29 March, 2013

A recent NSW Supreme Court decision ( Re Real Estate Capital Partners Managed Investments Ltd as responsible entity of the Real Estate Capital Partners USA Property Trust per White J [2012] NSWSC 190 unreported 6 March 2013) has held that a discretionary power of a responsible entity (RE) to redeem units on application by a unitholder gave the RE a relevant interest in all of the issued units in the A-REIT. This has major implications for control transactions involving A-REITs and responsible entities or the change of responsible entities of A-REITs.

The decision means that for an A‑REIT with a constitution with a discretionary 
redemption right:

• The 20% takeover rule (Section 606(2) of the Corporations Act 2001 (Cth) which provides that a person must not acquire a relevant interest in a voting unit in an A‑REIT if because of the transaction any person’s voting power in the A‑REIT increases from 20% or below to more than 20% or from above 20% to below 90% (as it applies to A‑REITs by virtue of section 604 of the Corporations Act)) does not apply to the RE, a person who controls the RE (By virtue of section 608(3)(b) such a controller is deemed to have the same relevant interest in units in the A‑REIT that the RE has) or a person who has a direct relevant interest in more than 20% of the shares in the RE (By virtue of section 603(a) such a person will have the same relevant interest in units in the A‑REIT that the RE has.) This is because those persons already have a relevant interest in all of the units in the A‑REIT, so the purchase by them of more units will not increase their voting power.
• A person acquiring a relevant interest in more than 20% of the voting shares in an RE will breach the 20% takeover rule (By virtue of section 608(3)(a) such a person will acquire a relevant interest in all of the units in the A‑REIT (because the RE has a relevant interest in all of the units in the A‑REIT)).
• The change of an RE will breach the 20% takeover rule (This is because the incoming RE’s voting power will go to 100% on being appointed as RE).

White J gave three reasons for his decision on this point:

• If a redemption request was made the RE would have had the power to accept the redemption request. In other words, the RE could control the disposal of the unitholder’s relevant interest in the units the subject of the request. If the RE accepted the redemption request the unitholder would cease to have a relevant interest in the units because they would be redeemed and cease to exist. In those circumstances, the so‑called “accelerator provision” (Section 608(8).) applied to deem the RE to have the relevant interest it would have had in units if a redemption request was made. The RE acquired the relevant interest upon issue of the units. (The RE’s voting power would not change on the issue of any new units because before and after the issue its voting power would be 100%.).
• In his honour’s view, the takeover provisions only apply with respect to an A‑REIT as if it were a notional company and did not extend to the redemption of units because a company, unlike an A‑REIT, could not redeem its shares without complying with the capital reduction provisions (This conclusion does not appear to take account of the ability of a company to redeem redeemable preference shares (which could be voting shares).).
• There was no difference between the effect of a redemption and a buy‑back and there are takeover exemptions for buy‑backs. 

Given the implications of the decision we will be shortly publish a more 
detailed case note, which will also consider his honour’s findings on what 
constitutes “adequate procedures” for inclusion in a constitution in relation to 
a right to withdraw.