28 October 2011

Meaning of “rights” of members of a managed investment scheme

In Re Centro Retail Limited and Centro MCS Manager Limited
[2011] NSWSC 1175, Barrett J had to consider the operation of s 601GC(1)
of the Corporations Act, and, in particular whether a proposed change to the constitution of a registered scheme would "adversely affect members' rights".

The change concerned the modification to the constitutional provision governing the price at which new units would be issued, and was an application to the court for judicial advice.

In the earlier case of Premium Income Fund Action Group Inc v Wellington Capital Ltd [2011] FCA 698, (which had also concerned a modification of the constitution by which the issue price of new units would be changed) Gordon J had expressed the opinion that the constitutional provision setting the issue price for new units was the source of a contractual right on the part of each existing member to insist that no new unit be issued except at that price.

Barrett J distinguished the Premium Income Fund case on the basis that Gordon J's opinion was not necessary for the decision. Rather her Honour's decision was made on the narrower basis that the responsible entity had not identified let alone considered the impact of the change on the relevant right, and so had not as a matter of fact been of the state of mind contemplated by the words "reasonably considers that change will not adversely affect members' rights."

Barrett J relied on the line of cases considering the meaning of "rights" in the context of cases challenging a variation of the class rights of shareholders, including: White v Bristol Aeroplane Co Ltd [1953] Ch 65 and John Smith's Tadcaster Brewery Ltd [1953] Ch 308. Both were cases concerning new share issues that diluted the voting power of the complaining preference shareholders and did but not change the voting rights attached to the preference shares. In both cases, the courts drew a distinction between a variation of rights and a variation in the enjoyment of those rights, and held that the share issues fell into the latter category.

Barrett J concluded that it was open to the responsible entity in the case before him to form, on reasonable grounds, the opinion that no "right" of members would be affected by the proposed change to the constitution.

His Honour went on to distinguish the question of whether the power of the responsible entity to modify the constitution under s 601GC(1)(b) was available from the question of whether that power might properly be exercised.

As a power vested in a trustee, it had to be exercised honestly, and in good faith for the benefit of the beneficiaries. However, Barrett J found on the facts that the trustee had, on reasonable grounds, come to the view that the modification would benefit the members as beneficiaries.

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