Early this month, the Financial Times reported on another attempt by PCCW, a company controlled by Li Ka-shing’s son, Richard Li, to list with the Hong Kong Stock Exchange, a business trust consisting of assets worth about $2 billion spun-off from the dominant phone company’s fixed line and mobile business. Such a listing, if eventually vetted both by the regulators and the shareholders of Richard Li’s company, would put Hong Kong at par with Singapore, which had much earlier been open to the listing of business trusts.
The Philippines is, as in many other developments in the financial markets, far, far behind. In fact, we hardly know what a business trust is. The closest that we have nearest to the Massachusetts trust is the real estate investment trust (REIT) which was introduced in the country in 2009 by RA No. 9856. Its tax provisions were implemented by Rev. Reg. No. 13-2011 which was issued about two years later. On account of its novelty, I will not be surprised if up to now there are still no takers of the alleged tax incentives offered by the REIT law.
Early legal literature on trusts often calls the business trust the Massachusetts trust. Not because it is a trust limited only to the state of Massachusetts, as when we say Philippine tamaraw (which is found in the Philippines only and not elsewhere) but because it was a popular form of business structure that originated in Massachusetts, in the same way we speak of pancit Malabon for a type of noodle dish that originated, or so the old folks say, in what was then the town of Malabon, but has since then been replicated in many other places because of its innate goodness.
The business trust began in Massachusetts in 1827 in reaction to the law that prohibited going into real estate development without a special charter from the state legislature. Property is conveyed to trustees who are bound to deal with the property in accordance with instructions set forth in a deed of trust that binds the trustees to act for the benefit of the holders of transferable certificates evidencing their beneficial interest in the property put in trust. The certificate holders are given the right to appoint new trustees who take title over the trust estate (i.e. the property or business being undertaken) without need of further conveyance. What the trustees can do and cannot do is plainly laid out in the Deed of Trust. The certificate holders receive shares of the net profit derived by the trustees from the operations of the trust.
One who is familiar with the current forms of doing business in the Philippines can immediately recognize the functional similarities between the business trust and our corporations. The Deed of Trust is something like the Articles of Incorporation and by-laws. The certificate holders have rights similar to those of the stockholders of a regular private corporation; they have some residual veto powers, including removal of the trustees in extreme cases, but by and large they are passive investors. Those who actively manage the entity, i.e., the trustees, as well as their deputies and subordinates, are really the ones in charge of the day to day affairs of the enterprise.
The resulting legal arrangement among the parties in a business trust can therefore be termed as one that walks and talks like a corporation but is really not a corporation. It is formed for a particular purpose shared by the group of owners, which, like that of most private corporations, is for profit. The rights of the owners are governed by a deed of trust specifying what they are entitled to, very much like the articles and by-laws of a private corporation.
Except for one major distinction: trustees have always been considered as fiduciaries in the true sense of the word. The trustees of a business trust are required to be so loyal to their beneficiaries as to be obliged to act for their benefit even if the latter conflicts with their own personal interests. And they have to walk with the prudence beyond that trodden by the crowd. In a sense, the governance of a business trust is a level higher than the required governance of private corporation.
There is nothing in Philippine law that prohibits the formation of a business or Massachusetts trust. The treatment of an unincorporated association as a corporation for tax purposes is clearly set forth in Section 22(b) of the National Internal Revenue Code which defines a “corporation,” within the meaning of the tax code, as a term that “includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participation), association, or insurance companies…” And the imposition on the directors and officers of the trustee’s fiduciary obligations can be founded on Article 1442 of the Civil Code which generally incorporates into Philippine law the general principles on the law on trusts, which ought to include not only the rules on the ancient trust device but also the exceptions and concessions made in more recent times in Massachusetts and elsewhere in the developed world.
If we want to, we too can set up a Massachusetts trust here and be, in that respect, at par with Hong Kong and Singapore.
Ricardo J. Romulo is a senior partner of Romulo Mabanta Buenaventura Sayoc & De Los Angeles.