Court clarifies voting restriction for managed investment schemes

A recent NSW Court of Appeal decision has helped remove the ambiguity around voting restrictions for registered schemes under section 253E of the Corporation Act. The decision determined that a responsible entity (RE) and all of its associates are not entitled to vote on a resolution if the RE, or any of its associates, has an interest in the resolution other than as a member.

This means a unitholder may be prevented from voting on a resolution where it has no direct interest, other than as a member, simply on the basis that it is an associate of the RE (where the RE does have such an interest).

Background

AMP Capital Funds Management Limited (AMP Capital), as the RE of the AMP Capital China Growth Fund (Fund), sought judicial advice from the Court or alternatively declaratory relief, as to whether AMP Life Limited (an associate of AMP Capital by reason of being under common control of AMP Limited) as a member was entitled to vote on two resolutions to be put to an extraordinary general meeting of the unitholders of the Fund.

It was accepted that AMP Capital had an interest in each proposed resolution, other than as a member, as the outcome of each resolution would affect the remuneration it receives as the RE of the Fund. It was also accepted that AMP Life in isolation did not have an interest in the resolutions other than as a member. Therefore the Court's determination rested upon the construction of s253E.

Competing constructions

Previously, there had been two first instance decisions with differing interpretations of this section. The "narrower construction" is that the relevant interest is only that of the voting entity and not the RE, despite them being associates. In the "broader construction" a unitholder was not entitled to vote because it was an associate of the RE, and it was not necessary to establish the associate itself had an interest other than as a member.
 
Court of Appeal's decision

The Court of Appeal preferred the broader construction of s253E for a number of reasons. Firstly, as a matter of grammar and syntax, the Court of Appeal found that references to "they" and "their interest" indicate that the proper construction of this section is to treat the interest collectively, so that the interest of one of the entities is taken to be the interest of all of them.

The second basis was termed the "prophylactic purpose" of s253E, which is the removal of a potential for a conflict of interest, so that the votes cast on a resolution are informed only by the interest of members qua members.

Essentially, the Court concluded that the disentitlement of the RE from voting would not achieve the purpose of s253E if associates were then able to vote in a manner consistent with the RE's interests.

Life Insurance Act

The Court of Appeal also considered the responsibilities of AMP Life as an insurer and its directors under the Life Insurance Act 1995 (Cth) to act in the interests of its policyholders. The Court determined that neither the insurer nor any of its directors will default in the performance of any duty as a result of the operation of s253E resulting in the insurer being disentitled to vote on a resolution.

Implications

This decision has implications for registered schemes where related bodies corporate of the RE (such as a life company, trustee of a superannuation fund, RE of another scheme or a custodian) or other associates of the RE have invested in the scheme. The decision will also be relevant to unregistered schemes where the constitution of the scheme has adopted s253E.

The voting restriction in s253E does not apply to a resolution to remove the RE of a listed scheme and choose a new RE for the scheme.

Nikki Bentley

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Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

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Jon Ireland

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Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

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Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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