- Management investment schemes
- Tree scheme not a franchise (Enviro Systems v ASIC)
- Investment Clubs - think again (ASIC v Chase) - Corporate governance
- Directors' fiduciary duty to shareholders under review (Peskin v Anderson)
Tree scheme not a franchise
Enviro Systems Renewable Resources v Australian Securities & Investment Commission (Supreme Court, SA, Martin J, 2 February 2001, [2001] SASC 11)
Managed Investment Scheme - whether what was sold by plaintiff was a franchise and not an interest in a managed investment scheme - meaning of "franchise" - Corporations Law ss9, 109H and Chapter 5C
Aussie Glass (Operations and Marketing) Pty
Ltd offered interests in a scheme where investors would
participate in the growing, harvesting and sale of timber. The
scheme ran under the registered business name of Enviro
Systems Renewable Resources (Enviro). Under the
terms of the scheme, participants were offered the right to
use identified Woodlots to grow Tasmanian Blue Gum trees for
harvesting and subsequent sale as timber or timber products.
Participants had to pay an annual franchise fee of $3,600 for
the first 2 years and thereafter the sum of $155 and 20% of
gross proceeds. Although participants could plant the trees
and sell the timber, the scheme was structured such that
Enviro's preferred forestry manager, Blue Gum Forestry
Management Pty Ltd (Blue Gum) would be in charge
of the entire process of planting through to selling the
timber. This was because any participant who entered into a
management agreement with Blue Gum could obtain a non-recourse
loan of $4,500 (it being provided via a book-keeping entry in
the accounts of Enviro) to defray the initial franchise fee.
Some of the unique features of the scheme were that Blue Gum
received instructions from Enviro as to how many hectares to
plant each season, managed the plantation as a whole without
distinguishing each participant's individual Woodlot. Also
neither the management agreement between Blue Gum and
participants identified a participant's Woodlot that was the
subject of the management services. Enviro sought a
declaration from the court that the scheme was a franchise and
not a managed investment scheme as alleged by ASIC.
Held: A franchise is clearly excluded from the definition of a managed investment scheme under s9 of the Law. The history of regulation of investment schemes points to the intention by the Legislature to regulate as managed investment schemes, those schemes which are passive in nature and where the success or failure is dependent on the activities of its promoter. It is necessary in determining whether a scheme is a managed investment scheme to have regard not only to the legal form of the arrangement but also to the substance of the scheme being promoted. In the present situation, the scheme was not in the nature of a franchise because the scheme was designed to attract passive investors. Furthermore, the income was not derived from the exploitation by a participant of the right to use a particular system owned by Enviro such as intellectual property right. As such it was a managed investment scheme and subject to the regulatory regime that applied to schemes.
Investment clubs - think again!
Australian Securities & Investments Commission v Chase Capital Management Pty Ltd (Supreme Court, WA, Owen J, 2 February 2001, [2001] WASC 27)
Investment clubs - whether series of syndicated investments were managed investment schemes - schemes not licensed - whether schemes should be wound up - Corporations Law ss9, 601ED & 601EE
Chase Capital Management Pty Ltd (Chase) and Leadenhall Funds Management Pty Ltd (Leadenhall) ran a series of syndicated investments going by the business name of The Manhattan Club (the Club). The promotional material for the Club stated that its aim was to "...educate and assist its subscribers in financial literacy" but the Club offered more than this to members. The Club identified the companies in which members could invest. Members would pay the money to Chase or Leadenhall who arranged the investments.
These investments were held by a company (CCML) registered in the Turks and Caicos Islands which also managed the investments. In some cases investments were carried out by Leadenhall on behalf of CCML. An administration fee was also payable to CCML. These arrangements came to ASIC's attention and ASIC applied to wind up Chase and Leadenhall for operating unregistered managed investment schemes. Some of the investors also brought an application for winding up although their ardours towards winding up cooled somewhat at the hearing stage.
Held: The court found that the Club was in reality a managed investment scheme and that Chase and Leadenhall were in the business of promoting schemes. There were a number of separate investments offered to, and acquired by, investors but, while each may have been a separate part of the scheme, they were nonetheless a part of an overall scheme.
Owen J rejected the argument by Chase that CCML and Leadenhall were merely trustees or agents of the investors to invest the money as requested by the investors. His Honour was of the view that one should examine the overall structure of the scheme which commenced with the communication of investment opportunities to members and continued through to the payment of money by a member for a right to share in the profits from the investment.
The Court held that the investment schemes were managed investment schemes that should have been registered under s601ED. As they had not, the Court could order that the schemes be wound up. In determining whether to wind up the schemes, the test was whether the public interest would be promoted by such an action. ASIC advanced a number of arguments to show that it was in the public interest to wind up the schemes. These were accepted by the Court . The Court, in deciding to order the winding up of the schemes, also considered discretionary factors relevant to the winding up on the just and equitable ground. However, Owen J was careful to limit the application of the just and equitable ground to the present case.
Corporate governance
Directors' fiduciary duties to shareholders
Peskin v Anderson * (English Court of Appeal, Lord Justices Brown, Mumery and Latham, 14 December 2000).
Directors' fiduciary duties - whether owed to shareholders (as distinct to the company) - circumstances that will give rise to a special relationship)
The recent decision of the English Court of Appeal in Peskin v Anderson continues a series of judgments that require the existence of special circumstances in order to justify the imposition of fiduciary duties on directors to individual shareholders (see the New Zealand Court of Appeal in Coleman v Myers (1997) 2 NZLR 225 and the New South Wales Court of Appeal in Brunninghausen v. Glavanics (1999) 17 ACLC 1,247). It is important for Australian directors to recognise that such a duty may arise where:
- directors are brought into close contact with shareholders (through dealings, negotiations, communications and other contact directly between the directors and the shareholders); and
- the relationship is capable of generating fiduciary obligations (such as an obligation to use confidential information acquired by the directors in that office, for the benefit of the shareholders).
The decision involved the de-mutualisation by scheme of arrangement of the Royal Automobile Club. Following the de-mutualisation, the motoring services business was sold and all members as at a certain cut-off date received a payment of 34,131 pounds for their interest in the business.
355 former members of the Club, who retired their membership prior to the cut-off date, commenced proceedings against the directors seeking damages for breach of a fiduciary duty to disclose the plans relating to the de-mutualisation.
The Court held that, in this case, there were no circumstances which justified an exception to the general rule that the director's fiduciary duties are owed only to the company. In so doing, the Court confirmed that directors will only owe fiduciary duties to shareholders (as distinct to the company) if there is a special factual relationship between the directors and the shareholders which is capable of generating fiduciary obligations.
The claimants also argued that the directors had acted beyond their power by spending Club resources in preparing for the sale of the motoring services business and, more fundamentally, for the scheme of arrangement which was a necessary pre-condition of any payment to members. However, the Court considered that, as it is lawful for a company to change its objects and to amend its Memorandum by means of the appropriate procedures, so it must follow that it is lawful for directors to authorise the expenditure of the company's money on those procedures.
* (Eds: The link does not take you directly to the case. You will have to click on the icon marked "Date" in the top left hand corner of the screen and scroll through a few pages to get to the case.)
