The 2020 Amendments to the Delaware Statutory Trust Act
July 29, 2020
The Delaware General Assembly recently enacted amendments to the Delaware Statutory Trust Act (the “DSTA”) which will become effective August 1, 2020. The amendments make a variety of changes relating to the nature and operation of Delaware statutory trusts (“DSTs”), including amendments (i) clarifying the ability of a DST to enter into contracts between series of such DST, (ii) clarifying that vesting title to trust assets in a trustee does not require the trustee to become a separate party to DST contracts, (iii) changing default voting thresholds for certain matters for registered investment companies organized as DSTs, (iv) enabling a DST to divide into two or more DSTs, (v) relating to the use of electronic signatures, (vi) permitting judicial cancelation of a DST in extraordinary circumstances and (vii) concerning the regulation of registered agents.
I. Series Ability to Contract
Section 3804 of the DSTA has been updated to confirm that a DST on behalf of one series is able to enter into contracts with the same DST on behalf of another series. The amendments also confirm that the DST, rather than a series of such DST, is the debtor for Uniform Commercial Code purposes.
II. Title to Trust Assets and Party to Contracts
Section 3805 of the DSTA has been updated to clarify that a trustee of a DST that holds title to trust assets is not required to be a party to any contract or other instrument (including security agreements) to which the DST is a party.
III. Registered Investment Companies and Voting Thresholds Concerning Reorganizations
Sections 3815, 3821 and 3823 of the DSTA relating to mergers, consolidations, conversions and transfers or continuances of DSTs have been updated and a new Section 3825 (relating to division and detailed below in IV) has been added which changes the default voting threshold for beneficial owners of a DST that is registered under the Investment Company Act of 1940 from unanimity to a majority vote, to the extent the governing instrument does not provide an alternative express standard for such matters. The changes eliminate the potential for an inadvertent failure to opt out of the default unanimity requirement. The amendments will not govern a DST whose original certificate of trust was filed with the Secretary of State of the State of Delaware on or prior to July 31, 2020. Such DSTs will continue to be governed by the DSTA provisions in effect on July 31, 2020.
IV. Division of a Statutory Trust
Under new Section 3825 of the DSTA, a DST may divide into two or more separate DSTs. New Section 3825 generally mirrors similar provisions recently adopted in the statutes governing Delaware limited liability companies and limited partnerships. Under such section, the original DST can continue its existence or terminate as part of the division as provided in a plan of division. In connection with a division, a dividing DST must adopt a plan of division setting forth the terms and conditions of the division, including the allocation of assets, property, rights, series, debts, liabilities and duties of such dividing DST among the resulting DSTs; the name of each resulting DST; and, if the original DST will survive the division, the name of the surviving DST. The surviving DST, if applicable, or any resulting DST must then file a certificate of division and a certificate of trust for each resulting DST with the Delaware Secretary of State.
Following a division, each DST will be liable for the debts, liabilities and duties of the original dividing DST as are allocated to it pursuant to the plan of division, and no other resulting DST will be liable for such obligations unless the plan of division constitutes a fraudulent transfer under applicable law. If any allocation of assets or liabilities is determined by a court of competent jurisdiction to constitute a fraudulent transfer, each resulting DST will be jointly and severally liable on account of such fraudulent transfer. Debts and liabilities of the original DST that are not allocated by the plan of division will be the joint and several debts and liabilities of all resulting DSTs.
Because division is a relatively new concept and may not have been specifically contemplated in existing contractual arrangements, the proposed amendments provide that any terms of a written contract, indenture or other agreement that restrict, condition or prohibit a DST from consummating a merger or consolidation or transferring assets will apply with equal force to a division if the DST (i) was formed prior to August 1, 2020, and (ii) entered into such written contract, indenture or other agreement prior to August 1, 2020.
V. Electronic Signatures and Delivery
Amendments to Sections 3801(b), 3801(c), 3806 and new Section 3826 of the DSTA include default non-exclusive, safe-harbor methods to reduce certain acts or transactions to an electronic document and to sign and deliver a document electronically. These provisions generally mirror similar provisions recently adopted in the statutes governing Delaware limited liability companies and limited partnerships, and will generally apply unless the governing instrument expressly opts out or restricts the use of electronic signatures and document delivery. These provisions are particularly important as more business entities rely on electronic signature and delivery procedures in the current environment.
The amendments do not prohibit one or more persons from conducting a transaction in accordance with Delaware’s Uniform Electronic Transactions Act, so long as the part or parts of the transaction that are governed by the DSTA are documented, signed and delivered in accordance with the relevant provisions of the DSTA. Further, the safe harbor methods apply solely for purposes of determining whether an act or transaction has been documented, and whether the document has been signed and delivered, in accordance with the DSTA and a governing instrument. In addition, the new amendments address the interaction between the DSTA and the federal Electronic Signatures in Global and National Commerce Act (the “E-Sign Act”) and confirm the intent to allow the DSTA to govern the documentation of actions, and the signature and delivery of documents, to the fullest extent the DSTA is not preempted by the E-Sign Act. The amendments do not apply to certain documents and actions, including (i) a document filed with or submitted to the Delaware Secretary of State, the Register in Chancery, or a court or other judicial or governmental body of the State of Delaware, (ii) a certificate of beneficial interest, or (iii) an act or transaction effected pursuant to the respective provisions of the DSTA relating to the requirement to maintain a registered office and registered agent in the State of Delaware, service of process, foreign entities or derivative actions. The amendments, though, are not intended to create any presumption that electronic signatures and delivery may not otherwise be permitted by the law governing such matters.
VI. Judicial Cancelation of a Certificate of Trust
A new Section 3824 of the DSTA provides that, upon a motion by the Delaware Attorney General, the Delaware Court of Chancery may cancel the certificate of trust of a DST for the abuse or misuse of its statutory trust powers, privileges or existence, and administer and wind up such DST’s affairs.
VII. Regulation of Registered Agents
Unlike other Delaware entities, DSTs generally do not have registered agents, but instead are generally required to have at least one trustee with a principal place of business in the State of Delaware. However, DSTs that are registered under the Investment Company Act of 1940 are generally permitted to have a registered agent in lieu of such a trustee. Section 3807 of the DSTA has been updated to impose the same duties on such registered agents that are currently required of registered agents of Delaware’s other entity statutes.
The DSTA was originally enacted in 1988 to provide greater certainty and flexibility with respect to trusts that are used in business transactions. The Delaware statutory trust is the preeminent form of trust for use in structured finance and investment fund transactions. The 2020 amendments to the DSTA demonstrate Delaware’s dedication to providing a sophisticated and modern body of statutory trust law that meets the changing needs of industry participants in the marketplace of today and the future. Delaware is committed to reviewing and enhancing the DSTA to maintain Delaware’s position as the top jurisdiction in which to form statutory trusts.