Summary

  • Section 601GC(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act) allows the responsible entity (RE) of a registered managed investment scheme to amend the constitution of the scheme without members’ approval if the RE reasonably considers that the changes will not adversely affect members’ rights. Constitutional amendments otherwise require a special resolution of members.
  • Recent single judge court decisions have diverged on the extent to which having a scheme administered in accordance with the provisions of its current constitution is a ‘right’ of members for the purposes of section 601GC(1)(b).
  • The issue has now been considered by the Supreme Court of Victoria at Court of Appeal level in 360 Capital RE Limited v Watts, on appeal from the judgment of Sifris J (see our previous article1).
  • The Court of Appeal held members’ ‘rights’ include the right to have a scheme administered according to the constitution of the scheme as it stands. The court regarded the distinction in other contexts between something which affects members’ rights as such and something which merely affects their value or enjoyment as essentially beside the point in this context.
  • On the present state of authorities, an RE contemplating a unilateral pricing or other amendment to the constitution of a scheme will in practice need to consider whether the amendments adversely affect the interests of members. It will also be critical that REs undertake and document a thorough and comprehensive decision-making process when deciding to make unilateral amendments to scheme constitutions.

Background

On 4 October 2012, the Victorian Court of Appeal dismissed an appeal by 360 Capital RE Limited, as RE of the 360 Capital Industrial Fund (Fund), and affirmed the decision at first instance of Sifris J finding that the RE’s purported changes to the Fund’s constitution were ineffective.

The case at first instance

On 31 July 2012, in Watts v 360 Capital RE Limited [2012] VSC 320, Sifris J delivered a judgement that the purported modifications to the constitution of a managed investment scheme made by the RE were ineffective as a result of the RE’s failure to obtain member approval for the modifications. The question was whether member approval was required for the modifications under section 601GC(1)(a) of the Corporations Act, or whether they could be made without member approval under section 601GC(1)(b).

The appeal judgement

The Court of Appeal upheld Sifris J’s finding at first instance and approved the reasoning of Gordon J in Premium Income Fund Action Group Inc v Wellington Capital Ltd that a member’s rights to have a managed fund managed and administered in accordance with the constitution of the fund as it stands are members’ ‘rights’ within section 601GC(1)(b). In doing so the court of Appeal disagreed with the approach of Barrett J in Re Centro Retail Ltd and adopted a restrictive approach in relation to the extent to which amendments can be made unilaterally by REs.

We find the court’s statements as to the extent to which an RE can rely on legal advice on questions of law difficult to reconcile. On the one hand, the court does say that, other things being equal, it is reasonable for a board to act on the basis of legal advice on questions of law and, in this case, it may be accepted that it was not unreasonable for the board to conclude, as they were advised, that the proposed changes would not affect members’ rights. However, the court then proceeds to state that is does not follow from this proposition that the board ought to be taken to have considered that the proposed changes did not adversely affect members’ rights. It is not clear to us how a reasonable basis for a conclusion that members’ rights were not affected at all cannot be a reasonable conclusion that members’ rights were not affected adversely. However, the court does appear to find that Sifris J was not in error to grant declaratory and injunctive relief on the basis that the board proceeded on a mistake of law.

What does this mean for you?

On the present state of authorities, an RE contemplating a unilateral pricing or other amendment to the constitution of a scheme will in practice need to consider whether the amendments adversely affect the interests of members. The Court of Appeal’s decision reinforces that it continues to be critical for REs to undertake and document a thorough and comprehensive decision making process when deciding whether to make unilateral amendments to a scheme constitution. This will make it harder to facilitate future capital raisings through scheme constitution amendments.