The 2022 Amendments to the Delaware Statutory Trust Act
July 28, 2022
Publication| Corporate Trust & Agency Services
The Delaware General Assembly recently enacted amendments to the Delaware Statutory Trust Act (the “DSTA”) which will become effective partially on August 1, 2022 and partially on August 1, 2023. The amendments make a variety of changes relating to the nature and operation of Delaware statutory trusts (“DSTs”), including amendments (i) adding business development companies to a number of provisions of the DSTA, (ii) clarifying how certain authorized persons may bind a DST to a contract, (iii) clarifying a trustee’s rights to delegate its duties, (iv) providing a safe harbor procedure for ratifying void or voidable acts, (v) streamlining Delaware filings upon the succession of a trustee of multiple trusts, (vi) clarifying when a statement in a Delaware filing is deemed effective, (vii) clarifying a beneficial owner’s right to obtain information from the DST, (viii) authorizing the use of electronic signatures on certificates of beneficial interest, and (ix) adding a control beneficial interest acquisition provision applicable to some DSTs.
I. Business Development Companies
Sections 3801(f), 3805(h), 3806(l), 3807(b), 3807(c), 3815(a), 3821(b), 3823(b) and 3825(c) of the DSTA have been updated to add business development companies to provisions that previously applied only to DSTs registered as investment companies under the Investment Company Act of 1940. Business development companies are not required to be registered as investment companies, but share many of the same characteristics and elect to be subject to many of the same federal regulations applicable to investment companies.
II. Binding a DST to Contracts
Pursuant to Section 3804(a) of the DSTA, a DST may be sued for debts and other obligations or liabilities contracted or incurred by the trustees or other authorized persons, or by the duly authorized agents of such trustees or other authorized persons. An amendment to this section clarifies that such persons may bind a DST to a contract or instrument by entering into such contract or instrument in the name of the DST or in the name of any such person acting on behalf of the DST, unless otherwise set forth in the governing instrument.
III. Conflicts of Interest and Certain Delegations
Sections 3806(b)(7) and 3806(i) of the DSTA, relating to the management of a DST, have been updated with respect to the effects of conflicts of interest on the delegation of a trustee’s rights, powers and duties under a governing instrument. Under Section 3806(b)(7), the amendment clarifies that a trustee managing the business or affairs of a DST with a conflict of interest that delegates any right, power or duty to another person does not cause such person to be deemed conflicted solely by reason of the conflict of interest of the delegating trustee. Similarly, a delegating trustee with a conflict of interest under the amendment to Section 3806(i) may delegate any or all of its rights, powers or duties to another person without causing such person to be deemed conflicted solely by reason of the conflict of interest of the delegating trustee. The foregoing amendments to Sections 3806(b)(7) and 3806(i) create a different rule than the rule applied in cases such as Wenske v. Bluebell Creameries, Inc., 214 A.3d 958 (Del. Ch. 2019), that a conflicted principal is legally disabled from delegating authority over the subject matter as to which the principal is conflicted even to an independent delegate. The amendment to Section 3806(i) also clarifies the broad power and authority of a trustee to delegate any or all of its rights, powers and duties to manage and control the business affairs of a DST.
IV. Ratification of Void or Voidable Acts
Under new Section 3806(o) of the DSTA, there is an express safe harbor procedure for a DST to ratify acts or transactions of a DST under the DSTA or a governing instrument and waiving failures to comply with provisions of a governing instrument that may cause such acts or transactions to be void or voidable. This new section is intended to provide a rule different from the rule applied in Composecure, L.L.C. v. Cardux, LLC, 206 A.3d 807 (Del. 2018), and Absalom Absalom Trust v. Saint Gervais LLC, 2019 WL 2655787 (Del. Ch. June 27, 2019), that acts or transactions determined to be void generally may not be ratified. Though the safe harbor procedures provide a roadmap under the DSTA to ratify or waive void or voidable acts or transactions, the language of the provision also makes clear that such procedures are not intended to foreclose ratification or waiver by other means permitted by law.
V. Trustee Succession
Section 3807 of the DSTA has been amended to add a new Section 3807(n), which provides a streamlined procedure for the succession of a trustee of multiple DSTs on the records of the Delaware Secretary of State. A trustee of one or more DSTs may now make a single filing to change the trustee’s name and address upon the payment of a filing fee, the execution and filing with the Secretary of State of a certificate setting forth the names and addresses of the predecessor trustee and the successor trustee, and stating that the successor trustee has succeeded such predecessor trustee. Such certificate will include in its body or on an attachment the list of names and file numbers of each affected DST. The filing shall be deemed an amendment to the certificates of trust of each affected DST. This amendment has a delayed effective date of August 1, 2023.
VI. Statements in Certificates
Section 3811(a) of the DSTA sets forth the requirements for executing certificates under the DSTA. Section 3811(c) of the DSTA provides that a person executing a certificate under Section 3811(a) has made an oath or affirmation, under penalties of perjury in the third degree, that to the best of such person’s knowledge and belief, the factual statements in such certificate are true. Section 3811(c) has been amended to clarify that such factual statements shall be true at the time the certificate becomes effective, not at the time the certificate is executed.
VII. Rights to Information of Beneficial Owners
Section 3819 of the DSTA provides rights to beneficial owners of a DST to obtain certain information about the DST reasonably related to the beneficial owner’s interest as a beneficial owner of a DST, which may be subject to reasonable standards established by trustees or other persons with authority to manage the business or affairs of the DST, except to the extent otherwise provided in the governing instrument. Amendments to Section 3819 of the DSTA clarify that the reasonable standards established by such trustees or other persons with authority to manage the business or affairs of the DST may include standards governing information relating to the books, records and other documents of the DST. Further, a new Section 3819(f) has been added limiting a beneficial owner entitled to obtain information in accordance with its rights as a beneficial owner of a DST under the DSTA or the governing instrument or other stated purpose, to obtaining such information as is necessary and essential to achieving that stated purpose, except to the extent otherwise provided in the governing instrument. To the extent current law provides that the “necessary and essential” test does not apply by default to (i) a beneficial owner’s right under Section 3819(a) of the DSTA to obtain information from a DST for a purpose reasonably related to the beneficial owner’s interest as a beneficial owner of a DST or (ii) a beneficial owner’s right under a governing instrument to obtain information from a DST for a stated purpose, new subsection (f) is intended to change that law.
VIII. Electronic Signatures and Delivery
An amendment to Section 3826(b) of the DSTA provides for the execution of beneficial interest certificates issued by a DST by manual, facsimile or electronic means. Previously, such beneficial interest certificates could only be manually signed. This amendment follows amendments in 2020 to Sections 3826(b), 3801(c) and 3806 and creation of a new Section 3826 of the DSTA that included default non-exclusive, safe-harbor methods to reduce certain acts or transactions to an electronic document and to sign and deliver a document electronically. Those provisions generally mirrored similar provisions adopted in the statutes governing Delaware limited liability companies and limited partnerships, and 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.
IX. Control Beneficial Interest Acquisitions
The 2022 amendments include a new Subchapter III of the DSTA to add a control beneficial interest acquisition provision for DSTs registered under the Investment Act of 1940 as closed-end management investment companies or DSTs that are closed-end management investment companies that have elected to be regulated as business development companies under the Investment Company Act of 1940, and that in either case have a class of equity securities listed on a national securities exchange registered under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) or designated for trading on the National Association of Securities Dealers Automated Quotation System (NASDAQ). These provisions govern the status of certain voting rights and procedures in connection with the acquisition of a control beneficial interest in respect of such types of DSTs. Practitioners should note that the Securities and Exchange Commission’s position on similar provisions in the laws of the State of Maryland remains unsettled.
X. Conclusion
The DSTA was originally enacted in 1988 to provide greater certainty and flexibility with respect to trusts that are used in business transactions. The new amendments will be effective August 1, 2022, except that the amendment described in Paragraph VI above will be effective August 1, 2023. The Delaware statutory trust is the preeminent form of trust for use in structured finance and investment fund transactions. The 2022 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.