Funds managers whose unitholders are targeted by low-ball offers can take some heart from Perpetual Investment Management's success in the NSW Supreme Court (Re Perpetual Investment Management Limited as responsible entity for Perpetual's Monthly Income Fund and Perpetual's Wholesale Monthly Income Fund [2011] NSWSC 133).

In a landmark decision, Justice White gave guidance under the Trustee Act 1925 (NSW) that Perpetual would be justified in not registering transfers of units in response to low-ball offers, except in those cases where the unitholder had subsequently indicated to Perpetual that it still wished to proceed with the transfer. Clayton Utz acted for Perpetual.

A low-ball offer is made, and a trustee is worried

Direct Share Purchasing Corporation Pty Ltd ("DSPC") is a company run by David Tweed. Its activities include making offers on securities at prices below market value.

After obtaining a copy of the register of unitholders for two of Perpetual's funds, DSPC mailed offers to unitholders to buy their units. DSPC said it thought a fair price was $1 per unit, and then offered to buy them for 50 cents each.

Concerned, Perpetual repeatedly warned the unitholders against accepting the offers. Nonetheless, a number of unitholders completed the forms accepting DSPC's offer.

Perpetual then sought the guidance of the NSW Supreme Court under section 63 of the Trustee Act 1925 as to whether it should register the transfers. It also wrote to the relevant unitholders to ask them if they wanted to proceed with the transfer. Most did not.

In writing to unitholders, Perpetual also asked about the circumstances in which they signed the documents, which revealed many of the elderly unitholders had not understood the origin or effect of the offer to buy their units.

DSPC's objections

DSPC's main objections to the Court's giving advice were that:

  • this was not a question of the management or administration of the trust property, or the interpretation of the trust deed, so the Court did not have power to give advice under the Trustee Act;
  • since Perpetual had already refused to register the transfers (pending the obtaining of judicial advice), there was nothing for the Court to give advice on;
  • as DSPC might seek to enforce the registration of the transfers by suing under section 1071F of the Corporations Act, any guidance the Court gave to Perpetual would be pre-judging that issue; and
  • the unitholders cannot be treated as a group; they have individual interests and it should be left to each individual unitholder to pursue his or her interests.

Why the Court could give guidance…

The Court rejected all of DSPC's objections.

It held that section 63 of the Trustee Act is beneficial legislation for the protection of trustees and should not be construed narrowly. In this case, there was a clear connection between advice to Perpetual as to whether to register the transfers and its administration of trust property, so the Court had the power to give advice. Further, Perpetual had only given a conditional refusal to register, pending guidance from the Court, so there was still a matter for the Court to advise upon.

As for the last two objections, the real controversy was not between DSPC and Perpetual, but between DSPC and the unitholders who had accepted DSPC's offer but had not indicated to Perpetual that they wanted the transfers to proceed. Any section 1071F proceedings would include them, and Perpetual could be expected to be a minor player in such proceedings.

… and the guidance it gave

A trustee in Perpetual's position is not obliged to scrutinise the enforceability of documents apparently valid on their face. Had it registered the transfers, Justice White doubted that the accepting unitholders could have criticised it.

But Perpetual was under no statutory obligation to register a transfer of units. Further, while the Constitution of each fund gave unitholders a right to transfer their units (and where it was clear to Perpetual that a unitholder wished a transfer to be registered, it should act accordingly), the vast majority of unitholders in the present case had indicated they did not wish to proceed.

As between DSPC and the unitholders, the unitholders may be legally obliged to go through with the transfers – or they may not be. That depended upon each individual's circumstances, how and why they agreed to the transfer in the first place, and other matters. However, in the circumstances in which DSPC had procured acceptances, Perpetual would be justified in acting on the basis that there is no presumption that the contracts between DSPC and the unitholders are binding.

Perpetual would also be justified in distributing income to the unitholders so entitled at the relevant date. If, ultimately, a court finds that a particular transfer was valid (but was not processed because the unitholder did not indicate to Perpetual that it wished to proceed), the unitholder would then have to account to DSPC for that income – but this did not affect Perpetual's obligation to distribute income to the registered unitholder.

What this means for other fund managers

This decision is an important one for other fund managers whose unitholders might be targeted in a similar way. It shows the flexibility of the powers given to the Court by section 63 of the Trustees Act.

In particular, the decision highlights a course of action (namely, the obtaining of judicial advice) which is available to responsible entities of registered schemes whose unitholders are targeted with low-ball offers but which is not available to corporations whose shareholders are similarly targeted.