A recent case has clarified the obligation of a Chair at a registered managed investment scheme meeting to exclude members from voting on a resolution where those members are associates of the responsible entity.
When do members need to be excluded?
The Corporations Act mandates that a number of key matters affecting the operation of a registered managed investment scheme can only be implemented with a member vote. Examples are most changes to the constitution, certain related party transactions, resolutions to wind up a scheme and resolutions to change the responsible entity.
To avoid the possibility that the responsible entity and its associates may take actions for their own benefit which conflict with members’ interests, the Corporations Act (at section 253E) provides that the responsible entity and its associates cannot vote on matters where they have an interest in the resolution other than as a member.
There has been a long-running dispute as to how this anti-conflict provision worked in practice. A particular difficulty arises in a corporate group where a member itself has no different interest, but is associated with the responsible entity only because they are under common control. Prior to the most recent case, there were two views (each supported by conflicting authority). One view was that to be excluded from voting, the associated member must itself have a different interest (the “narrow” view). The other view was that if one associated member has a different interest then all associates of the responsible entity in the corporate group are excluded (the “broad” view).
This uncertainty has been an ongoing source of difficulty at scheme meetings and has attracted media attention in a number of recent high profile M&A transactions involving trusts.
For the responsible entity, it placed the Chair of the scheme meeting in a particularly difficult position. This is because, the Corporations Act vests in the Chair the decision as to whether a member is eligible to vote. Chairs have previously had to choose which of the competing views to adopt without clear guidance form the courts.
For the funds management industry generally, many of whom establish multiple funds with cross-investment, the voting rights of members was uncertain. On the narrow view, schemes would often be able to vote their cross holdings on resolutions where a related responsible entity or another associate has an interest. The broad view, prevents this.
What did the recent case resolve?
The recent case was decided in the Court of Appeal in NSW. It determined (by unanimous decision) that the broad view applies.
This provides much-needed clarity to Chairs of responsible entities. They now know that if either the responsible entity or any associate has a relevant interest, then all of the responsible entity and its associates are excluded from voting.
For the funds management industry, the clarity will assist funds management groups in determining the structure of their businesses and their investments. In particular, it is now clear that any stake that a fund takes in a registered scheme operated by associates may be disenfranchised.
It may be that there will be law reform in this area – in particular, in circumstances where a person holds a stake in a fiduciary capacity (such as responsible entities, life insurers and superannuation entities). Until then, it is clear that the broad view applies.