Increasingly, wholesale investments are promoted as some form of "club investment" where the numbers of investors are limited and key investors have a "say" over key issues. Investor committees often have different names but, in essence, are bodies that have rights of veto over key issues in an investment fund, including changes to business activities or investment strategy, redevelopment of facilities and development of assets over a certain value. When a superannuation fund appoints a person to an investor committee, this can raise a number of issues for both the investor and the superannuation fund. Some of these issues include the following:
- Whether the appointee owes any fiduciary duty to the trustee or to other investors.
- Whether the appointee's exercise of its voting rights could be considered to place the appointee in the position of a shadow director.
- Whether the appointee is entitled to disclose to its appointor any information provided to him or her by the trustee or manager of the investment fund in relation to voting at the investor committee.
Also, superannuation funds must consider to what extent these issues can be dealt with by way of appropriate drafting in the investor committee charter or in the trust deed. It is my view that appropriate drafting can solve many of the issues, however, there are still some uncertainties.
One of the key functions of an investor committee is to consider approving certain key decisions of the trustee of the investment fund. Often decisionmaking of investor committees is segmented by importance: more important decisions require higher voting thresholds such as 75% or 90% (super majorities) and decisions of lesser importance require an ordinary resolution (50%). These thresholds can effectively give a veto right to certain investors in the fund (via their investor committee appointees). An important issue is whether the exercise of these voting rights is in any way constrained or has any adverse consequences for the appointee or the superannuation fund. The first issue is whether the voting is constrained by any fiduciary or good faith duties.
Fiduciary duties arise either by virtue of the status or relationship of the parties or can be imported into a relationship via contractual drafting. Viewing the role of appointees on an investor committee from a status or relationship-based approach, it is possible to conceive of the appointee having fiduciary duties. Office holders are often recognised as being fiduciaries. However, such an appointee, even though an office holder of sorts, at best, is more akin to the position of an employer whose consent was required to a variation to the trust deed as in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd 1 . Thus, in my view, the appointee should be subject, at worst, to the "anomalous" duty of good faith (see below). In any event, prudence dictates that since there is the potential for fiduciary duties to be imposed, their impact should be removed by express and clear drafting.
The drafting of the trust deed or the investor committee charter may give rise to considerations of whether fiduciary duties can apply to the investor committee appointee. In a "club-type investment", the promoter may seek a clause requiring the parties to be "just and faithful" to each other, such as the following:
"The unit holders and their appointees will observe the following general principles of conduct in respect of their dealings with one another and the Trustee under this agreement and under the trust deed:
- Be just and faithful to one another and the Trustee in all dealings, acts, matters and things arising out of this agreement or in respect of the Trust, the units or the assets of the trust;
- Cooperate with one another and the Trustee and meet and conduct in good faith such discussions and negotiations as may be necessary and desirable to amicably resolve any incidents of dispute which may arise between them."
Such a clause contains two concepts which may prove problematic:
- Being "just and faithful"
- Acting in "good faith"
The term "just and faithful" has its origins in partnership law. At one level, the requirement to be just and faithful simply can mean in partnership law the requirement to produce due and fair accounts to one another as partners. 2 However, in another context, the concept of being just and faithful can be seen as being part of the partners' duties of "utmost" good faith ie the partners' fiduciary duties. 3 By importing the words "just and faithful" into their dealings, the parties may elevate their simple unit holders' arrangement, where the parties usually owe no duties to one another, into a situation where they owe each other the fiduciary duties partners owe to each other.
The two well-known fiduciary duties are "not to have a conflict of interest (or a conflict of duty)" and the "duty not to acquire any unauthorised profits" from the activities. However, in the partnership context there is a further fiduciary duty ie to act in the best interests as a collective entity. It is doubtful whether any superannuation fund investing in an investment fund, whether it be a club fund or otherwise, really wants to subordinate its interest to those of the investment vehicle ie to act in the interests of the fund as a collective enterprise. A superannuation fund will want to be able to consider and, act in, its own interests.
However, fiduciary duties are subject to the express terms of the trust deed or the contract giving rise to them. 4 Therefore they can be modified or excluded by appropriate drafting. Accordingly, I generally recommend that such "just and faithful" clauses be deleted and express clauses be inserted indicating that there are no fiduciary duties owed between the investors, or between investors and appointees (or as between the appointees and the trustee of the fund).
Again, the adoption of a requirement to act in good faith can be problematic. "Good faith" is an uncertain term, the meaning of which is evolving. Where a long-term investment is involved, this can be problematic, as case law on what good faith means may develop over time from that which we understand today. Today, "good faith" is largely seen as a requirement to allow one's counterparty to be heard properly and to consider what the counterparty has proposed, but a party can act in its own interests and follow its own strategies and desires. 5
If the concept of "good faith" develops over time it could move away from this current understanding. However, because "good faith" is such a "popular" and fair-sounding term, it is unlikely that parties can strike it out or avoid draftspersons using "good faith" as a drafting term.
Within the provisions of the Corporations Act 2001 (Cth) (Corporations Act), there is no practical difference between being a shadow director and being a director. Therefore, persons identified as shadow directors can be made accountable for the actions of a company. Notably, this could mean that an appointee, if treated as a shadow director, could be made liable for the trustee trading while insolvent or for director penalties, and even make the appointee a target in a recovery action.
Under the Corporations Act, a person is a shadow director of a company or body where the directors of that company or body "are accustomed to act in accordance with the person's instructions or wishes". There are two general exceptions to this proposition, namely where the directors act on advice given by the person in the proper performance of functions attaching to:
- The person's professional capacity (ie a company and its accountant); or
- The person's business relationship with the directors or the company or body (ie a company and its bank).
There is no case law on the this issue from an investor committee perspective. An approximation may be cases where a person gives advice to the board, which was discussed in Buzzle Operations Pty Ltd (in Liquidation) v Apple Computer Australia Pty Ltd. 6 Young JA spelled out the following principles where a person is giving advice to a company:
- Not every person whose advice is heeded by the board is to be classified, as a general rule, as a de facto or shadow director.
- The fact that a board will tend to take advice to preserve itself from a person's wrath does not make that person a shadow director.
- The evidence must show "something more" than just being in a position of control. Was the power put to practice? One must judge on the whole of the facts and circumstances.
- The shadow director does not need to influence the whole board, just a majority
Given that the board needs to act in accordance with a person's wishes, it is unlikely that any one investor committee appointee would have such influence, even though that person had a majority of votes on the investor committee. However, the possibility exists that all the investor committee appointees could be treated as shadow directors, because collectively they can direct the board on certain matters. Again, this is an unlikely outcome.
In my view, when the investor committee votes on a majority or supermajority issue, its ability to veto the decision acts as a "brake" on board decisionmaking, rather than being a part of board decisionmaking. Further, the investor committee often only votes on a limited range of matters (albeit very important matters). Viewed in this light, an investor committee appointee exercising his or her vote would not be a shadow director. Further, it is unlikely that an appointing superannuation fund would be treated as a shadow director, given that companies with much greater control have not been so treated (eg see Standard Chartered Bank of Australia Ltd v Antico 7 ).
Additionally, in reality the process by which decisions will be made will not simply be a matter of voting at the investor committee meeting. The trustee or the manager of the fund will often consult with key investors as part of the creation of proposals that are put to the investor committee. Indeed, for certain investment decisions requiring approval, some fund documents may institutionalise methods of consultation with the investor committee while the decision or project under consideration is developed. This "proposal process" can appear somewhat "managerial" in nature.
Thus, in drafting appropriate clauses for this process, the draftsperson needs to bear in mind that participation of the investor committee should not stray into active participation in management, to avoid the potential to be seen to be actively influencing the board's decision-making.
In order for the investor committee to properly decide whether or not to vote in favour of a proposal, the appointee will need adequate information about the nature of the proposal. Further, the investor committee appointee will need to report back to the governing body of his or her superannuation fund to receive instructions and/or views on the proposal. This need for information means that the investor committee charter or trust deed must be drafted so that the appointee can disclose relevant materials provided to the investor committee appointee, where these materials go beyond what has been provided to the superannuation fund via quarterly and other reports.
Also, the appointee will need to receive sufficient information to ensure the decision-making process is sound. This will often require the appointee (and possibly the governing body of his or her superannuation fund) to access additional information relating to third-party providers or counterparties dealing with the trustee, and the terms of contracts entered into which may be confidential. In order that this confidential information can be disclosed, the underlying contract needs to permit this disclosure. However, fund managers and trustees are often reluctant to discuss with such counterparties the inclusion of clauses that allow the provision of information to investor committee appointees and to their appointors. Nonetheless, consideration needs to be given to include clauses requiring the trustee of the fund to negotiate with counterparties to permit this information flow.
Since the Global Financial Crisis, superannuation funds investing in property investment funds or infrastructure funds often seek a position on the fund's investor committee, and for the investor committee to have a meaningful role in the operation of the fund. Careful drafting is required to ensure that their appointees to the investment committee do not have any exposure as fiduciaries, have adequate access to information and rights to discuss the information with their appointors. Such appointees are unlikely to be treated as shadow directors for Corporations Act purposes, but each situation must be analysed on its own facts to determine if this potential for liability exists.
1  1 WLR 589. Although the outcome in
this case could be said to be influenced by the employer-employee
mutual duty of good faith.
2 Lindley & Banks on Partnership 19th Ed. (2010) pp 234-5.
3 Lindley & Banks on Partnership 19th Ed. (2010) pp 552-561; Bean Fiduciary Obligations & Joint Ventures (1995) p 143 and pp185- 196.
4 Hospital Products Ltd v USSC (1984) 156 CLR 41, 97.
5 It is still unclear at law, whether good faith is merely the exclusion of "bad faith" (Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234) or has greater content (South Sydney District Rugby League Footbal Club Ltd v News Ltd  FCA 1541 at 426 ). Further to this, the courts are known to imply such a duty in some cases, but in doing so, the obligations of the parties become difficult to particularise and a breach of such duty can be hard to quantify in advance. The exact obligations under contract law in relation to a duty of good faith are vague, however it is suggested that the courts will examine every contract differently and as such define good faith, and in turn, if it was breached on a case-by-case basis. There is no clearly defined criteria about acting in good faith, but it is suggested that concepts such as cooperation, reasonableness, proper purpose and legitimate interest come under the banner and will be examined by the court to determine the duty: see Harper, The Implied Duty of "Good Faith" in Australian Contract Law  MurUEJL 22. Furthermore, this duty can be recast as a "duty of cooperation" (see Australian Oil & Gas Corporation Ltd v Bridge Oil Ltd 12 April 1989 Unreported NSW CA and Offshore Mining Company Ltd v A-G 28 April 1988 Unreported NZ CA).
6  NSWCA 109.
7 (1995) 18 ACSR 1.
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