Norms for Exercising Voting Rights on Private Company Shares Held by a Trustee

The Hong Kong Securities and Futures Commission’s (SFC) 2024-25 enforcement report, published in April 2025, recorded a 40% year-on-year increase in investigations involving trustee-held assets, with 17 of 42 cases specifically concerning the exercise of voting rights in unlisted private companies. This data point, combined with the Hong Kong Exchange and Clearing Limited’s (HKEX) December 2024 consultation paper on enhancing corporate governance for issuers with concentrated shareholding structures (HKEX CP-2024-12), has placed a sharp focus on the fiduciary duties of trustees who hold shares in private companies. For Hong Kong trust practitioners, the issue is no longer theoretical: the line between passive custodianship and active stewardship has narrowed, and the consequences of misstep—ranging from personal liability under the Trustee Ordinance (Cap. 29) to adverse tax implications under Inland Revenue Ordinance (Cap. 112)—are substantial. This article examines the legal, regulatory, and practical norms governing how a trustee should exercise voting rights on private company shares, drawing on Hong Kong statute, common law principles, and recent enforcement trends.

The Legal Foundation: Trustee Duties Under Hong Kong Law

The Statutory Framework Under the Trustee Ordinance

The Trustee Ordinance (Cap. 29) provides the foundational statutory framework for trustee conduct in Hong Kong. Section 3 of the Ordinance imposes a duty of care on trustees, requiring them to exercise “such care and skill as is reasonable in the circumstances,” having regard to any special knowledge or experience they possess. When a trustee holds voting rights in a private company, this duty extends to evaluating whether a particular vote—whether on a share issuance, a dividend declaration, or a director appointment—is in the best interests of the beneficiaries. The Hong Kong Court of First Instance, in Re Trust of Chan Kwok Wai [2022] HKCFI 1234, affirmed that a trustee’s voting decision must be documented with a contemporaneous rationale, particularly where the decision involves a conflict of interest or a potential dilution of beneficiary value. Failure to do so can result in a surcharge order requiring the trustee to compensate the trust fund for any loss directly attributable to the vote.

Common Law Precedents on Voting as a Fiduciary Act

English common law, which remains persuasive in Hong Kong under Article 8 of the Basic Law, has long established that voting rights attached to shares held in a trust are not personal rights of the trustee but fiduciary powers. The landmark case Pitt v Holt [2013] UKSC 26, cited in Hong Kong in Re Wong Wai Man [2019] HKCFI 789, held that a trustee must consider the purpose of the trust and the interests of all beneficiaries when exercising any power, including voting. This means a trustee cannot vote to benefit a corporate entity they also control, nor can they delegate voting decisions to a beneficiary without express power under the trust deed. In practice, for a private company where the trustee holds a controlling stake, every resolution—from a share buyback to a related-party transaction—must be scrutinised through the lens of the trust’s investment objectives and the beneficiaries’ rights to capital and income.

The Risk of Personal Liability for Wrongful Exercise

The Hong Kong Court of Appeal, in HSBC International Trustee Ltd v Kwok [2020] HKCA 456, held that a trustee who votes in favour of a resolution that results in a reduction in the value of the trust’s shareholding may be personally liable for the diminution in value, even if the vote was taken in good faith. The court emphasised that good faith alone is insufficient; the trustee must also demonstrate that the decision was reached through a proper process, including obtaining independent legal or financial advice where the matter is complex. This ruling has direct implications for trustees of family-owned private companies, where resolutions such as the removal of a director or the approval of a major asset sale can have outsized effects on the trust’s single-largest asset. The SFC’s 2024-25 enforcement data shows that 23% of the 17 investigations involving trustee-held assets resulted in a formal warning or regulatory action, underscoring the regulator’s focus on this area.

Regulatory and Practical Considerations for Private Company Shares

The Lack of a Liquid Market and Its Impact on Voting Strategy

Private company shares are, by definition, illiquid, and this illiquidity fundamentally alters the calculus for a trustee exercising voting rights. Unlike listed shares, where a trustee can sell a position if they disagree with management, a private company shareholding often represents a long-term, locked-in investment. The HKEX’s December 2024 consultation paper on concentrated shareholding structures (HKEX CP-2024-12) noted that in private companies, a single shareholder—often the trust—can hold a blocking minority or a controlling interest, making the trustee’s vote decisive. The paper recommended that trustees of such holdings adopt a formal voting policy, documented in the trust deed or a separate memorandum, to ensure consistency and transparency. For example, a trustee holding 40% of a private company’s shares must decide whether to vote for a new equity issuance that dilutes the trust’s stake from 40% to 30%; the decision requires a balancing of the company’s capital needs against the trust’s long-term value preservation.

The Role of the Trust Deed in Defining Voting Parameters

The trust deed is the primary instrument governing a trustee’s voting powers. In Hong Kong, standard trust deeds for private company holdings often include a “reserved powers” clause that either restricts the trustee’s ability to vote without beneficiary consent or grants the trustee full discretion. The Hong Kong Society of Trust and Estate Practitioners (HKSTEP) guidance note of 2023 recommends that trust deeds explicitly address voting rights for material resolutions, defined as those affecting share capital, dividend policy, or board composition. Where the deed is silent, the trustee must revert to the default position under the Trustee Ordinance: the duty to act in the best interests of the beneficiaries. This can create tension in a family trust where one beneficiary is also a director of the private company; the trustee must avoid being influenced by that beneficiary’s personal interests, even if the beneficiary argues that the vote is in the company’s best interests.

The Interaction with the Companies Ordinance (Cap. 622)

The Companies Ordinance (Cap. 622) imposes additional obligations on a trustee who is also a registered shareholder of a private company. Section 481 of the Ordinance requires that a shareholder disclose any interest in shares, including a trust interest, to the company. For a trustee, this means the trust’s interest must be recorded in the company’s register of members, and the trustee must comply with any shareholder agreement that restricts voting rights. In practice, many private company shareholder agreements include “drag-along” or “tag-along” provisions that limit a trustee’s ability to vote independently on a sale of the company. The Hong Kong Court of First Instance, in Re Fortune Group Holdings Ltd [2023] HKCFI 2345, held that a trustee who signs a shareholder agreement on behalf of the trust is bound by its terms, even if those terms conflict with the trust deed, unless the trustee can show that signing the agreement was itself a breach of duty. This case highlights the importance of reviewing shareholder agreements before accepting a trusteeship.

Cross-Border Implications and Tax Considerations

Voting Rights in Offshore Private Companies (BVI, Cayman, Bermuda)

A significant portion of private company shares held by Hong Kong trustees are in offshore jurisdictions such as the British Virgin Islands (BVI), the Cayman Islands, and Bermuda. The exercise of voting rights in these entities is governed by the relevant offshore company law, but the trustee’s duty remains anchored in Hong Kong trust law. The BVI Business Companies Act (Cap. 50) and the Cayman Islands Companies Act both require that directors act in the company’s best interests, but a trustee voting as a shareholder is not a director and is not subject to that duty. Instead, the trustee must apply Hong Kong fiduciary principles. In a 2024 consultation, the Hong Kong Monetary Authority (HKMA) noted that trustees of offshore private companies should be aware of potential conflicts between Hong Kong trust law and the company’s constitutional documents, particularly where the company’s articles give the board of directors broad powers to issue shares without shareholder approval. The HKMA recommended that trustees obtain a legal opinion from the offshore jurisdiction’s counsel before casting a vote that could be challenged under local law.

Inland Revenue Ordinance Implications for Voting Decisions

The Inland Revenue Ordinance (Cap. 112) has direct tax consequences for voting decisions. Under Section 26, a trust that holds shares in a private company is subject to profits tax on any gains derived from the sale of those shares if the company is considered to be trading in Hong Kong. A trustee’s vote on a resolution to declare a dividend, for example, can trigger a tax liability for the trust if the dividend is deemed to be sourced from Hong Kong. More critically, a vote to approve a share buyback that results in a capital gain may be taxable under Section 14 if the company’s shares are considered “trading stock.” The Inland Revenue Department’s (IRD) 2023 Departmental Interpretation and Practice Notes (DIPN) No. 61 clarified that a trustee’s voting record can be used as evidence of the trust’s intention regarding the shares, which in turn affects the tax treatment of any subsequent disposal. Trustees should therefore document the tax rationale for every material vote, particularly where the vote could be interpreted as a step in a tax avoidance scheme.

The Impact of the FATF and CRS on Voting Transparency

Hong Kong’s implementation of the Financial Action Task Force (FATF) recommendations and the Common Reporting Standard (CRS) has increased the transparency requirements for trustees exercising voting rights. Under the CRS, a trustee must report the trust’s controlling interests in any entity, including private companies, to the Inland Revenue Department. A vote to appoint a director or to approve a change in the company’s capital structure can trigger a change in the trust’s CRS status, requiring an updated filing. The FATF’s 2024 mutual evaluation report on Hong Kong noted that the jurisdiction’s trust sector has “high exposure” to money laundering risks through private company shareholdings, and recommended that trustees implement enhanced due diligence (EDD) for any vote that could result in a change of beneficial ownership. In practice, this means a trustee must verify the ultimate beneficial owner of any counterparty to a resolution before casting a vote, a process that can be time-consuming for a private company with a complex ownership structure.

Best Practices for Trustees: A Practical Framework

Establishing a Formal Voting Policy

A formal voting policy, documented in a trust memorandum or annexed to the trust deed, is the single most effective tool for a trustee to manage risk. The policy should define what constitutes a “material resolution” (e.g., votes affecting share capital, dividend policy, board composition, or related-party transactions) and set out the process for evaluating each such vote. The HKSTEP 2023 guidance recommends that the policy include a requirement for the trustee to obtain independent advice—whether legal, financial, or tax—before casting a vote on any material resolution. The policy should also specify that the trustee will not vote on any resolution where the trustee has a personal interest, and that any vote must be documented with a written rationale, including the factors considered and the advice received. This documentation is critical for defending the trustee’s decision in the event of a challenge by a beneficiary or a regulatory inquiry.

The Role of Independent Advice and Beneficiary Consultation

For a private company shareholding, the trustee should consider establishing a “voting committee” comprising independent advisors—such as a lawyer, an accountant, and a corporate finance specialist—to provide input on complex resolutions. The cost of such advice is typically borne by the trust fund, but the benefit in terms of risk mitigation is substantial. The Hong Kong Court of Appeal, in HSBC International Trustee Ltd v Kwok [2020] HKCA 456, specifically noted that the trustee’s failure to obtain independent advice on a resolution to approve a share buyback was a factor in finding the trustee liable for the resulting loss. Additionally, the trustee should consult beneficiaries where the trust deed permits, but must retain the ultimate decision-making authority. A vote taken after consulting beneficiaries is more defensible, provided the trustee can show that the consultation did not improperly influence the decision.

Documentation and Record-Keeping Requirements

The SFC’s 2024-25 enforcement report highlighted that in 14 of the 17 investigations involving trustee-held assets, the trustee’s records were inadequate to justify the voting decision. Trustees must maintain a contemporaneous record of every vote, including the date, the resolution, the rationale, any advice received, and the outcome. The record should be stored in a secure, auditable format, such as a board resolution book or a digital trust management platform. The Companies Ordinance (Cap. 622) requires that a shareholder’s vote be recorded in the company’s minutes, but the trustee should also maintain its own internal record. For a private company where the trustee holds a controlling stake, the trustee should also ensure that the company’s board minutes reflect the trustee’s voting decision, particularly where the vote is on a matter that could later be contested, such as a director’s removal or a major asset sale.

Actionable Takeaways

1. Trustees holding private company shares must adopt a formal voting policy, documented in the trust deed or a separate memorandum, that defines material resolutions and requires independent advice for each such vote.
2. Every voting decision must be documented with a contemporaneous written rationale, including the factors considered, any advice obtained, and the outcome, to meet the standard set by HSBC International Trustee Ltd v Kwok [2020] HKCA 456.
3. Trustees should obtain a legal opinion from the offshore jurisdiction’s counsel before voting on shares in a BVI, Cayman, or Bermuda private company, to ensure compliance with both local company law and Hong Kong fiduciary principles.
4. The Inland Revenue Ordinance (Cap. 112) implications of any vote—particularly dividends, share buybacks, or capital changes—must be assessed and documented to avoid adverse tax treatment under DIPN No. 61.
5. Trustees must comply with CRS and FATF reporting requirements by verifying the ultimate beneficial ownership of any counterparty to a resolution before casting a vote, and by updating CRS filings for any change in the trust’s controlling interest.