Application of Magellan Asset Management Limited as responsible entity of the Magellan Global Fund [2024] NSWSC 603

Background

1. The Fund is a global equities investment fund and is admitted to the official list of the Australian Securities Exchange (ASX). The Fund has two classes of units on issue: open class units and closed class units. The closed class units are traded on the ASX with the exchange ticker "MGF". The open class units are quoted and traded on the ASX under the AQUA Rules (being Schedule 10A to the ASX Operating Rules) with the exchange ticker "MGOC". The AQUA Rules facilitate the trading of open-ended investment schemes such as exchange traded funds.
2. The constitution of the Fund provides that both the open class units and closed class units confer on its holder an undivided, absolute, vested and indivisible beneficial interest in the Fund as a whole, subject to the Fund's liabilities, not in parts of or single assets: cl 6.2. The management and performance fees payable by holders of closed class units and open class units are the same.
3. The primary difference between the classes is that the open class units are subject to the application and redemption provisions in the constitution of the Fund, whereas the closed class units are not. Thus, holders of open classed units are able to redeem their units directly with the responsible entity through the daily application and redemption facility operated by the responsible entity. Holders of closed class units are not able to request redemption of their units by the responsible entity and may only realise their investment by sale of their units on the ASX or private negotiated sale.
4. The Fund's portfolio is managed as a single investment portfolio, with common portfolio managers and a common investment strategy. For operational purposes, the assets and liabilities of the Fund are allocated proportionately between the open class units and closed class units based on their respective net asset values (NAV). This is done through two separate sub-portfolios established and held by the Fund's custodian and administrated by the Fund's administrators. As at 30 April 2024, the Fund had a NAV of approximately $9.5 billion with the open class units having a NAV of $6.2 billion and the closed class having a NAV of $3.3 billion.
5. The stated rationale of the Conversion proposal as announced to the market on 7 December 2023, is that the closed class units have been trading at a persistent and material discount to the NAV per closed class unit. The Conversion is intended to address this circumstance by converting the closed class units to open class units, thereby facilitating the redemption of all units at NAV through the Fund's redemption process.

Two-stage application

1. In accordance with common practice in matters of this kind commonly referred to as a "trust scheme", the application is pursued in a two-stage process: see, for example, Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107.
2. At the first stage, the responsible entity of the Fund seeks judicial advice to the effect that it will be justified in pursuing the conversion proposal up to and including the point at which holders of units of the Fund are given the opportunity to vote on the proposal. Here, there are two proposed meetings, (a) a meeting of all unit holders of the Fund to consider the proposed amendments to the Fund's constitution, and (b) a class meeting of closed class unit holders to approve two resolutions, one relating to the variation or cancellation of class rights arising from the proposed amendments to the Fund's constitution, and the other relating to the removal of the Fund from the official list of the ASX.
3. The responsible entity also seeks a direction that it will be justified in proceeding on the basis that the making of the proposed amendments to the constitution of the Fund, following approval of the proposed changes to the constitution by a special resolution of all unit holders of the Fund and the approval of the variation or cancellation of the rights of closed class unitholders by a special resolution of closed class unitholders of the Fund, would be within the powers of alteration conferred by the constitution of the Fund and s 601GC of the Corporations Act 2001 (Cth).
4. At the second stage, assuming the required majorities are obtained at the separate meetings of unit holders of the Fund, and all other conditions precedent are satisfied, the responsible entity intends to seek judicial advice that it will be justified in giving effect to and implementing the amendment resolution and the variation or cancellation resolution and in doing all things and taking all necessary steps to implement the Conversion.

Proposed meetings

1. The resolution to be considered at the meeting of all unit holders of the Fund is a special resolution in accordance with s 601GC of the Corporations Act to amend the constitution of the Fund to facilitate the Conversion. The proposed amendments are set out in a supplemental deed poll contained in the draft booklet to be sent to unit holders, which was tendered on the application.
2. The resolutions to be considered at the meeting of closed class unit holders are (1) a special resolution in accordance with cl 7.5 and par 2.4(j) of Sch 1 of the constitution of the Fund approving the variation or cancellation of class rights arising from the proposed amendments to the Fund's constitution to facilitate the Conversion, and (2) a special resolution approving the removal of the Fund from the official list of the ASX under ASX Listing Rules 17.11 in connection with the Conversion.
3. As the responsible entity and its associates will not vote their interests on the proposed resolutions no issue arises as to the application of a s 253E of the Corporations Act.
4. Section 601GC(1) provides that the constitution of a registered scheme may be modified, or repealed and replaced with a new constitution "by special resolution of the members of the scheme": s 601GC(1)(a). This provision, which is unlimited in its terms, confers a wide power of alteration of the constitution of a managed investment scheme: Re Mirvac Ltd at [44]-[47]. The operation of s 601GC is modified or varied in the case of a registered scheme by an ASIC instrument styled "ASIC Corporations (Changing Scheme and Retail CCIV Constitutions) Instrument 2019/700". The relevant modification in par [5] of the instrument says that s 601GC is taken to include sub-sec (1B) which requires compliance with any procedure in a scheme constitution for varying or cancelling rights of a class of members or interests. Here, that requirement will be satisfied by the special resolution to be put to closed class unit holders for approval of variation or cancellation of rights attached to closed class units under the constitution of the Fund. The responsible entity is required by s 601GC(2) to lodge with ASIC a copy of the modification or the new constitution and that provision provides that the modification or repeal and replacement "cannot take effect until the copy has been lodged".
5. The Conversion proposal is conditional upon the unit holders in the Fund passing the special resolution to amend the Fund's constitution and the closed class unit holders, as a class, passing the special resolutions to change the constitution and approving the delisting of the Fund from the official list of the ASX. The proposal is also conditional upon the ASX approving the removal of the Fund from the official list of the ASX and the Court giving the judicial advice to be sought at the second court hearing.
6. The directors of the responsible entity unanimously recommend that unit holders vote in favour of the resolutions required to effect the Conversion proposal. The draft booklet to be sent to unit holders states that the directors believe the expected benefits of permanently addressing the trading discount to net asset value of the closed class units and providing more flexibility for entering into and exiting from the Fund through open class units outweigh the risks and disadvantages of the Conversion proposal.
7. Although there is no regulatory requirement for an independent expert report, the directors of the responsible entity have obtained a report from Lonergan, Edwards & Associates Limited (LEA). Mr Wayne Lonergan and Ms Julie Planinic, each authorised representatives of LEA, have declared that they have prepared the independent expert report, and that neither LEA, Mr Lonergan nor Ms Planinic has any interest in the outcome of the Conversion. They have expressed the opinion in the draft report that the Conversion is in the best interests of the Fund's unit holders (in each respective unit class and as a whole) in the absence of a superior proposal (which they consider unlikely).
8. The mechanics by which the Conversion proposal is intended to be implemented are explained in the draft booklet which is proposed to accompany the notices of meeting to be sent to unit holders. In short, subject to the satisfaction of all conditions precedent, it is proposed that on the effective date (proposed to be 11 July 2024), the responsible entity will lodge with ASIC an executed supplemental deed poll amending the constitution of the Fund as approved by unit holders and request that the closed class units be suspended from trading on the ASX. On the implementation date (expected to be 22 July 2024), the responsible entity will redeem all closed class units on issue and (subject to the treatment of ineligible foreign unit holders, as referred to below) issue the number of new open class units equal to the Conversion ratio multiplied by the number of closed class units held by closed class unit holders on the Conversion record date. The Conversion ratio is based on the respective net asset value of each unit class on the Conversion calculation date, expected to be the business day immediately before the implementation date. Hence, the proposed Conversion involves no value dilution as between the two existing classes of units. Open class units issued upon implementation of the Conversion will be quoted on the ASX under the AQUA rules and are expected to commence trading on the exchange on the business day following the implementation date.
9. There are a small number of closed class unit holders (presently 9) with registered addresses in overseas jurisdictions, other than New Zealand, Hong Kong and Singapore, to whom, by reason of foreign securities law requirements, there would be difficulty in issuing new securities. It is proposed that the open class units which would otherwise be issued to such unit holders will instead be issued to a sale agent for disposal on behalf of ineligible foreign closed class unit holders and the net proceeds of sale remitted to them. This is disclosed in section 2.8 of the booklet. The treatment of ineligible foreign closed class unit holders is not a reason to withhold giving the judicial advice sought.

Statement of facts

1. In support of the application for judicial advice, the responsible entity has tendered a statement of facts. It also relied on several affidavits addressing formal matters, such as (i) the total number of units in the Fund on issue as at 30 April 2024, including the number of open class units and closed class units and the number of ineligible closed class unit holders, (ii) the proposed notices of meetings of unit holders and proxy forms, (iii) the verification and due diligence process in respect of the draft booklet to be issued to unit holders, and the associated product disclosure statement (as required by s 1012B of the Corporations Act), and (iv) the arrangements for the despatch of the draft booklet to unit holders.
2. Senior counsel for MAM has provided the Court with comprehensive written submissions, a copy of which will be retained on the court file. Two particular issues call for brief comment.
3. Tax implications: the taxation implications of the proposed Conversion are addressed at section 1.8 and 6 of the explanatory memorandum. The report from Allens at section 6 provides unit holders with a general overview of the taxation implications, including, the eligibility of Australian resident closed class unit holders, who would otherwise make a capital gain or capital loss on redemption of their closed class units, to obtain unit exchange roll-over relief. Although it is expected that the Commissioner of Taxation will issue a Class Ruling which is consistent with the outcomes outlined in section 6 of the explanatory memorandum, disclosure is made that the Class Ruling is not expected to be issued by the Commissioner until after the implementation date of the proposed Conversion. The merits of the Conversion proposal, including the tax implications for closed class unit holders, is a matter to be assessed by the unit holders of the Fund.
4. Deemed warranty: the proposed amendments to the constitution of the Fund include a deemed warranty by closed class unit holders that all of their closed class units will, as at the date of redemption, be free of encumbrances. The purpose and effect of such a provision is to ensure that a closed class unit holder whose units are subject to an encumbrance is not unfairly advantaged: Re Ardent Leisure Limited t/as Ardent Leisure Limited [2018] NSWSC 1665 at [26] (Black J), citing Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [57]-[63], a scheme of arrangement case. Here, appropriate prominence is given to the deemed warranty in the explanatory memorandum at section 2.6. The inclusion of a deemed warranty is not a reason to withhold giving the judicial advice sought.

Disposition of application

1. The jurisdiction of the Court to hear and determine this application under s 63 of the Trustee Act is engaged because the governing law of the constitution of the Fund is the law of New South Wales: cl 51.
2. I am satisfied that it is appropriate to provide judicial advice to the effect that the responsible entity will be justified in (i) convening meetings to consider the proposals which are to be put to the meetings of all the unit holders and the closed class unit holders, and (ii) distributing the booklet to unit holders of the Fund registered as at the date of the booklet which will be accompanied by a product disclosure statement in respect of the issue of new open class units pursuant to the proposed Conversion.
3. I am also satisfied that it is appropriate to provide judicial advice to the effect that the responsible entity of the Fund will be justified in proceeding on the basis that the making of the amendments to the constitution of the Fund which are proposed, following approval of the proposed changes to the constitution by a special resolution of all unit holders of the Fund and the approval of the variation or cancellation of the rights of closed class unit holders by a special resolution of closed class unit holders of the Fund, would be within the powers of alteration conferred by the Fund's constitution (relevantly cl 7.5 and par 2.4(j) of Sch 1) and s 601GC, Corporations Act.
4. The responsible entity also seeks procedural orders which provide for (a) any unit holder claiming to be prejudiced by the amendments to the constitution, or the implementation of the proposal, to be heard at the second court hearing, and (b) the giving of notice of the second court hearing by publication in the booklet and an announcement on the ASX not later than 7 days before the second court hearing. The draft orders are consistent with the usual practice in matters of this kind and should be made.
5. Accordingly, at the conclusion of the hearing on 20 May 2024, I made orders providing judicial advice to the extent indicated in these reasons, together with related procedural orders.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 May 2024