What is it about?

A responsible entity may need to amend the constitution of a registered managed investment scheme where it may either not have the time to call a members’ meeting to make the amendment or not wish to incur the expense of the meeting. Therefore, the responsible entity may wish to rely on its power to amend the constitution acting unilaterally where members' rights are not adversely affected.

There has been much commentary on the recent decision of the Victorian Court of Appeal concerning the proposed amendments which 360 Capital RE Limited sought to make to the constitution of a registered managed investment scheme without members’ approval. Various articles have indicated that this most recent decision potentially narrows the scope for the responsible entities to amend constitutions where the earlier decision in the Centro case had potentially broadened it.

However, there are also common threads to all the decisions that cannot be overlooked.

How is a Constitution amended?

The constitution of a registered scheme may be modified, or repealed and replaced with a new constitution:

(a) By special resolution of the members of the scheme, or

(b) By the responsible entity if the responsible entity reasonably considers the change will not adversely affect members' rights.

Element (b) effectively contains 3 criteria:

  • Member's rights must not be affected,
  • Those rights must not be affected adversely, and
  • The responsible entity must have considered the relevant change and come to a reasonable conclusion.

Most of the commentary has focused on the two lines of authority as to what constitutes members’ rights. However, few have focused on the equally important element of procedure. The responsible entity must have considered the relevant change.

The two lines of authority

Until now, there have been a range of single judge decisions which have come to different conclusions as to whether members’ rights have been affected by proposed amendments.

One series of decisions, mostly from the New South Wales Supreme Court, have focused on "members' rights" and distinguished any effect on the value of "members' interests". Thus an amendment could be made without members’ approval which affected the value of an interest by changing the formula for the issue price of units, if it did not affect members’ rights, such as the right to be issued units, to receive dividends, or to vote.

The second series of decisions stated that the members have the right to have the scheme administered in accordance with the constitution as it applies prior to the amendment and any amendment which is other than merely technical (such as changing the number of days for a notice) would affect members’ rights.

The Victorian Court of Appeal has rejected the judgements of the New South Wales Supreme Court and others and endorsed the second series of decisions.

The procedural issue

This is not the end of the matter. In almost all of the cases, the responsible entity sought legal advice as to what constitutes members' rights. However, in none of the cases, did the internal papers of the responsible entity (whether board papers or minutes of meeting of the board of the responsible entity) indicate how that advice had been applied to the facts at hand to demonstrate that the responsible entity considered the impact of the amendments and whether they were adverse.

The relevant court in each case commented adversely on this. For example, the board minutes of 360 Capital went so far as to state that "having regard to the matters considered by the Board and the [opinion of 360 Capital's lawyers]....... the amendments do not adversely affect the rights of members." However, the judgement noted that even the legal advice given to the 360 Capital board was that at the time of the decision the law was in a state of flux and the board minutes did not reflect any discussion, deliberation or analysis. The court both at first instance and on appeal indicated that there was no proper consideration of the matter.

Learnings

It is important to recognise that the Victorian Supreme Court is taking a narrow view of the power to ultimately amend a constitution. Whether that narrow view will prevail will only be apparent in the next case from New South Wales (or another court) and only ultimately decided by the High Court of Australia. Therefore, it is still accurate to observe that the law is in a state of flux.

However, what has never been questioned in any case is that the responsible entity and the board must reasonably consider that the rights are not adversely affected. That requires a consideration of the effects of the changes and it requires evidence that management and the board have turned their minds to the questions and not merely relied on a legal opinion.