Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar

Judgment

1. These proceedings concern applications in respect of trust schemes which were heard together. By Summons filed on 11 September 2020, Magellan Asset Management Limited ("MAML") as responsible entity of the Magellan Global Fund ("MGF") sought the Court's opinion, advice and direction under s 63 of the Trustee Act 1925 (NSW) that it would be justified in convening a meeting of unitholders of MGF to consider a proposed restructure ("Restructure") as defined in an explanatory memorandum; in distributing that explanatory memorandum to unitholders of MGF; and in proceeding on the basis the proposed amendments to MGF's constitution would be within the powers of alteration conferred by that constitution and s 601GC of the Corporations Act 2001 (Cth). If unitholders approve the Restructure at the relevant meeting, MAML will seek further advice that it would be justified in giving effect to the Restructure and the amendments to MGF's constitution. MAML as responsible entity of MGF also seeks associated directions in respect of, inter alia, the manner in which the proposed meeting is to be held.
2. MAML in its capacity as responsible entity of Magellan Global Equities Fund ("MGE") and in its capacity as responsible entity of the Magellan Global Trust ("MGG") also seeks corresponding directions in respect of meetings of unitholders of MGE and MGG and proposed amendments to the constitutions of MGE and MGG respectively. MAML in its capacity as responsible entity of MGF is represented by separate solicitors and counsel (Mr Jackman) from the solicitors and counsel (Mr Thomas) representing MAML in its capacities as responsible entity of each of MGE and MGG. I will refer to MGF, MGE and MGG together as the Funds.
3. The making of orders was deferred from the date of the first Court hearing on 15 October 2020 to 20 October 2020, when those orders were made in Chambers after the Australian Securities and Investments Commission ("ASIC") had granted certain relief to MAML which was necessary in respect of the unitholder meetings. These are my reasons for making those orders.

Background and affidavit evidence

1. By way of background, the three Funds in issue have the primary objective of providing investors with access to global equity portfolios. MGF is an open-ended fund and units in MGF are unlisted; MGE is also an open-ended Fund and MGG is a closed-ended Fund; and the units of MGG and MGE are quoted on the Australian Securities Exchange ("ASX"). Broadly, the Restructure would consolidate the three existing Funds, namely into a single Fund which would then have two unit classes, an open class and a closed class, both of which would be quoted on ASX. Mr Jackman points out that "Open Class Units" will be quoted on the ASX under the AQUA Rules but will also allow the holders of those units to continue to apply for and redeem units directly with MAML as responsible entity for MGF, and MGE unitholders will be offered Open Class Units in exchange for their units in MGE; and "Closed Class Units" which will be quoted on the ASX under the ASX Listing Rules and MGG unitholders will be offered Closed Class Units in exchange for their units in MGG.
2. Mr Jackman points out that implementation of the Restructure involves the three steps. First, each Fund will amend its constitution by resolutions passed by unitholders in accordance with s 601GC(1)(a) of the Corporations Act to facilitate the Restructure, including permitting the issue of a closed class of units and amending the terms of the existing open-ended unit class to permit that unit class to be quoted on ASX.
3. Second, MAML as responsible entity of MGF will acquire all units in MGE from MGE unitholders, who will receive the number of open class units in MGF calculated on a specified basis, such that the value of open class units they receive is intended to be the same as the value of their MGE holding, as determined by the net asset value ("NAV") per unit in MGF and MGE. MAML as responsible entity of MGF will also acquire all units in MGG from MGG unitholders, who will receive the number of closed class units in MGF calculated on a specified basis, such that the value of closed class units in MGF they receive is intended to be the same as the value of their MGG holding, as determined by the NAV per unit in MGF and MGG. MAML as responsible entity for MGF has entered into scheme implementation deeds with MAML as responsible entity for MGG and MAML as responsible entity for MGE respectively which provide for these transactions, which would be implemented by the trust schemes between MGE and its unitholders and MGG and its unitholders which are also addressed in this application. Existing unitholders in MGF would continue to hold open class units in MGF following implementation of the Restructure.
4. Other amendments are proposed to be made to the MGF Constitution, as summarised in section 9 of the MGF Explanatory Memorandum, including an amendment to allow MAML as responsible entity for MGF to effect compulsory redemptions in a prescribed list of scenarios and clarification to the calculation of its entitlement to fees. The Restructure is conditional upon the unitholders of each Fund passing the resolution to amend that Fund's constitution and related resolutions to facilitate implementation of the Restructure. If unitholders of any Fund do not pass the applicable resolutions the Restructure will not be implemented. The Restructure is also conditional upon receipt of certain regulatory relief from ASIC and the Court giving the judicial advice to be sought at the second Court hearing. If the Restructure is approved and implemented, MAML as responsible entity for MGF would also offer unitholders, holding both open class and closed class units in MGF, the opportunity to subscribe for new closed class units and an option for new closed class units (referred to as the "MGF Partnership Offer") and issue bonus options to holders of eligible closed class units on the basis of one bonus option for every two closed class units held (described as the "Bonus MGF Option Issue").
5. MAML has tendered a statement of facts in respect of the proposed application and also reads several affidavits in support of the application. An affidavit dated 9 September 2019 of the solicitor for MAML as responsible entity of MGF, Mr Kim Reid, describes the Restructure, which was announced to ASX by MAML on 3 August 2020, and involves consolidation of the several Funds into a single trust. The Restructure would be implemented by MAML, in its capacity as responsible entity of MGF, acquiring all units in MGE and MGG.
6. By his affidavit dated 13 October 2020, Mr Robert Fraser, who is chairman of the board of MAML and a non-executive director of its parent entity, Magellan Financial Group Ltd ("MFG") consents to act as chair of the proposed virtual meetings of unitholders of MGF, MGE and MGG to consider the proposed Restructure. By an affidavit dated 13 October 2020, Mr Brett Cairns, who is the managing director of MAML, and also the chief executive officer of MAML, consents to act as alternate chair of the virtual meetings if Mr Fraser is unable to do so.
7. MAML also relies on the affidavit dated 13 October 2020 of Mr Lonergan, whose firm was engaged to prepare an independent expert's report for MGF, MGE and MGG in relation to the Restructure. Mr Lonergan confirms that he holds the opinions expressed in the draft independent expert reports and has not become aware of any facts or circumstances which would cause him to change those opinions, and confirms those reports were prepared in accordance with ASIC Regulatory Guides 111-112 dealing with the content of expert reports and the independence of experts.
8. Mr Lonergan's reports (Ex WRL-1) in turn deal with the several steps involved in the Restructure. Mr Lonergan concludes that the Restructure is in the best interests of existing MGF unitholders and identifies several advantages for MGF open class unitholders in the Restructure, although he recognises that the relative voting power of existing MGF open class unitholders would reduce as a result of the number of units to be issued, and expressed the view that that did not represent a material disadvantage and that there were no material disadvantages to existing MGF open class unitholders from implementation of the Restructure. Mr Lonergan also concludes that the proposed trust scheme in respect of MGE is fair and reasonable and in the best interest of MGE unitholders in the absence of a superior proposal, and identified advantages in the scheme for MGE open class unitholders and expresses the view that no material disadvantages would accrue to existing MGE open class unitholders on implementation of the relevant scheme. In his report in respect of MGG, Mr Lonergan similarly concludes that the trust scheme in respect of MGG is fair and reasonable and in the best interests of MGG unitholders, again identifies several advantages to unitholders and concludes that there are no material disadvantages to existing MGG closed class unitholders pursuant to implementation of the relevant scheme.
9. MAML also relies on the affidavit dated 13 October 2020 of Mr Craig Milner, which exhibits reports in respect of the Australian tax consequences for Australian resident and non-resident unitholders of implementation of the Restructure, and confirms that he holds the opinion set out in those reports and has not become aware of any facts or circumstances which would cause him to change those opinions.
10. An affidavit dated 13 October 2020 of Ms Clare Sporle, a partner in the firm of Ernst & Young, refers to limited assurance reports prepared by that firm for inclusion in the explanatory memoranda for each of MGF, MGE and MGG, and expresses the view that she holds the opinions set out in those reports and has not become aware of any facts or circumstances which would cause her to change those opinions.
11. MAML also relies on the affidavit of Mr Rakitha Amaranath dated 13 October 2020, who is a senior client relationship and business development manager with Link Market Services Pty Ltd ("Link"). Mr Amaranath refers to the engagement of Link by MAML as responsible entity of MGF and MGE to provide registration and vote-counting services at the virtual meetings of unitholders of MGF and MGE, using a virtual meeting system provided by Link, and describes the manner in which polls would be conducted at that meeting. An affidavit dated 13 October 2020 of Mr Steven Hodkin, who is the head of listed client services at Boardroom Pty Ltd ("Boardroom") refers to the engagement of Boardroom by MAML as responsible entity of MGG to provide vote-counting and other services in respect of the proposed virtual meeting of unitholders of MGG, using Lumi meeting software.
12. By his affidavit dated 14 October 2020, Mr Leo Quintana, who is the chief legal officer of MAML, provides background information as to MAML, MGF, MGE and MGG, describes the Restructure and the consideration in respect of the trust schemes by which MAML as responsible entity of MGF would acquire the units in MGE and MGG, and also refers to the terms of the MGF Partnership Offer and Bonus MGF Option Issue and the content of the explanatory memoranda for the Restructure and the schemes. Mr Quintana also sets out the process which had been adopted for due diligence and verification in respect of the explanatory memoranda. Mr Quintana's affidavit in turn exhibits the proposed explanatory memoranda and the constitutions of the several entities and other documents relevant to the implementation of the Restructure. A further affidavit of Mr Quintana dated 15 October 2020 referred to the MAML's board's approval of the explanatory memoranda and to the Equity Commitment Deed entered into in respect of the Restructure and to deed polls entered into in respect of the MGE scheme and the MGG scheme.
13. An affidavit dated 15 October 2020 of Mr Julian Donnan, a solicitor acting for MAML, referred to the provision of information relating to the Restructuring and trust schemes to ASIC.

Applicable principles

1. Registered managed investment schemes are not Part 5.1 bodies for the purposes of the scheme provisions in Part 5.1 of the Corporations Act 2001 (Cth). However, it is now common in a "trust scheme" for a responsible entity to seek judicial advice in a two-stage process that is analogous to that adopted in company schemes under Part 5.1 of the Corporations Act: Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107; Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194; Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487; Re DUET Management Company 1 Ltd [2013] NSWSC 817; (2013) 95 ACSR 34; Re Sydney Airport Holdings Ltd [2013] NSWSC 1665; Re Investa Listed Funds Management Ltd as responsible entity for Armstrong Jones Office Fund and Prime Credit Property Trust [2018] NSWSC 1766 at [9]. At a first Court hearing, a responsible entity will typically seek judicial advice that it is justified in propounding resolutions to implement the scheme and in proceeding on the basis that proposed amendments to the constitution of the registered managed investment scheme to implement the trust scheme would be within the powers of alteration conferred by that constitution and s 601GC of the Corporations Act: Re Mirvac Ltd above at [47]; Re Macquarie Capital Alliance Ltd above at [19]; Re DUET Management Company 1 Ltd above at [9]; Re Investa Listed Funds Management Ltd above at [9]. There is no implied limitation on the Court's power to give advice pursuant to s 63 of the Trustee Act or on the discretionary factors that the Court may take into account in doing so: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar (2008) 237 CLR 66 at [55]-[59].

Despatch of materials to unitholders and conduct of meetings

1. MAML proposes to despatch the explanatory memorandum for the Restructuring and the schemes in substantially the form included in Exhibit LQ-1 to Mr Quintana's Affidavit, and the applicable notice of meeting and a proxy voting form, to unitholders of each Fund, as recorded in the register of unitholders of each Fund as at a specified time on 14 October 2020. Mr Jackman points out that meetings of unitholders of each Fund will be held sequentially on 25 November 2020. Each meeting will consider resolutions to amend the constitution of the Fund in accordance with the applicable Supplemental Deed Poll and to approve the Restructure, including for the purposes of Ch 2E of the Act as modified by Pt 5C.7 of the Act. The meeting of MGG unitholders will also include consideration of a resolution to approve the acquisition by MAML as responsible entity of MGF of all of the units in MGG.
2. MAML proposes that these meetings be held virtually rather than by a physical meeting which unitholders can attend and I accept that approach is appropriate given the circumstances of the COVID-19 pandemic and the current travel restrictions in place between States and Territories. As Mr Jackman points out, a virtual meeting of unitholders is permitted by s 252Q of the Act provided the technology used gives members as a whole a reasonable opportunity to participate, and virtual meetings are also authorised by cl 5(1) of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 made under s 1362A of the Act. The virtual meetings will be held, for MGF and MGE, on the virtual meeting platform provided by Link and for MGG, on the 'Lumi AGM' platform licensed by Boardroom. I referred to the affidavit evidence in respect of those platforms above. Unitholders will also be able to submit proxies in advance of the meetings and the procedures for voting and participation in the meetings are disclosed in section 2 of the explanatory memoranda and in the notice of meeting for each Fund.

Performance risk

1. As Mr Jackman points out, scheme participants' ability to enforce their entitlements under a scheme is a matter that has been considered relevant to the exercise of the Court's discretion: Re APN News & Media Ltd (2007) 62 ACSR 400 at 405 [23]; Re Signature Gold Ltd [2017] FCA 766 at [66]); Re Villa World Ltd [2019] NSWSC 1207 at [22]. A similar consideration can arise in a trust scheme where there is a third party providing consideration or benefits: Re Sydney Airport Holdings above at [17]; Re Mirvac Funds Management Ltd [2014] NSWSC 1569 at [7]. Mr Jackman submits and I accept that, in this matter, performance risk arises solely with respect to the costs of the Restructure which MFG has agreed to pay. I also accept that this risk is not material where MFG is the ultimate parent of the Plaintiff, its obligations are addressed by the three Commitment Deeds dated 2 August 2020 between MFG and each Fund, and the quantum of costs relative to the size of Funds and MFG's balance sheet is insignificant.
2. Mr Jackman submits and I accept that other than the above, no performance risk arises in the present case. No third party which is not otherwise bound by the trust schemes is to provide benefits to members under the schemes and the relevant obligations are to be performed by MAML in its capacity as responsible entity of each of the Funds pursuant to the constitutions of the Funds as amended. The Restructure is conditional upon all resolutions being passed by unitholders of all Funds. Accordingly, if the resolutions are approved by unitholders, MAML in its capacity as responsible entity of each Fund will become obliged to undertake the steps necessary to effect the Restructure and unitholders could compel compliance by enforcement of the contract embodied in the constitution of each Fund in accordance with s 601GB of the Act.

Deemed warranties

1. The proposed amendments to the constitution of MGE and MGG each include a deemed warranty by the unitholders of those Funds that they have full power and capacity to transfer their units to MAML in its capacity as responsible entity of MGF under the Restructure and that those units will be free from encumbrances (cl 49.6 of the MGE constitution as proposed to be amended by the MGE Supplemental Deed Poll and cl 48.6 of the MGG constitution as proposed to be amended by the MGG Supplemental Deed Poll). These deemed warranties are appropriately disclosed in the explanatory memoranda. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made in the explanatory material relating to the schemes: Re APN News and Media Ltd above at [57]-[63]; Re DUET Management Company 1 Ltd above at [23]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. These matters do not provide reasons not to give the advice sought in respect of the trust schemes.

Directors' recommendation as to the Restructure

1. As Mr Jackman points out, the directors of MAML as responsible entity of each of the Funds unanimously recommend that unitholders in each Fund vote in favour of the resolutions to effect the Restructure. The explanatory memoranda indicate that directors have considered a range of alternatives and concluded that the Restructure is superior both to the existing Fund arrangements and the other alternatives considered and that the directors have formed the view that the Restructure is in the best interests of unitholders including by reference to matters set out in section 3.5 of the explanatory memoranda.
2. Mr Jackman points out that the implementation of the Restructure may assist Dr Brett Cairns, the Managing Director and Chief Executive Officer of MAML, to satisfy the criteria for payment of an annual short-term incentive for the 2021 financial year, which include the delivery of key strategic projects such as the Restructure. Dr Cairns' interest and the amount of that incentive is disclosed in the MGF explanatory memoranda (including in the Chairman's Letter, key questions and directors' recommendation) and also in the MGE and MGG explanatory memoranda. The relevant boards (excluding Dr Cairns) and, separately, Dr Cairns, have determined that Dr Cairns can, and should if he wishes to do so, make a recommendation on the Restructure notwithstanding the benefits he will (or may) receive if the schemes becomes effective and this is also disclosed in the explanatory memoranda.
3. Mr Jackman accepts, in submissions, that, where a director will receive a substantial benefit in relation to a scheme which other unitholders will not receive, that benefit should be fully and prominently disclosed as a matter for unitholders to take into account when considering that director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257 at [22]-[27]; Re Nzuri Copper Ltd [2019] WASC 189 at [88]; Re Kidman Resources Ltd [2019] FCA 1226 at [115]; Re Villa World Limited above at [30]-[40]; Re GBST Holdings Limited [2019] NSWSC 1280 at [24]-[30] and points out that such disclosures are made in the explanatory memoranda. I accept that the recommendation made by Dr Cairns, in the context of disclosure of the benefits he would (potentially) receive if the Restructure proceeds, does not provide reason not to convene the meetings or approve the explanatory memoranda in respect of the Restructure and the schemes.

Votes of MAML and its associates will be disregarded

1. Any votes cast in relation to the resolutions by MAML, its related entities receiving a financial benefit in relation to the Restructure (including entities performing the role of trustee of holding trusts and investment manager to the Funds) and their associates will be disregarded, unless cast as a proxy for a unitholder otherwise entitled to vote and, as Mr Jackman points out, no issue arises as to the potential application of s 253E of the Act.

Constitutional amendments

1. MAML seeks the Court's advice under s 63 of the Trustee Act that it would be justified in proceeding on the basis that the making of the proposed amendments to the constitutions of the Funds, following requisite approval by unitholders, would be within the powers of alteration conferred by those constitutions and s 601GC of the Corporations Act. Those constitutions relevantly include amendment powers and the constitution of a managed investment scheme may also be altered by a special resolution of the members of the scheme under s 601GC(1)(a) of the Corporations Act. That power of alteration is wide and unlimited in terms, and the Court can give a direction as to its exercise under s 63 of the Trustee Act in a trust scheme: Re Mirvac Ltd at [44]-[47] above. I am satisfied that MAML, as responsible entity of the Funds, would be justified in proceeding on the basis that the making of the proposed amendments to those constitutions in connection with the Restructure and the trust schemes, following the requisite approval by unitholders, would be within its powers, including the powers of alteration conferred by those constitutions and s 601GC of the Corporations Act.

Orders

1. Nothing in the form of the proposed amendments to the constitutions of the Funds or in Mr Lonergan's analysis or the other expert reports indicates any issue as to the Restructure or proposed trust schemes that should cause the Court to decline to advise MAML that it would be justified in convening the unitholder meetings for the purpose of considering the Restructure and the proposed schemes. As I noted above, the explanatory memoranda have also been the subject of a due diligence and verification process.
2. For these reasons, I made orders in accordance with those proposed by MAML after the requisite ASIC relief was given, by orders made in chambers on 20 October 2020.

---

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: 03 November 2020