In this case, the New South Wales Court of Appeal took a narrow interpretation of a component of an incentive fee formula which related to the price at which the securities were most recently “traded on ASX”.  The Court found that it did not include takeover acceptances made on the ASTC Settlement Facility (rather than SEATS (the operating platform then used by ASX)) after suspension of the securities following lodgement of compulsory acquisition notices.  The result for the relevant fund manager was a difference of over $10 million in incentive fees. Contracting parties should take care when drafting fee provisions to ensure that they in fact capture what is intended.

Hastings Funds Management Ltd (Hastings) was the responsible entity of three registered managed investment schemes, the units of which were stapled and traded as stapled securities on the ASX.  Following the successful completion of an off-market takeover bid for the stapled securities by APT Pipelines Limited (APT), its subsidiary Australian Pipeline Ltd (Australian Pipeline) replaced Hastings as responsible entity. 

The scheme constitutions provided for the calculation of an incentive fee payable to the Hastings out of the assets of the trust on its replacement as responsible entity. A component of the incentive fee was “the price at which stapled securities were most recently traded on ASX” (with ASX defined as ASX Limited).  A dispute arose between Hastings and Australian Pipeline regarding whether or not “traded on ASX” included acceptances of takeover offers after APT had lodged compulsory acquisition notices and ASX had suspended the stapled securities from trading and before Hastings ceased to be the responsible entity (which would have meant a difference of more than $10 million in the incentive fee). 

The Supreme Court of New South Wales – Court of Appeal held that the term “traded on ASX” did not include post-suspension acceptances by CHESS-sponsored security holders of off-market offers settled through the ASTC Settlement Facility, rather than SEATS (the operating platform then used by ASX).  In so finding, the Court:

  • held that while there is no doubt that the purpose of the incentive fee was to reward the responsible entity, the parties chose how this was to be done and the purpose of the incentive fee did not assist in determining the meaning of “traded on ASX”;
  • rejected the trial judge’s finding that there was a sufficiently related connection between off-market bids and the market platform (as the stapled securities were listed on the ASX) and held that the question is not whether there was a connection between the trades and the market, but whether the trades were on ASX (which it held meant the market operated by ASX);
  • rejected the assertion that express exclusion in the formula of ‘special crossings’ (which were not traded on the SEATS platform) meant that "traded on ASX" must be more than trades on the SEATS platform and that other off-market trades could be caught;
  • held that while it could not be disputed that off-market trading has the capacity to influence the price at which securities are traded on ASX, that does not mean that off-market trades themselves are trades on ASX;
  • held that the formula for the incentive fee is directed to securities traded on ASX, not securities capable of being so traded; and
  • held that the fact that off-market trades on a CHESS sub-register are required to be settled through the ASTC Settlement Facility does not mean that the trade takes place on ASX - ASTC is a separate entity with a separate licence.