The most common trust arrangement during the IPO process includes family asset arrangement for shareholders and equity incentive plans for employees. As for the shareholders' family property arrangement, the grantors, or the shareholders, usually care most about the security and controllability of their assets. That means the original shareholders should know how to control and dispose of the assets after they transfer equities or assets to the trustees via the trust arrangement.
As the trust system under the common law system separates the ownership right and profit right, grantors' control over the assets and related security issues have aroused most attention and doubts under the civil law system. People believe that once the trusts are established, the assets previously belonging to the grantors would be owned by the trustees, who will become the legal owners of the trust assets. The key to ease the grantors' concerns is the selection of the forms for the trusts, which consequently involves the selection of jurisdictions with relevant trust laws. Many jurisdictions, such as the Cayman Islands, Singapore, Jersey and Hong Kong, have trust laws with the types of trusts in each jurisdiction being very complex. The issue of how to select a suitable form is very important but difficult.
Based on our research and practice as well as the aforementioned needs and characteristics of trust products, trust products available for family property arrangement are British Virgin Islands Vista Trust (BVI Vista Trust) and the Cayman Islands' Intentionally Grantor Defective Trust (IDT1). Both types have the same features; they can help grantors transfer their assets to the trustees while more importantly ensure grantors don't lose control and disposal rights over the assets under the trust agreement. Taking the IDT1 in the Cayman Islands as an example, an investment committee can be established and its duties, power, obligations and members can be decided by the grantors during the trust's establishment. The setup of the investment committee is designed to protect the value of trust assets and it can provide advice on investment, including how to exert shareholders' voting rights, and offer written recommendation to the trustees on the management and disposal of trust assets. Under this form of trust, grantors have the right to decide on how to allocate assets on their own in terms. They can also decide to transfer the gains to the beneficiaries. Trustees can flexibly exert the right of disposal based on the wishes of the grantors and the beneficiaries' conditions. Such a trust is a very effective tool for asset protection.
During the practical arrangement for the trust products of family assets, there are usually double offshore corporate structures, which enable more efficient asset management and better privacy. The grantors of the trusts will set up two Special Purpose Vehicles, or SPV1 and SPV2, which can be located in BVI or the Cayman Islands. The grantors will be the first shareholders of the two companies. Subsequently, the grantors will transfer all the equities of SPV1 to SPV2, which will become the sole shareholder of SPV1. The grantors will transfer the equities of the target company to the securities account opened by SPV1 at an investment bank and eventually transfer all the equities of SPV2 to the trustee (trustee of IDT1) under the trust agreement. The grantors and trustee will appoint a director to SPV1 and SPV2, respectively. It means that the director of SPV1 is appointed by the grantors while the director of SPV2 is appointed by the trustee. The grantors will inform the trustee on how to invest and allocate the trust assets in a written format. After the double offshore corporate structure is completed, the family property trust can provide complete and effective protection and arrangement for the assets under the trust. The detailed arrangement of the family property trust is illustrated in Figure 1.
The other important part of trust arrangement during an IPO is the trust for employees' benefits. If the employee benefit trust plans is improperly designed, it will not only impact employees' motivation, but also affect the company's listing process.
Employee benefit trusts also face the choice of trust types. In this regard, we also suggest the use of BVI Vista Trust and the Cayman Islands' Intentionally Defective Trust. Taking the BVI Vista Trust as an example, the advantages of this type of trust for grantors is that the grantors always have the control of the SPV during the existence of the trust; there are limitations on the appointment or removal of corporate directors by the trustee as well as on the sale of corporate shares; the grantors always have the right to obtain the company's economic benefits and have real control over the company.
As for the employee benefit trust, the grantors can set up one or several parallel SPVs and transfer the shares as incentives to employees to the SPV. It means that the SPV will hold the shares of the target company. In addition, the grantors can transfer the SPV to the Vista Trust via the trust agreement. The employees entitled to the benefits will be the beneficiaries of the SPV. The employee benefit trust can not only effectively motivate employees but also ensure the equity ownership of controlling shareholders in the target company will be diluted after its listing while their control over the company will be loosened. The detailed arrangement of the employee benefit trust is illustrated in Figure 2.
The core element of trust arrangement is to specify the purpose by the grantors to set up the trust. There is a saying that "one false step will make a great difference" and, while this article only describes the applications of some trust structures in a company's listing, I hope it can offer help to practitioners during the IPO process.
