Most of the time, investors don’t need to think too heavily about the difference between investments in listed shares or units. Every now and then, however, the difference becomes all too clear. The battle for the future of AMP Capital China Growth Fund is a case in point.
Last week, the NSW Court of Appeal confirmed that in relation to a managed investment scheme, ‘associated’ unitholders, as well as the responsible entity were precluded from voting on key resolutions that determine the future of funds. In this case, AMP Capital Funds Management Limited (RE) and AMP Life Limited (AMP Life) were told they couldn’t vote on a resolution directing the RE to wind up the AMP Capital China Growth Fund (Fund).
The Fund is a listed management scheme which invests in China A-shares. These are shares listed on the Shanghai or Shenzhen stock exchanges. AMP Life holds approximately 36% of the units in the Fund on behalf of policyholder interests in its statutory funds.
Recently, one of the other unitholders in the Fund, LIM Asia Multi-Strategy Fund Inc (LIM), has been agitating for a change in the Fund’s strategy. In particular, LIM has sought a winding up of the Fund due to what it sees as “persistent and excessive discount to net asset value”.
As a result, the RE announced that it would hold an EGM, giving the unitholders the choice between enhancing the Fund to make it more cost effective or winding it up, under a proposal put forward by LIM.
In order to make life easier for the chair of the meeting and resolve any ambiguity, the RE sought judicial advice to resolve whether AMP Life could vote on the proposed resolutions. Interestingly, it was subsequently reported that AMP Life had appointed an independent expert to help it decide how it should vote on the winding-up resolution.
Section 253E of the Corporations Act precludes a responsible entity and its associates from voting on a matter in which they have an interest other than as a member. “Interest” includes any direct or indirect benefit or advantage, other than as a member, arising out of the passing of the resolution. The prohibition does not extend to resolutions to remove the responsible entity of a listed management investment scheme..
There had been debate for some time between the so-called narrow and broad construction of the provision. The narrow view was that both the responsible entity and the associate had to have an extraneous interest in the resolution to be precluded from voting. The broad construction held that the prohibition applied irrespective of the associates’ interest in the subject matter of the resolution.
In the Supreme Court, Brereton J preferred the broader construction. It was also common ground that the winding-up resolution gave the RE an extraneous interest in the resolution, presumably as a consequence of the potentially adverse impact of the responsible entities’ fees of a winding up resolution.
Brereton J preferred the broader construction primarily because of the ‘prophylactic’ purpose of section 253E to remove the potential for a conflict of interest. It recognised the unique way that the legislation regulates responsible entities (and their associates) from exercising its voting power if it has an extraneous interest, so that votes will be informed only by the interests of members qua members. Moreover, it seeks to prevent associates colluding to procure a particular outcome. It is their association not their interest which is critical.
Nevertheless, there is no equivalent rule for corporate structures. The related party rules restrict some matters and indeed, Chapter 2E (as modified by Part 5C.7) applies to registered managed investment schemes. Crucially, transactions contemplated by a resolution to replace a responsible entity are transactions to which those provisions apply.
AMP Life, concerned that it was unfairly being disenfranchised, sought an appeal from the decision.
In its submissions, counsel for AMP life drew attention to the fact that AMP life, as an insurer, had important duties under Life Insurance Act and at general law and that section 253E (by virtue of section 1348), should be read down to avoid impediment of those duties. The Court (Bathurst CJ, Barrett J and Meagher J) rejected this contention however, on the basis that “neither the insurer nor any of its directions defaults in the performance of any duty just because the assets fall victim to inherent susceptibility”.
After a brief consideration of the issues, the Court dismissed the appeal, agreeing with the reasoning of the Brereton J. The result may have an impact on similarly drafted provisions within the Corporations Act relating to managed investment schemes, including section 253D which relates to jointly held interests, section 610 which refers to voting power in a managed investment scheme, section 601ED which deals with the registration of a managed investment scheme and section 601FG which relates to the acquisition of interests in a managed investment scheme.
The application to activists in managed investment schemes is also interesting. Members can request that the responsible entity call a members’ meeting to consider voting on a resolution to remove the responsible entity and elect a replacement. The removal power only requires an ordinary resolution to replace the responsible entity. All members are entitled to vote on resolutions to replace a removed or retiring responsible entity.
The decision is a reminder that while there are lots of similarities between companies and manged investment funds, in many ways they are very different. The ramifications of the decision are yet to fully play out but it raises some interesting challenges for responsible entities, their associates and activist unitholders. Not least is the fact that there are no voting restrictions on resolutions to replace the responsible entity.