Ellison v. Sandini – Full Federal Court of Australia decision suggests that it may be difficult to create a proprietary interest in a portion of a larger bloc of shares held by another person
Australian Family Court orders, that were made by consent between Mr and Ms Ellison, required a corporation (“Sandini” - that was controlled by Mr Ellison) in its capacity of trustee of the Ellison family trust to forthwith transfer 2.1M shares of a public company to Ms Ellison. However, Ms Ellison instead got Sandini to transfer those shares to a company controlled by her. This busted rollover relief to Mr Ellison unless it could be considered that the beneficial ownership of those shares had already been transferred to her because of the consent orders.
Jagot J (speaking for the majority) found for the Commissioner (i.e., no rollover relief to Mr Ellison) partly on the basis of her doubts that there had been such a prior transfer (concluding that “the orders vested statutory rights and a beneficial interest of some kind in Ms Ellison but … I do not consider that interest can be characterised as beneficial ownership.”)
She started with the proposition that “if the original owner continues to enjoy rights to deal with the asset, including rights of disposal, then it could not be said that another entity is the beneficial owner of the asset, even if the other entity may have a beneficial interest in the asset.” The difficulty in this regard was that (subject to a glitch discussed below) Sandini held a total of 35M shares of the public company, so that it might be considered that even after the order it had the right to decide which out of that larger pool was the block of 2.1M shares to be transferred to Ms Ellison (or, as it turned out, to her company).
She made a guarded finding that a person could have a proprietary interest in a specified portion of a larger pool of fungible assets, stating:
[T]he weight of authority is that there can be a valid trust over a fungible pool of assets provided the assets and relevant proportions for the different beneficiaries are identified with sufficient certainty. … If, given the terms of the declaration and the nature of the property, the trustee is constituted as nothing more than a bare trustee on behalf of the beneficiary in respect of the beneficiary’s proportional interest, it may well be that there has been a change of ownership … . For this to be the case, however, the rights vested in the beneficiary must be capable of supporting the grant of equitable remedies the equivalent of ownership, including preventing the trustee from dealing in the relevant proportion of the asset pool other than in accordance with the beneficiary’s directions.
However, she went on to doubt that the 35M shares in issue were fungible, given that different shares could have different tax basis and in light of the alluring proposition that:
If all shares in the company are of the same class, there is but a single asset, being the issued share capital … [which] single asset cannot give rise to the capacity for selection which defines a fungible asset.
In Canada, it would seem backwards to consider that the nature of a property interest is determined by its tax treatment (see, e.g., ARTV) and CRA likely accepts that shares (as contrasted with partnership units) are distinct properties. Accordingly, it may be appropriate to skip over her fungibility doubts.
Now for the glitch. The relevant consent order was botched. Sandini, in fact, was not the trustee of the Ellison family trust. It was the trustee of a unit trust holding the 35M shares and of which the Ellison family trust (with a different corporate trustee) was the sole unitholder. Jagot J found that, given that the consent “orders are to be construed on their own terms without reference to extrinsic material” she had no equitable discretion to fix this, so that “on their own terns, the orders have no operation and cannot be enforced.” Thus, on this more emphatic ground, the order also did not effect any transfer of beneficial ownership to Ms Ellison.