Jurisdiction - Australia
Australia – Unilateral Amendments To Scheme Constitution – Responsible Entities Must Reasonably Consider Members’ Rights.

 31 August, 2012



On 31 July 2012, the Supreme Court of Victoria ruled in Watts & Watts & Ors v 360 Capital RE Limited & Anor [2012] VSC 320  (Watts v 360 Capital RE) that in order to amend a constitution of a managed investment scheme in accordance with s601GC(1)(b) of the Corporations Act 2001(Cth) (Corporations Act), a Responsible Entity must give reasonable consideration to whether the proposed changes will adversely affect members’ rights.
Importantly, the Responsible Entity must form its own opinion and cannot simply accept the advice of lawyers or experts without deliberation or analysis.
A key implication for Responsible Entities relates to documenting its deliberations as it steps through the “3 step process” to consider the rights of members before and after the proposed change, and whether any impact of the change is “adverse”. Not only must the Responsible Entity’s decision be documented in its board minutes, but the board minutes must also contain a record of the decision making process and the matters considered by the board in reaching that decision.
With the line of recent cases Responsible Entities should take the opportunity to look at their approach to approving registered scheme constitution amendments, as the law continues to develop in this area. It is worth noting that 360 Capital RE has appealed this decision.
The background to the 3 step process 
The two recent Victorian cases Watts v 360 Capital RE and Elders Forestry Management Limited [2012] VSC 287 support Barrett J’s 3 step approach in ING Funds Management Ltd v ANZ Nominees Ltd [2009] NSWSC 243.
Where a Responsible Entity wishes to invoke its power under s601GC(1)
(b) of the Corporations Act, it should properly analyse and consider the 
following to determine whether the proposed change to the constitution would 
adversely affect members’ rights:
■ what are the rights of the members created by the constitution before the proposed change;
■ how the proposed change would change or impinge those rights (as distinct 
from the enjoyment of them or their value); and
■ if those rights are impacted, compare and assess to determine whether the 
impact is “adverse”.
A critical part of the 3 step process is for the Responsible Entity to give full and proper consideration and deliberation on the members’ rights and whether they would be adversely affected by the change. 
Watts v 360 Capital
360 Capital RE Limited (360 Capital RE) is the responsible entity of the 360
Capital Industrial Fund (Fund). The Fund is an unlisted managed investment
scheme registered under Chapter 5C of the Corporations Act. 360 Capital RE contracted to acquire a portfolio of four industrial properties. The acquisition was to be funded by a combination of bank debt and placement of convertible notes to both institutional and retail investors.
On 31 May 2012, 360 Capital RE unilaterally amended the constitution of the Fund (Constitution) under s601GC(1)(b) of the Corporations Act to remove or change the provisions which would preclude the issue of redeemable unsecured convertible notes prior to the listing of the Fund (May Amendment).
On 5 July 2012, 360 Capital RE executed another supplemental deed under s601GC(1)(b) of the Corporations Act to place restrictions on convening and
the conduct of meetings of members (July Amendment).
Prior to the May Amendment, 360 Capital RE sought legal advice from solicitors, senior counsel and junior counsel and prior to the July Amendment, 360 Capital RE sought legal advice from its solicitors. The board of 360 Capital RE considered these before executing the supplemental deeds.
Unitholders of the Fund brought proceedings in the Victorian Supreme Court to seek, among other things, a declaration that the May Amendment and the July Amendment were of no force or effect. 
Proper consideration
360 Capital RE submitted with respect to the May Amendment that it had obtained advice from solicitors, legal counsel and an independent expert’s report. The minutes of the Responsible Entity board documented that the directors had:
■ considered the rights of the unitholders and the proposed amendments to the Constitution; and
■ given regard to the legal advice from its solicitors, senior and junior counsel and the independent expert.
The minutes did not specify what matters other than the legal opinions were considered by the board in this process (and no further evidence of this was provided by the directors of 360 Capital RE in the proceedings).
In relation to the July Amendment, 360 Capital RE submitted that it had obtained legal advice from its solicitors. It also submitted that the amendments were procedural or administrative in nature and did not affect unitholder’s rights.
The court held that for both the May and July Amendments, 360 Capital RE had not given proper consideration as to whether and to the extent unitholder’s rights would be affected. The board minutes did not sufficiently evidence the required consideration of: 
■ precisely what the rights were before the proposed modification; 
■ how the modification would change those rights; and 
■ why such change would not be adverse.
Accordingly, it was held that 360 Capital RE could not unilaterally alter the Constitution under section 601GC(1)(b) of the Corporations Act. Both the May Amendment and July Amendment were not effective and the convertible notes were invalid.



For further information, please contact


Nikki Bentley, Partner, Henry Davis York
Kathy Civardi, Partner, Henry Davis York
Elizabeth Gray, Partner, Henry Davis York
Lucinda McCann, Partner, Henry Davis York
Anne MacNamara, Partner, Henry Davis York



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