Managed Investment Schemes - Section 253E of the Corporations Act 2001 revisited

Voting upon resolutions where an associate has an extraneous interest in those resolutions

The recent decision of In the matter of AMP Capital Funds Management Limited (in its capacity as responsible entity of the AMP Capital China Growth Fund (ARSN 122 303 744))[1] highlights the importance of legislative interpretation when assessing whether an “associate” of the responsible entity (RE) is able to vote upon a resolution in the context of a managed investment scheme.

In this case the plaintiff, the RE, sought declaratory relief as to whether a unitholder in the scheme (Unitholder) was permitted to vote on two resolutions proposed to be put to Unitholders at an extraordinary general meeting when the RE and Unitholder shared the same ultimate holding company.

The facts and the issues

The issue in this case was whether there was a conflict of interest between the Unitholder and the RE such as to prevent the Unitholder from voting on resolutions as follows:

• The first resolution (proposed by the RE) was that a “capital management opportunity” be offered to Unitholders.  This “capital management opportunity” involved a one-off redemption of up to 15% of units on issue and an on-market buy-back of up to 5% of the units on issue.
• The second resolution (proposed by a separate Unitholder) was that the RE be directed to wind up the Fund.

The first resolution and the second resolution are collectively referred to as the Resolutions.

The issue arose because of competing authorities on the construction of section 253E of the Act which provides:

The responsible entity of a registered scheme and its associates are not entitled to vote their interest on a resolution at a meeting of the scheme’s members if they have an interest in the resolution or matter other than as a member (our emphasis).

Accordingly, the New South Wales Supreme Court had to decide whether:

• Upon its proper construction, section 253E precludes an associate (ie the Unitholder) of the RE from voting on a resolution when only the RE, but not the associate Unitholder, has an extraneous interest in the resolution.
• The Unitholder was entitled to vote on the Resolutions in circumstances where it was an associate of the RE and the RE had an extraneous interest in the Resolutions; in that there was argued to be an adverse impact on its fees as RE of the scheme if either of the Resolutions passed; and
• whether disqualifying the Unitholder from voting in respect of the Resolutions would usurp the role and purpose of the chair of the meeting.

The considerations and the decision

There are competing authorities regarding section 253E of the Act[2] and therefore, prior to this decision, the law was in a state of flux.  In this decision, the RE was looking for guidance regarding the two resolutions and sought the Court’s relief to justify its legal interpretation of section 253E.

Whilst the Court was unwilling to do this on the basis that it pre-empted the role of the chair of the meeting, Brereton J was prepared to provide directions as to the construction of section 253E and, in particular, the use of the phrase “the responsible entity and its associates”.

In coming to a decision, the Court noted (amongst other things) that the entitlement to vote at the meeting is first and foremost a matter for the chair which is to be decided upon the factual situation prevailing at the time of the meeting (as opposed to prior to the meeting).

However, there was commercial and legal utility in granting declaratory relief prior to the meeting as doing so would quell an impending legal dispute (which would have to be resolved by the chair at the meeting with considerably less assistance on the legal issues).

That was so notwithstanding that the chair was not a party to the proceedings and therefore not bound by any declarations made and a challenge to a right to vote at the meeting could still be made at the meeting which would have to be determined by the chair.

It was reiterated that:

• section 12 of the Act provides that where a provision in the Act (such as section 253E) relates to the extent, or restriction, of a power to exercise, or to control the exercise of, the votes attached to voting interests in a managed investment scheme, a body corporate is an associate of the responsible entity if, and only if, one or more of the paragraphs in section 12(2) applies; and
• paragraph 12(2)(a)(iii) refers to the situation where the body corporate is controlled by an entity that controls the responsible entity.  The Unitholder is controlled by the RE.  It follows that the Unitholder is an “associate” of the RE for the purpose of section 253E of the Act.

As section 253E of the Act:

• refers to “the responsible entity and its associates” (as opposed to severable individual entities); and
• is designed to (amongst other things) remove the potential for a conflict of interest, by precluding the responsible entity from exercising its voting power if it has an extraneous interest so that votes will be informed only by the interests of members as members,

the Court ultimately held that section 253E applies to any associate of the RE when the RE or its associates has an extraneous interest and therefore the Unitholder was disqualified from voting in respect of the Resolutions because of the RE’s extraneous interest.  This provision operated irrespective of the fact that the Unitholder did not itself have an interest in the Resolutions other than as a member of the scheme.

The appeal

On appeal, the decision of the New South Wales Supreme Court was upheld.

Lavan Legal comment

This case provides clarification with respect to the construction of section 253E of the Act.  It stands as authority for the proposition that a broad interpretation of this section  is to be adopted such that the RE and its associates are to be treated as one for the purposes of section 253E.  

Importantly, it illustrates that a corporation can apply to the Court seeking declaratory relief in the context of a managed investment scheme with respect to a particular entity voting upon resolutions in the event that:

• doing so will assist a chair of a meeting in performing his or her function;
• there is commercial and legal utility in doing so; and
• doing so would quell a legal dispute in advance and the decision with respect to that legal dispute would not usurp or pre-empt the role of the chair of the impending meeting.