The Corporations Act 2001 (Cth) (Corporations Act) permits the responsible entity (RE) of a registered managed investment scheme to unilaterally amend the scheme's constitution if the RE reasonably considers that the change will not adversely affect members' rights.
The Centro Case1 provides important guidance on the ability of REs to exercise this power in the context of modifications to the unit pricing provisions of scheme constitutions and confirms that member approval is not required provided the RE reasonably considers that the modifications will not adversely affect members' rights and will ultimately benefit those same members.
This development is of particular importance to the managed investment scheme industry as REs regularly use this power to unilaterally amend the unit pricing provisions in scheme constitutions to permit them to undertake capital raisings at a discount to market price.
The Centro restructure
Centro MCS Manager Ltd (Centro) is the RE for the Centro Retail Trust (Trust), the trust component of the Centro Retail Fund stapled group.
The Centro group proposes to implement a complex restructure which is directed towards the aggregation in a single entity of the assets of a number of Centro entities. An important part of the restructure, as it relates to the Trust, is the adoption in the Trust's constitution of new provisions regarding the issue price of new units in the Trust. Those provisions contemplate the issue of new units at a price that is to be determined by reference to a transaction-specific formula that is based on the net equity value of the assets of the Trust. They can be contrasted with the existing pricing provisions in the Trust's constitution which authorise the issue of new units at a price established by reference to the market price of units on the Australian Securities Exchange.
The Centro Case
Centro applied to the NSW Supreme Court for judicial advice on whether it would be justified in acting unilaterally to make the modification to the Trust's constitution outlined above – that is, whether the statutory power referred to in the opening paragraph of this update permitted Centro to make the constitutional amendment or whether that amendment must instead be approved by a special resolution of the Trust's members.
Barrett J gave judicial advice that Centro would be justified in making the proposed modification to the Trust constitution.
A threshold question for his Honour's consideration in forming that view was whether the proposed modification would "affect members' rights". That is because it is only where "members' rights" are affected does it become necessary for an RE to consider whether the effect on those rights will be adverse.
Contrary to the reasoning of Gordon J in the Premium Case2 but consistent with his own views in the earlier ING Case3, Barrett J held that the proposed modification of the Trust's constitution would not affect (whether adversely or otherwise) "members' rights". In forming this view, his Honour confirmed that a constitutional provision prescribing the price at which units may be issued does not confer a contractual "right" on the members of the scheme to insist that no new unit be issued except at that price; rather, the provision instead merely qualifies the power of the responsible entity to issue new units.
Having concluded that the statutory modification power was available to Centro, his Honour then turned his attention to the important question of whether the RE would be justified in exercising that power by making the modification in question – in other words, it is not sufficient for the power to exist as the exercise of the power in the manner proposed must also benefit the members of the scheme, being those persons for whom the RE holds property on trust.
In the present case, there was ample material before the court to show that Centro had made an assessment of the benefit to the beneficiaries of the Trust. That material included a draft independent expert's report which concluded that the issue price of units under the amended pricing provision would actually exceed the issue price under the existing pricing provision.
The decision in the Centro Case confirms the ability of REs to modify unit pricing provisions in registered managed investment scheme constitutions without members' approval and clarifies the interpretation of "members' rights", both issues over which doubt existed following the decision of Gordon J in the Premium Case.
In light of the Centro Case, it is now open to REs to unilaterally amend constitutions to vary the issue price of new units without members' approval if the RE:
- forms, on reasonable grounds, the opinion that no right of members will be affected by the proposed amendment to the constitution to vary the issue price of a unit;
- properly discharges its fiduciary duties (and also its other duties under Corporations Act) to act honestly and in good faith;
- exercises the power of modification to benefit the members (including the consideration of matters of dilution and loss of value etc); and
- documents in detail (e.g. through board minutes etc) the considerations that led to the decision to exercise the power of modification.
Both the Premium Case and Centro Case are decisions in the first instance and have not been overturned or affirmed by superior courts. However, the Centro Case is more in line with current market practice so provides comfort to REs exercising the power to unilaterally amend constitutions to vary the issue price of units.