26 August, 2016
Summary
There has been persistent uncertainty regarding when the RE of a managed investment scheme and its associates will be excluded from voting on a resolution of a scheme due to them having extraneous interests in the resolution.
A recent court decision1 has found that if either the RE or any of its associates has an extraneous interest in the resolution, neither the RE nor any of its associates is entitled to vote.
The decision has implications for externally managed schemes that invest in other schemes that are also managed by the same external manager. The immediate effect of the decision was that AMP Life Limited was disqualified from voting its 36% interest on a resolution to wind up a fund, the RE of which was a related body corporate (and therefore an associate) of AMP Life (see Comment section).
Background to the confusion regarding voting eligibility
As highlighted in the third edition of Schemes, Takeovers and Himalayan Peaks in 2013,2 there has been enduring uncertainty as to when the RE of a managed investment scheme and its associates would be excluded from voting on a resolution of the scheme if either of them have an extraneous interest in the resolution. The two competing views were:
- if the RE or any of its associates has an extraneous interest in the resolution, the RE or that associate (as the case may be) is not entitled to vote, but the other (without the interest) is entitled to vote; or
- if any one of the RE and its associates has an extraneous interest in the resolution, neither the RE nor any of its associates is entitled to vote.
A decision of the Supreme Court of New South Wales, upheld on appeal, appears to have authoritatively settled that the second view is the correct one.
An additional ambiguity has been whether the definition of “associate” for the purposes of the voting restriction provision was to be drawn from either section 12 or sections 11 and 15 of the Corporations Act 2001 (Cth). The same decision has settled that section 12 applies.
Challenges to a right to vote at a meeting of interest holders in the scheme are required to be made at the unitholder meeting and the Chair’s decision is final.3 Until this recent court decision, adjudicating such challenges was all the more difficult due to the lack of certainty in relation to the operation of section 253E of the Corporations Act 2001 (Cth).
The voting restriction: section 253E
The relevant voting restriction is imposed by section 253E of the Corporations Act 2001 (Cth), as follows:
“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. However, if the scheme is listed, the responsible entity and its associates are entitled to vote their interest on resolutions to remove the responsible entity and choose a new responsible entity.”
The section operates where one person (the RE or an associate) has both an interest as a member of the scheme (for instance, they hold units in a trust) and an extraneous interest. In that case, the section prevents the RE or associate, as the case may be, from voting on a resolution which concerns or affects the extraneous interest (unless the resolution is to remove the RE from office). In AMP Capital Funds Management,4the issue was more complex: it was whether an associate of the RE was barred from voting, because the RE had an extraneous interest in the resolution, although the associate had no extraneous interest of its own.
The difficulty arose because the first sentence of section 253E is overtly ambiguous: it commences with a plural noun phrase, but glides through occurrences of “their” and “they” which are equivocal between plural and singular meanings and ends with the singular “an interest … other than as a member”. Although any reading involves some violence to the text, the sentence can be read as providing that:
- if the RE or any of its associates has an extraneous interest in the resolution, the RE or that associate (as the case may be) is not entitled to vote; or
- if any one of the RE and its associates has an extraneous interest in the resolution, neither the RE nor any of its associates is entitled to vote.5
The section is a curiosity. Statutes are traditionally drafted in the singular whenever possible, reserving the plural for collective references, as a way of avoiding this sort of ambiguity. In 1995 the Corporate Law Simplification Task Force issued a paper explaining why they had decided to use the pronoun “they” as a singular pronoun, in preference to a clumsy “he or she” or a question-begging use of “he”.6 The paper carefully demonstrates that “they” can be a clear, convenient and familiar substitute for “he or she” as a way of referring to one person.
The Task Force’s paper ends, however, by noting that “they” should not be used where it would be ambiguous between a singular and a plural reference. It gives the example “Where an applicant notifies the other residents, they must lodge a section 12 notice within 14 days”, where “they” could refer to the applicant, or to the other residents. Section 253E does not involve a genuine singular use of “they”, as the Court of Appeal observed. Instead, what has occurred is similar to the Task Force’s example of how not to use “they”.
The AMP Capital Funds Management decision
Prior to the AMP Capital Funds Management decision one decision at first instance had adopted the first of the readings mentioned above, another the second.7 Neither decision had involved a careful examination of section 253E, and the first decision was not drawn to the attention of the judge who made the second. In AMP Capital Funds Management Brereton J, after looking at those two decisions, chose the second reading, for the following reasons:
- as a matter of overall impression, the collective reference to the RE and its associates and the words “their” and “they” seem all to be plural in sense, referring to the RE and its associates as a block. It counts against this reading that “their interest” and “as a member” are in the singular. The Court of Appeal was disposed to regard “their interest” as referring to the aggregated interests of the block of the RE and its associates, and “as a member” as using the singular form “merely to identify the common interest shared by all members”, as such. This is somewhat unconvincing: to refer to an aggregate, the drafter should have used plural forms;
- the evident policy of the section, to preclude conflicts of interest between the RE and its associates, on the one hand, and the members, on the other hand, would fail if an associate with no extraneous interest of its own could vote, when the RE itself was excluded, because that vote is likely to be cast by reference to the association. The Court of Appeal reinforced this argument by referring to the provisions requiring the RE to put the interests of scheme members before its own. While this argument is the strongest, it involves an assumption as to how far Parliament has carried the legislative policy;
- members of the scheme other than the RE are identified for exclusion by the fact of their association, not that of their interest, and association is a concept used by the legislation to marshal persons and their securities into blocks which it treats alike.8This is questionable: on the first reading, excluded members are identified by both association and interest; and
- the second sentence of the section treats the RE and its associates as a block for the purpose of allowing them to vote, implying that otherwise the first sentence would have excluded them en bloc, although only the RE itself necessarily has a direct extraneous interest in its removal as RE. This is curious: “their interest” is singular, associates will often have indirect interests via the RE, and the drafting could be down to brevity, as an over-wide provision here is harmless.9
Comment
Taken together these reasons afford a reasonable basis for the decision, which should finally settle the construction of section 253E. It is to be hoped that Parliamentary Counsel will, in future, tread more warily around the seductive trap of a pronoun which can be singular or plural, as you choose.
Externally managed schemes that invest in other schemes that are also managed by the same external manager (and which typically also have responsible entities under common control of that manager) should consider reviewing the implications of this practice in light of the judicial clarification. This is because it can result in disqualification from voting, and such disqualification reducing the threshold required to pass the resolution in question. This is what happened in AMP Capital Funds Management Limited10 where AMP Life Limited, a life insurance fund with its own statutory and general law duties to act in the interests of its policyholders, was disqualified from voting its 36% interest on a resolution to wind up the fund that was proposed by an investor unhappy with the management of the fund. It was disqualified because AMP Life was a related body corporate (and therefore associate) of the RE of the fund and the disqualification of AMP Life’s 36% interest also resulted in the threshold required to pass the resolution being lowered from 50% to 32% of total issued units.
Endnotes
- Re AMP Capital Funds Management Ltd (in its capacity as the responsible entity of the AMP Capital China, Growth Fund) [2016] NSWSC 986.
- Tony Damian and Andrew Rich, ‘Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement to Effect Change of Control Transactions’ (The University of Sydney, Ross Parsons Centre of Commercial, Corporate and Taxation Law, 3rd Ed, 2013 at 503 and 509 [9.10.3(b)].
- Section 253G of the Corporations Act 2001 (Cth).
- Re AMP Capital Funds Management Ltd (in its capacity as the responsible entity of the AMP Capital China Growth Fund) [2016] NSWSC 986; appeal dismissed in AMP Life Ltd v AMP Capital Funds Management Ltd [2016] NSWCA 176.
- A third interpretation is that if and only if the RE itself has an extraneous interest, the RE and all of its associates are disentitled from voting on the relevant resolution. The court did not consider this reading, on which 'they' is singular, but 'their' is plural.
- Corporate Law Simplification Task Force, Attorney-General’s Department, A Singular Use of 'They', Canberra, 1995.
- Re Great Southern Managers Australia Ltd (2009) 76 ACSR 146 at [25]; Everest Capital Ltd v Trust Company Ltd (2010) 77 ACSR 371; at [96].
- Quoting R Levy, Takeovers Law and Strategy, 3rd ed, Sydney, Thomson Reuters, 2009, at [3.7].
- That is, the work of this sentence could be done by a provision that the first sentence “does not apply to a resolution to remove the responsible entity of a listed scheme and appoint a new responsible entity.” There is a further exception in section 253A(2) for excluded members voting under directed proxies, but it casts no light on the drafting of section 253E, except by exemplifying the successful use of the singular 'they'.
- Re AMP Capital Funds Management Ltd (in its capacity as the responsible entity of the AMP Capital China Growth Fund) [2016] NSWSC 986.
For further information, please contact:
Andrew Rich, Partner, Herbert Smith Freehills
andrew.rich@hsf.com
