shareholder agreement. Thus, corporate forms like the public benefit corporation in the United States, which are designed to support impact investing, remain vulnerable to mission drift. Whilst their social purpose might be enshrined in the corporate charter, actual commitment to such a purpose depends on successive shareholders remaining loyal to that purpose. In contrast, careful drafting can readily circumvent Saunders v Vautier, making trust purposes legally immutable. Put simply, whilst trusts and corporations both serve to separate ownership from management, only trusts also separate ownership from control.

The trust’s advantage over corporations is well illustrated by recent innovations like the Stewardship Purpose Trust of the US State of Oregon. Its recent adoption by Patagonia, a clothing brand with a long commitment to environmental protection, is worth considering. The Patagonia model employs a dual-share structure. The family, which had full ownership of the corporation, transferred their entire shareholding to two entities. The stewardship purpose trust obtains and holds the voting shares of the corporation in perpetuity, whilst a social welfare organisation focussed on environmental causes receives the non-voting shares. Thus, the purpose trust, rather than shareholders, controls Patagonia’s operations in line with its commitment on environmental sustainability, with profits directed to environmental protection.

Accountability in the Oregon Stewardship Trust is maintained through two key mechanisms. First, a system of checks and balances operates between three trust parties: a stewardship committee (minimum three members) directing the trustee, the trustee holding voting rights, and at least one enforcer. All these parties – numbering at least five – owe fiduciary duties. The committee reports to both trustee and enforcer, but has power to remove them unless the trust terms provide otherwise. The trustee may reject committee directions that would seriously breach trust terms or fiduciary duties. Second, to prevent conflicts of interest, none of these parties may benefit from trust distributions. This framework provides more robust enforcement than existing non-charitable purpose trusts, such as those under the Cayman Island’s Special Trust Alternative Regime.

Our conception of trusts as stewardship commitments helps to distinguish between justificatory limits (where parties lack the requisite commitment for the trust form, as in sham or illusory trusts) and external policy constraints of trusts (such as tax evasion or money laundering). This distinction is particularly relevant for current debates about massively discretionary trusts, suggesting that concerns about tax avoidance are better addressed through regulation.

Drawing these threads together, our analysis reframes trust law theory by demonstrating how trusts facilitate autonomous choice through stewardship commitments. Trust law provides a framework for individuals to commit resources to their chosen goals, allowing them to create value guided by their own life-vision. This capacity to support autonomous decision-making justifies trusts as distinct form within facilitative private law.

Lusina Ho is the Harold Hsiao-Wo Lee Professor in Trust and Equity at The University of Hong Kong, Faculty of Law

Matthew Harding is a Professor of Law at the Melbourne Law School, University of Melbourne.

The authors' complete article can be accessed here.