Summary
A recent decision of the Supreme Court of New South Wales (court) highlights the need for a responsible entity (RE) to focus on the legal tests to be applied, and process, for effecting an amendment to the constitution of a registered managed investment scheme. While a fund manager will (rightly) consider commercial issues, it is critical that the RE’s legal counsel and its external advisers focus on the legal questions that the RE needs to address and the process by which the amendment is to be effected.
In the decision, the court ruled that steps taken by the RE to amend the constitutions of two cash funds were invalid. The court held that, having regard to the Corporations Act 2001 (Cth) (Corporations Act), for a RE to unilaterally amend a constitution of a registered scheme:
- the amending document must be in an appropriate form (for example, a deed)
- the RE must form the opinion that the amendment will in no way adversely affect members’ rights, and
- there must be a reasonable factual basis for the RE’s opinion.
In addition, the court drew a clear distinction between the members’ rights (in this case their right of redemption exercisable at any time) and their interests in the value and enjoyment of those rights.
Unless all three of the above conditions can be satisfied, an amendment requires approval by a special resolution of members. This will typically involve significantly more time (at least 21 days’ notice) and uncertainty (requiring a 75 per cent vote in favour) than if the RE can simply amend the constitution.
Background to the decision
In November 2008, the RE commenced steps to amend the constitutions of the two funds by inserting a new clause into each constitution to temporarily suspend members’ redemption rights pending the holding of meeting of members. The constitution of each scheme provided that the RE ‘may by deed’ amend it.
To give effect to the proposal, the RE signed various documents at different times as outlined in the timetable below (and lodged the necessary documents with ASIC).
The RE asked the court to declare that the purported amendments to the constitutions, and ratification of those amendments, were valid.
The court’s decision
Section 601GC(1)(b) of the Corporations Act gives a RE the power to amend the constitution of its registered scheme (the RE’s Power) on the condition that it reasonably considers that the amendment will not adversely affect members’ rights.
The court considered:
- whether any of the November 2008 and December 2008 documents were in a form capable of amending the relevant constitution under section 601GC(1)(b), and whether they did so, and
- whether the (above) pre-condition to the RE’s Power was satisfied.
The court decided that the amendments to each constitution were invalid.
The court held that the RE’s Power must be exercised through a document that is consistent with the form of the constitution in the particular case and ‘legally enforceable between the members and the [RE]’. In this case, the specific provisions of each constitution, as well as their status as deeds poll, meant they could only be amended by another deed. On this ground, the court concluded that the November documents, not being deeds, could not amend the constitutions.
The court drew a clear distinction between the members’ rights (in this case the right to redemption exercisable at any time) and the members’ interests in the value or enjoyment of those rights.
In this regard, the RE did not call any witnesses and the documents in evidence (board minutes, an internal commercial paper and external legal advice) primarily focused on the commercial effect on the interests of members, rather than the effect on their rights.
The court rejected the possible argument that members’ rights include a right to have a scheme operated and administered according to the constitution as it stands, because any amendments would arguably be adverse to that right.
The court took the view that suspending the members’ redemption right (even only long enough to hold a general meeting of members) defers the availability of money to the members and is clearly adverse to their rights, especially when any adverse effect at all, however slight, is sufficient to deny the RE’s Power. In light of this, the court found that a reasonable person would conclude that the amendment to each constitution would adversely affect members’ rights. For this reason, the purported amendments were ineffective.
Finally, the court held that the purported ratification in January 2009 of the November 2008 documents was ineffective because it sought to retrospectively defeat the accrued rights of members who had lodged redemption requests between November and January. As the November documents were invalid, the position following the execution of those documents was the same as if they had not been executed.
What should counsel do?
If you are advising your board on a proposal to amend a scheme constitution, you should:
- check the constitution’s amending provisions and follow them appropriately
- compare the legal nature of members’ rights before and after the proposed change
- ensure the board considers, and has a reasonable basis for, whether those changes adversely affect members’ rights in any way
- record in minutes:
- the necessary procedural steps to amend the constitution
- the legal test to be addressed
- the matters considered by the board in reaching its decision as to the above legal test
- ensure that the amending document is signed by appropriately authorised officers.
More information
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