Time to lower the bar on replacing REs

There is growing concern that the threshold voting requirements imposed by the Corporations Act for a resolution to replace the incumbent responsible entity of an unlisted registered MIS are too high. Henry Davis York supports this view and would support legislation to lower this threshold to ‘approval by special resolution’.

There is growing concern amongst the financial services industry that the threshold voting requirements imposed by the Corporations Act for a resolution to replace the incumbent responsible entity (RE) of an unlisted registered managed investment scheme (MIS) are too high. Henry Davis York supports this view and would support legislation to lower this threshold to ‘approval by special resolution’.

What does the requirement for an extraordinary resolution require?

Under the Corporations Act, where an RE wishes to retire as RE of an unlisted MIS, it must call a meeting of members of the MIS to explain its reasons for wanting to retire, and to allow members to vote on a resolution to choose a replacement RE. This must be approved by an extraordinary resolution of members which requires at least 50% of all the votes that may be cast by members entitled to vote (including members not present in person or by proxy) are cast in favour of the resolution. Likewise, where members of a MIS wish to remove the RE, they must call a meeting and vote on resolutions to remove the current RE and appoint a replacement RE by extraordinary resolution. This compares to a listed MIS which requires approval by only 50% of members present in person or by proxy via an ordinary resolution.

Why is the requirement for an extraordinary resolution a problem?

The requirement for an extraordinary resolution may be seen to hinder the efficient operation of a registered MIS and could be a material impediment to facilitating a change of RE which may be in the members’ best interests. In particular, the onerous voting thresholds may materially impede a change of RE in circumstances where members are dissatisfied with the performance of the RE and wish to remove it or where the incumbent RE is insolvent and seeks to retire and members wish to appoint a replacement RE to continue to operate an otherwise solvent MIS.

This high threshold is particularly problematic for the many widely held MISs which have a large proportion of units held through an Investor Directed Portfolio Services (IDPS).
Such platforms commonly have a blanket policy of refraining from engaging in corporate actions. As a result, many platforms will refrain from voting on resolutions to remove an RE from an MIS. Where a large proportion of units are held through such platforms that do not vote, it can be very difficult (if not impossible) to carry an extraordinary resolution.

Further, the current voting threshold has the effect of potentially entrenching an RE. From an investor’s view point, it would also be preferable if the threshold for removal of an RE were lower, to create a better check and balance on an RE, through a more realistic prospect of being dismissed if the majority of members consider it is not the best candidate for operating the MIS.

What is a suitable alternative?

It is Henry Davis York’s view that an RE should be permitted to retire by giving notice to members on the condition that the outgoing RE proposes a suitable, replacement RE. Members’ interests would be protected by both the election to retire and the selection of a replacement RE being subject to the outgoing RE’s prevailing obligation to act in members’ best interests.

In the case of replacement of an incumbent RE by the members of a MIS, it is Henry Davis York’s view that members’ best interests should be served if removal could be effected by way of a special resolution of members.

How is the Government responding to this issue?

In June 2011 the Corporations and Markets Advisory Committee (CAMAC) published a discussion paper Managed Investment Schemes calling for submissions from industry participants on a number of issues and proposed areas for reform in the MIS space. CAMAC sought submissions on what changes (if any) should be made to the current requirement for an extraordinary resolution by the members to remove an incumbent RE and to approve the appointment of a new RE.

More recently, in March 2012 ASIC released a consultation paper seeking comment on its policy on platforms including on the issue of voting on scheme resolutions. ASIC recommends that platforms should have in place a voting policy for scheme resolutions to allow indirect investors through the platform to exercise voting rights. However, this would not resolve the significant practical issues surrounding achieving the extraordinary resolution threshold.

We made submissions to CAMAC on the Managed Investment Schemes discussion paper on this issue and many others. A full copy of that submission is available on our website at
www.hdy.com.au/publications/submissions.html.
CAMAC was due to report to Treasury by 30 June 2012 on the submissions made on the MIS Discussion Paper. We, like many others, are eagerly awaiting CAMAC’s recommendations to Treasury on this issue