Innovation and the Organizational Contract: Lessons from Income Trusts

This Article investigates why North American businesses typically do not adopt the trust form, other than as a financing vehicle. It examines an episode in Canada in which the trust form became very popular amongst publicly traded businesses. Until 2006, there were significant tax advantages associated with adopting an “income trust” structure. Regardless of the tax motivations for the form, the income trust offered businesses greater flexibility in choosing their governance rules than that offered by the corporate form. Income trusts often took advantage of this flexibility, deviating from mandatory corporate law rules on a number of dimensions. This Article finds that there were positive market reactions to innovations in governance by income trusts. However, once the law changed to remove the tax advantages of income trusts, the form all but ceased to be adopted—despite relatively low costs of adoption. On balance, this Article suggests that innovative trust structures are not especially valuable from a pure governance perspective, though governance innovations may be valuable if combined with tax advantages.