On 4 October 2012, the Victorian Court of Appeal dismissed an appeal by 360 Capital RE Limited and provided important clarification of the circumstances in which the responsible entity of a registered managed investment scheme can amend the scheme’s constitution without the approval of the members of the scheme.
Section 601GC(1)(b) of the Corporations Act 2001 allows the responsible entity of a registered scheme to amend the scheme’s constitution without the approval of members “if the responsible entity reasonably considers that the change will not adversely affect members’ rights”. The previous leading case in the area was ING Funds Management v ANZ Nominees Ltd (2009) 228 FLR 444 where Barrett J of the NSW Supreme Court had held that “members’ rights” for the purposes of section 601GC(1)(b) did not include the right to have a scheme operated and administered according to the constitution as it stands. Barrett J’s reasoning was applied in a number of subsequent decisions by judges at first instance, but a divergence had become apparent in the approach of the Victorian Supreme Court and the Federal Court on the one hand and the NSW Supreme Court on the other as to what rights were members’ rights. In particular, in Premium Income Fund Action Group Inc v Wellington Capital Ltd (2011) 84 ACSR 600, Gordon J had held that a change to the constitution affecting the price at which new units might be issued affected members’ rights. Barrett J declined to follow Premium Income in Re Centro Retail Ltd (2011) 255 FLR 28 and held that members’ rights were not affected by a similar change to a constitution.
In 360 Capital, the Victorian Court of Appeal held that “the right of a member to have a managed investment scheme administered according to the constitution of the scheme is fundamentally the most important right of membership”. The Court preferred the approach in Premium Income and doubted the correctness of Centro.
The Court further held that “[g]iven that a member has a right to have the scheme conducted according to the scheme’s constitution, a change to the constitution must inevitably change the nature and quality of that right”. It follows that most if not all changes to a scheme’s constitution are likely to affect members’ rights. A responsible entity will therefore need to consider whether or not the affectation is adverse if it wishes to amend the constitution without the approval of members.
The Court of Appeal also considered the question of whether a responsible entity could reasonably form the requisite opinion if it acted in good faith on what was ultimately found to be erroneous legal advice. The Court considered that it was reasonable for a board to rely on external legal advice, but that any decision based on such advice remained examinable by the courts, “[i]f the board did not address itself to the question which [the statute] formulates, if the board’s conclusion were affected by a mistake of law, if the board took some extraneous reason into consideration or excluded from consideration some factor which should affect its determination”.
List G Barristers member, Douglas Gration, appeared as junior counsel for the respondent members of the scheme who had successfully challenged amendments to the scheme’s constitution before Sifiris J.