Amending your Constitution - Important Developments for Responsible Entities By Paul Cleary & Darryl Pereira | April 2009 Area of Expertise | Superannuation & Managed Investments
Summary The decision in ING Funds Management Ltd v ANZ Nominees Ltd Ltd; ING Funds Management Ltd v Professional Associations Superannuation Ltd [2009] NSWSC 243, handed down on 3 April 2009, provides important judicial guidance on how a Responsible Entity (RE) of a managed investment scheme may modify its constitution.
Who Does This Impact? Responsible Entities of Managed Investment Schemes.
What Action Should Be Taken? The decision sets out some important considerations that need to be taken into account when an RE is considering amending the constitution of a Managed Investment Scheme.
Background ING Funds Management Limited (the Company) as the RE of two managed investment schemes, sought to make modifications to the constitutions of both schemes by: •
executing in November 2008 supplemental deeds seeking to insert an additional clause to make any new redemption request inoperative until the end of a ‘Suspension Period’. The only party to the supplemental deeds was the Company as the RE of each of the scheme. The supplemental deeds of November 2008 were not executed in accordance with the requirements for execution of documents by a company as a deed;
•
creating on 24 December 2008 two documents described as supplemental deeds in the same terms as the November 2008 documents and executed by a director and a secretary in the manner contemplated by the Corporations Act Act; and
•
signing in January 2009 two further documents, each expressed to be a deed. This was intended to repair any defect in the documents purported to be executed in November 2008 by ratifying those documents.
Each of the attempted modifications were lodged with ASIC as required under s601GC(2) of the Corporations Act. The amendments were challenged on behalf of members of each of the schemes who sought redemption of units during the relevant period. The Company applied to the NSW Supreme Court for declarations that it had validly amended the constitution of each scheme. The issues in the case concerned the effectiveness of the actions taken by the RE in November 2008, December 2008 and January 2009 to suspend the rights of members of the schemes to require redemption of their units.
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Amending your Constitution - Important Developments for Responsible Entities by Paul Cleary & Darryl Pereira
The Decision Were deeds necessary to amend the constitutions? It was accepted that the November 2008 documents were not deeds as they had not been executed by the appropriate officers. However, it was argued by the Company that the document was effective in terms of s601GC(1)(b) of the Corporations Act Act, as an act of the company modifying the constitution. Section 601GC(1) relevantly provides: 1. 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 considers the change will not adversely affect members’ rights.
The issues raised in relation to the actions of November 2008 were: (a)
whether each relevant document, not being a deed, was a document that was capable of effecting a modification of the constitution under s601GC(1)(b) and whether it did so; and
(b) whether the condition that ‘the responsible entity reasonably considers the change will not adversely affect members’ rights’ was satisfied. The Court found that the method of effecting a modification chosen by the RE when acting under s601GC(1)(b) is one that ensures that, after the modification, the constitution continues to be contained wholly in a document contemplated by s601GB of the Corporations Act. Section 601GB provides that the constitution must be contained in a document that is legally enforceable as between the members and the RE. It followed, according to the Court, that what is necessary and appropriate to effect the modification must have regard to the form that the constitution actually takes in a particular case. The Court found that it was not open to the Company to modify the constitution except by another deed having the binding effect described by the clauses in the particular constitutions. The documents of November 2008 were not deeds. They were therefore not effective to modify the respective constitutions of the schemes. Section 601GC(1)(b) The Court considered the operation of s601GC(1)(b) in the context of the Company’s actions and made the following important observations regarding the power to modify the constitution under this provision: •
the RE is to establish that it had the state of mind required under s601GC(1)(b). This involves an assessment of how the RE viewed ‘members’ rights’ before the modification and the impact that the modification would have on those rights.
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Amending your Constitution - Important Developments for Responsible Entities by Paul Cleary & Darryl Pereira
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‘reasonably considers’ means the relevant belief or opinion must be actually held by the RE and that facts existed that are sufficient to induce the belief or opinion in a reasonable person.
•
the opinion formed by the RE that members are not adversely affected must be seen to be something that the RE reasonably considers.
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section 601GC(1)(b) speaks in terms of members’ rights. Members’ interests are another thing altogether. So is the enjoyment or value of members’ rights.
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No particular degree of adverse affectation is required, any adverse affectation at all is sufficient to deny the RE the modification power.
•
The question is not a general question whether members will be ‘worse off’ if the change is made but rather is a specific question that goes wholly and exclusively to the much narrower matter of members’ rights.
The Court broadly summarised the test under s601GC(1)(b) as follows: The task of the responsible entity, when approaching that provision, is first to ascertain the rights of members created by the constitution, as they exist immediately before the modification. The responsible entity must then decide whether those rights – as distinct from the enjoyment of them or their value – will be changed or impinged upon by the modification. If that question is answered in the affirmative, the responsible entity must undertake a process of comparison and assessment in order to decide whether the impact is within the ‘adversely affect’ description.
In relation to the operation of s601GC(1)(b) to the Company’s actions, the Court found: •
in relation to determining the Company’s state of mind, in the absence of any evidence from the decision-maker all the Court could have regard to were the inferences available from documentary evidence, including the minutes of the relevant meetings;
•
that there was no evidence of the basis on which the Board determined that the modification ’will not adversely affect members’ rights’;
•
that the Company failed to prove the grounds on which the Officers formed the stated opinion or reached the stated conclusion that the modification would not adversely affect members’ rights. By doing so, the Company failed to prove that the grounds were reasonable grounds.
The Court also considered whether in any event there could have been any reasonable basis for a conclusion that the modification would not adversely affect members’ rights. It was noted that the modification meant that every member’s rights would have been changed in such a way that any redemption request received after the modification took effect would have resulted in redemption at a later time than would have applied had there been no modification. The Court found that, to a person wishing to have money, a right to receive money later is less favourable than the right to receive it in the very near future. It followed that it was ’not possible that a reasonable person would have come to any conclusion other than that the modification would adversely affect members’ rights.’
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Amending your Constitution - Important Developments for Responsible Entities by Paul Cleary & Darryl Pereira
The Court then considered whether the purported ratification by the Company in January 2009 was effective. The Court found that each of the documents of 8 January 2009 could be accepted as being a deed. However, because the action of November 2008 was invalid the position immediately after the action of January 2009 was the same as if the November action had not been taken. Therefore the ratification attempted was ineffective. For these reasons, the Court dismissed the Company’s application that the constitution of each of the managed investment schemes had been validly amended to suspend the right to redeem.
Implications Under section 601GC(1)(b) of the Corporations Act Act, an RE needs to establish that any amendment made to a constitution pursuant to that section is an amendment which does not adversely affect members’ rights. The Court interpreted s601GC(1)(b) as providing that the existence of a right as opposed to the enjoyment or value of that right, must not be adversely affected by a modification to a constitution. In this case, the Court characterised the Company’s concern ’with declining asset values’ as going to the value or enjoyment of the right, which is not the issue under s601GC(1)(b). The effect of the Court’s interpretation of the words used in s601GC(1)(b) means that any amendment which adversely affects a right that a member has under the constitution is not permissible irrespective of whether the values of other members’ rights are retained or protected or whether the amendment is otherwise in the best interests of the members. Therefore, any amendment to the powers to redeem under a managed investment scheme under s601GC(1)(b) is not permissible unless the amendment can be characterised in this way. Merely lodging a modification with ASIC does not effect the validity of a modification in the event the modification is challenged. As a result of this decision, REs wishing to amend a constitution pursuant to s601GC(1)(b) should ensure that: •
any document seeking to amend or modify a constitution of a managed investment is in a form contemplated by the form of the constitution and compliant with the Corporations Law requirements; and
•
where there is a Board resolution to modify the constitution under s601GC(1)(b): •
the minutes show that the RE has considered whether the proposed modification adversely affects members’ rights;
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there is in fact sufficient evidence to permit the Board to reasonably arrive at this conclusion; and
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the minutes show that the resolution to modify the constitution was based on the Board’s consideration of the evidence that the proposed modification would not adversely affect members’ rights.
Note that in considering whether there is an adverse affect on members’ rights, the RE needs to consider the position immediately before the proposed modification on the rights of the members.
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Amending your Constitution - Important Developments for Responsible Entities by Paul Cleary & Darryl Pereira
Whether the RE wishes to include in the minutes the evidence it considers as part of resolving to modify a constitution is a matter for the RE. In doing so, that evidence and the decisions based on it may become reviewable by a Court. On the other hand, minuted evidence may assist the RE in demonstrating that decisions based on that evidence were reasonable.
For more information, please contact: Paul Cleary Partner T: 02 8257 5760 paul.cleary@turkslegal.com.au
Darryl Pereira Senior Associate T: 02 8257 5718 darryl.pereira@turkslegal.com.au
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