In brief

  • Section 601GC(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act) allows the responsible entity of a managed investment scheme to amend the scheme constitution without unitholder approval if the responsible entity reasonably considers that the changes will not adversely affect unitholders’ rights. 
  • The recent Premium Income Fund case cast doubt on the previously widely held view that amendments which merely affected the price at which units were issued did not affect any ‘right’ of unitholders and therefore could be implemented unilaterally by responsible entities. 
  • In In the matter of Centro Retail Limited, Barrett J rejected the Premium Income Fund case interpretation of section 601GC(1)(a) and expressly held that the responsible entity of a managed investment scheme has the power to amend the scheme constitution to set new unit pricing parameters without the need for unitholder approval because such an amendment does not ‘affect unitholders’ rights’, although it may affect their interests. 
  • However, Barrett J noted that the responsible entity must exercise the power to amend the constitution consistently with its fiduciary obligations to act for the benefit of unitholders.

Background

Centro MCS Manager Ltd (RE) is the responsible entity of the Centro Retail Trust (Trust), the trust component of the Centro Retail Fund stapled group. The RE applied to the Federal Court for judicial advice under the Trustee Act 1925 (NSW) in connection with a proposed restructure of the Centro Retail Fund. In particular, the RE asked the Court to advise whether the RE had the power under section 601GC(1)(b) to amend the constitution of the Trust to facilitate an issue of units based on a restructure-specific formula referable to the fund’s net asset value (rather than the market price based issue pricing that the constitution had previously required).

ASIC appeared in an amicus curiae capacity to argue that the reasoning in the Premium Income Fund case clearly meant that the RE would not have power under section 601GC(1)(b) to make unit pricing amendments without a unitholder resolution, as such an amendment would be adverse to unitholders’ rights.

Ruling

Barrett J analysed the Premium Income Fund and ING Funds Management Ltd cases, as well as various cases which addressed similar issues in the context of the rights of shareholders in a company. His Honour noted that the suggestion in the Premium Income Fund case that unitholders had a ‘right’ to insist that no new units be issued other than pursuant to the existing pricing formula was dicta. He then went on to expressly reject this interpretation of unitholders’ ‘rights’, contrasting the meaning of unitholders’ ‘rights’ with unitholders’ ‘interests’ (ie, something that affects the enjoyment or value of unitholders’ rights). His Honour then held that it was open to the RE, on reasonable grounds, to find that the pricing amendments would not adversely affect unitholders’ rights.

Barrett J went on to note that although the RE had the power to make the amendments under section 601GC(1)(b), it still had to ensure that it properly discharged its fiduciary duties when exercising that power. In particular, His Honour emphasised that the RE must conclude that it is acting for the benefit of unitholders when committing to a particular course of action. In this case, His Honour was satisfied that the RE had adequately considered relevant issues and documented its reasons for exercising its amendment powers.

What does this mean for you?

The Centro case provides much needed clarity around the responsible entity’s power to amend a scheme constitution to facilitate capital raisings, particularly in the current environment of significant market price fluctuations.

However, responsible entities should be sure to thoroughly document their decision making process when deciding whether to make pricing amendments to scheme constitutions.

In particular, the relevant board minutes should reflect that the directors carefully considered whether:

  • any unitholder rights were adversely affected by the amendments (pursuant to the Centro case, the responsible entity can reasonably determine that issue pricing amendments do not adversely affect those rights), and 
  • the amended pricing provisions were for the benefit of unitholders, having regard to the circumstances surrounding the proposed unit issue and any dilutive impact of that issue.

The board should carefully document the considerations that lead to those decisions (eg prevailing market conditions, general pricing and availability of capital and the urgency surrounding the capital raising).

The case also provides additional comfort for schemes which have undertaken past capital raisings based on constitution amendments that did not receive unitholder approval, including hybrid capital raisings where conversion (which may involve issuance of scheme ordinary units based on pricing adopted via constitution amendments made at the time of the issue of the hybrid instruments) has not yet occurred.