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Australia – Negotiating Co-Investment Documents: Structural And Operational Considerations For Superannuation Funds.

14 November, 2013

 

 

This is the first in our series of articles on legal and contractual issues to be considered by superannuation funds when co-investing in infrastructure and other private investments.

This article focusses on some structural and operational matters to be addressed in co-investment documents.

 

Co-investments by superannuation funds in infrastructure and other private investments are commonly governed by a shareholders’ agreement and a constitution of the portfolio entity. These types of documents need to be properly tailored to address matters of particular importance to superannuation fund investors due to their particular structures and operational requirements.

 

Over time, superannuation funds, like many other large institutions, may undergo structural or operational changes. These may include mergers between superannuation funds, intra-group transfers of investments, or a change of custodian, trustee or investment manager.

The possibility of these types of structural and operational changes should be contemplated at the outset in the co-investment documents. Otherwise, a superannuation fund may be required to offer its investment for sale under pre-emptive rights to the other investors, or may be in default under the co-investment documents, unless it obtains appropriate waivers or consents from the other parties.

 

These types of structural or operational changes broadly fall into the following categories when considered in the context of co-investment documents:

 

  • those where there is a transfer of legal title to the investment, and
  • those where there is an underlying change of control of the investment.
 

Where There Is A Transfer Of Legal Title

 

Co-investment documents usually restrict the ability of an investor to dispose of its investment. Often, a disposal is subject to pre-emptive rights in favour of other investors. Typically, there will be exceptions to these restrictions. A common exception is for transfers to affiliates. Although this type of exception usually allows transfers within a corporate group, a superannuation fund may not fall within this exception due to its particular structure. Absent careful wording to accommodate a superannuation fund, this type of exception may allow a transfer to an affiliate of the legal title holder (who may be a custodian or trustee) rather than to an affiliate of the superannuation fund. Also, it may not allow changes to legal title of an investment even where there is no change in beneficial ownership.

 

It is important for a superannuation fund that the exceptions to the restrictions on disposal of an investment are tailored to specifically allow the following types of transfers of an investment to occur even if they would constitute a disposal of the investment of the superannuation fund:

 

  • a change of custodian,
  • a change of trustee (for example, where the investment is held through a subsidiary trust which does not have the investment held by a custodian),
  • a transfer within the superannuation fund group comprising the superannuation fund and its subsidiary entities, or
  • a merger of the superannuation fund into another superannuation fund.
 

The transferee of the legal title to an investment will usually need to accede to the co-investment documents so that it becomes a party to them and can then be registered as the new legal titleholder. It is therefore important that the form of accession documents is pre-agreed in the co-investment documents, that they are in a form which can readily be signed by the transferee, and that the other parties are obliged to sign them if they are substantially in the pre-agreed form. Otherwise, difficulties may be encountered in reaching such agreement with the other investors and the portfolio company at the time of transfer. This could delay or frustrate the structural or operational changes being implemented by the superannuation fund. Where the transferee is acting as custodian or trustee, this will also necessarily require a pre-agreed provision which limits any liability of the transferee in relation to the co-investment documents to its recourse to the assets of the underlying entity for which it is acting as custodian or trustee.

 

Where There Is An Underlying Change Of Control

 

Co-investment documents often have provisions which protect investors against a change of control of another investor. Consequences of a change of control of an investor often include an obligation of the investor to offer its investment for sale under pre-emptive rights to the other investors at an agreed or independently determined price.

 

These types of provisions are often based on concepts that can readily be applied to a corporate investor but which become problematic when applied to a superannuation fund investor due to its particular structure and operations.

 

Care should be taken by superannuation funds with these types of provisions so that they do not inadvertently capture any of the following:

 

  • a change of control of a custodian,
  • a change of trustee or control of the trustee,
  • a merger of the superannuation fund with another superannuation fund,
  • a change of investment manager or control of an investment manager, or an out-sourcing or in-sourcing of investment management, or
  • a change of members of the superannuation fund.
 

In particular, these types of provisions:

 

  • should distinguish between the legal title holder and the beneficial owner of the investment, so that a change of the legal title holder or control of the legal title holder does not trigger such provisions even though the investment remains within the superannuation fund or any of its subsidiary entities,
  • should treat any superannuation fund into which another superannuation fund merges as being the same superannuation fund, and
  • should not entrench the position of an investment manager of a superannuation fund by serving as a poison pill in the event of a change of investment manager.
 

Terminology To Be Aware Of

 

Although the provisions in co-investment documents will vary on a case by case basis, they often use terminology that revolves around corporations and corporate groups. Superannuation funds should pay close attention to provisions that use terminology such as ‘affiliate’, ‘associate’, ‘holding company’, ‘subsidiary’, ‘related body corporate’ or ‘control’, including when any of those terms are defined to have the same meaning as in the Corporations Act 2001 (Cth). Much of this terminology does not cover trusts or entities (other than corporations) and does not cover corporations, trusts or entities which are owned or controlled in a fiduciary capacity (whether as custodian, trustee or otherwise). Furthermore, they may instead capture the custodian or trustee of the superannuation fund and their respective group entities rather than look substantively to the entities that form the superannuation fund group of entities. Be wary of these types of provisions. They merit careful attention and often require adaptation to properly accommodate a superannuation fund investor.

 

Key Message

 

The key message about the types of provisions discussed above is that, although they may seem relatively standard or boilerplate, and often are for corporate investors, they require particular care and tailoring for superannuation funds. Careful attention to the wording of these provisions at the outset can prevent difficulties down the track for superannuation funds should they wish to undertake any structural or operational changes.

 
herbert smith Freehills

 

For further information, please contact:
 
Kon Mellos, Partner, Herbert Smith Freehills
kon.mellos@hsf.com
 

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