Changing the constitution without unitholder approval

The decision of Justice Barrett of the NSW Supreme Court in Centro Retail Limited and Centro MCS Manager Limited in its capacity as Responsible Entity of the Centro Retail Trust[2011] NSWSC 1175 (“Centro”) on 5 October 2011 has given wider latitude to funds to change their constitution without unitholder approval where the change is not considered to adversely affect members’ rights and benefits members of the scheme.

This avoids the need to seek member approval or court sanction at the time the amendment is proposed The discretion exists under section 601GC(1)(b) of the Corporations Act and was interpreted in that case to permit a change to the issue price of units, different to that provided for by the existing provisions of the constitution.

In the Centro case, the responsible entity of the trust sought judicial advice that it would be justified in amending the issue price provisions of the constitution.

The Law
Section 601GC(1)(b) of the Corporations Act allows responsible entities to amend constitutions without unitholder approval if “…the responsible entity reasonably considers the change will not adversely affect members’ rights”.  Changes that will adversely affect members’ rights may only be made with unitholder approval (by special resolution) (see section 601GC(1)(a)). Only if “members’ rights” are affected does it become necessary for a responsible entity to address the question whether the effect on those rights will be “adverse”.

In Centro, the Supreme Court held that no member has a “right” today to insist that going forward the scheme will only be administered in accordance with the constitution as it stands today. To hold otherwise is at odds with section 601GC(1)(b). A responsible entity may reasonably consider that no “right” of members will be affected by a proposed change to the constitution, provided the change will benefit the members of the scheme. The court sanctioned the change.
However it is important to note that this case is at odds with the earlier decision of the Federal Court in Premium Income Fund Action Group Incorporated v Wellington Capital Limited [2011] FCA 698 (“PIF”) on 20 June 2011 where the court held that members of a scheme have a “right” to see the scheme administered in accordance with the constitution and amendments to the issue price were invalidated. An appeal court decision down the track will hopefully resolve the uncertainty.

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