PIF revisited - no right not to be diluted


On 5 October 2011 Justice Barrett of the Supreme Court of NSW handed down a decision in Centro Retail Limited and Centro MCS Manager Limited in its capacity as Responsible Entity of the Centro Retail Trust [2011] NSWSC 1175 (“Centro”) where he found that the responsible entity of Centro Retail Trust would be justified in modifying the constitution of the trust without unitholder approval to a insert a provision permitting the issue of units at a price different to that provided for by the pre-existing provisions.

This case is at odds with the decision of Justice Gordon of the Federal Court (handed down on 20 June 2011 this year) (see our Alert: Court invalidates amendment to trust constitution issue price provisions) (“PIF”).  It is important to note that both Centro and PIF are decisions of single judges in the Supreme Court of NSW and the Federal Court respectively and therefore neither is inherently superior.  We note that Justice Barrett had previously considered the point in ING Funds Management Ltd v ANZ Nominees Ltd [2009] NSWSC 243 (“ING”) (cited in PIF) and Re Australand Holdings Ltd (2005) 219 ALR 728. Further, ASIC appeared in the Centro proceedings and submitted that PIF should be followed and the amendment should require unitholder approval.

Absent an appellate Court determination of the point, uncertainty over this area will persist.

Background to the decision

In this case, Centro MCS Manager Limited (the “Applicant”) as the responsible entity of the Centro Retail Trust (“CRT”) sought judicial advice that it would be justified in amending the issue price provisions of the constitution of CRT in connection with a proposed restructure of the Centro group without unitholder approval.

Under the amendment, CRT would be permitted (for the purposes of the restructure only) to issue units at a price based on the net asset value of CRT per unit.  This is different to the pre-existing issue price provisions under CRT’s constitution, which requires that units be issued at a market price (based on the unit portion of the market value of the Centro Retail Trust stapled securities which are quoted on the ASX).

The Applicant considered that it could make the amendments without unitholder approval in reliance on section 601GC(1)(b) of the Corporations Act.  That section allows responsible entities to amend constitutions without unitholder approval if “…the responsible entity reasonably considers the change will not adversely affect members’ rights”.  Changes that will adversely affect members’ rights may only be made with unitholder approval (by special resolution) (see section 601GC(1)(a)).

Threshold question - does the modification affect “members’ rights”?

The threshold question in the unilateral amendment power under section 601GC(1)(b) is whether the proposed modification would "affect members' rights".  Only if "members' rights" are affected does it become necessary for a responsible entity to address the question whether the effect on those rights will be "adverse".

PIF decision

In the Federal Court’s PIF decision, Justice Gordon found that, in the context of the scheme constitution in that case, members had a right to have additional units issued in the scheme (to themselves or others) only at the fixed price specified in the constitution (which was at $1 or net asset value).  In this context, a change to enable the responsible entity to issue units at a market based price was held to constitute a change in rights, and the responsible entity needed to be satisfied that that change was not adverse.

Justice Barrett’s disagreement with the PIF decision

The essence of Justice Gordon’s decision in PIF was that members of a scheme have a “right” to see the scheme administered and operated in accordance with the constitution.  In Centro, Justice Barrett expressed his disagreement with that principle. 

Justice Barrett considered that it is incorrect to regard a member of a managed investment scheme of the kind under consideration both in Centro and PIF as having a “right” today to insist that new units not be issued at any time in the future except at the issue price dictated by the constitution as it stands today.  This is consistent with the view Justice Barrett had earlier put forward in ING where he had stated that:

“It is possible to argue that 'members' rights' include a right to have the managed investment scheme operated and administered according to the constitution as it stands. If that is so, any modification of the constitution involves an invasion of that right that is arguably adverse. I am not persuaded that this is a correct approach. It denies all efficacy to s 601GC(1)(b) and must, for that reason, be rejected. Because the power to modify is concerned with the constitution, the focus is on rights created or secured by the constitution itself."

Justice Barrett goes so far as to say that a responsible entity might well conclude that members’ “rights” would not be adversely affected by a modification to a constitution to require the responsible entity to issue a vast number of new units to a particular person for a purely token consideration.

Effect of Barrett’s view on “members’ rights”

Justice Barrett stated that despite what was said in the PIF case it is open to a responsible entity in circumstances equivalent to those in Centro, to reasonably consider that no "right" of members will be affected by a proposed addition to the constitution of a provision allowing a single issue of units at a particular price.

Any modification must still be in the best interests of members

Justice Barrett noted that a responsible entity considering whether to exercise the power to modify the constitution of a managed investment scheme unilaterally must think beyond the question whether the power exists.  The responsible entity must also conclude that the exercise of the power of modification in the particular way proposed will benefit the members of the scheme.  In the hypothetical case of a modification requiring units to be issued for token consideration mentioned above, Justice Barrett considered in the absence of further facts that the responsible entity would be unlikely to be able to form a positive opinion on that matter.

Original Article