Unitholders cannot be characterized as partners. Actions done and decisions made by them through meetings can be regarded as the acts of owners of the rights constituted by the units. They are analogous to assents by beneficiaries of trusts.

Of course, as in companies, in order for actions to be taken by a large aggregate of individuals, meetings and rules for majority decisions are necessary. Voting rights simply are parts of the rights constituting units. Once the majority in a meeting is given the power to bind the minority, there emerges the tension between voting powers as property rights and the notion of fairness in the exercise of those powers.

The starting-point is that when unitholders vote in a unitholders‘ meeting, they vote in respect of their units, which are their property, and the right to vote is attached to a unit as an incident of property to be enjoyed by its owner. There is no reason why, in the absence of other factors, an owner of units in the course of enjoying this property right should be under a duty to other unitholders. This was the conclusion reached by the Full Court of the Supreme Court of Western Australia inGra-ham Australia Pty. Ltd. v. Perpetual Trustees WA Ltd. by relying on leading cases concerning shareholders of companies. In this case, the redemption price provided in the trust was based on the value of underlying assets seven days before the redemption request. Immediately after the collapse of the stock market in October 1987, the manager made no payment until after a meeting of unitholders had resolved that redemption should be made on the basis of current asset value. It was held that the power of a majority of unitholders to amend the trust deed waswide enough to make amendments that would defeat the vested or accrued rights of a unitholder.

FundsIn coming to this conclusion, Malcom CJ stated that the following propositions from the judgment of Latham CJ in Peters’ American Delicacy Co. Ltd. v. Heath ‘apply equally to a trust deed for a unit trust as they did to a deed of settlement of the kind under which limited companies were once established’. In Peters’ case, Latham CJ said:

. . . (ii) The contract between members of the company and between the company and its members which is constituted by the articles must be regarded as containing among its terms a provision that articles may be altered in the manner provided by the Act. An alteration in a particular case may constitute a breach of contract witha shareholder, but such a breach does not invalidate the resolution to alter the article.

Where the rights of members of the company depend only upon the articles, it is possible to alter the rights of members or of some only of the members by altering the articles. The fact that an alteration prejudices or diminishes some of the rights of the shareholders is not, in itself, a ground for attacking the validity of an alteration. Any other view would, in effect, make unalterable and permanent any articles which conferred rights upon a class of shareholder, or possibly upon any shareholder, if they or he desired that those rights should continue to exist unchanged. It is plainly not the law that the fact that an alteration of articles alters the rights or prejudices the rights of some shareholders is sufficient to prevent the alteration from being validly made.

The power to alter articles must be exercised bona fide. It is generally said that the power must be exercised bona fide for the benefit of the company as a whole. (v) When the validity of a resolution of shareholders is challenged, the onus of showing that the power has not been properly exercised is on the partycomplaining. The court will not presume fraud or oppression or other abuse of power.

In upholding the validity of the amendment, the court in Gra-ham must have impliedly held that the majority had exercised their power properly. Thus, at one stroke, the court both recognized the voting rights incident to units and admitted into the law of unit trusts the company law principle that the power to alter articles ‘must be exercised bona fide for the benefit of the company as a whole’. This principle arguably has two requirements: (1) that the alteration should be made bona fide and (2) that it should tend to benefit the company as a whole. It has its origin in the equitable doctrine of fraud on a power, rather than fiduciary principles.

The application of this principle to unit trusts was justified by Malcom CJ on analogy with the deed of settlement company. This may perhaps be questioned. It is clear from Smith v. Anderson that certificate holders were not considered as ‘associating’ for the purpose of carrying on business despite the use of a deed of settlement. The deed of settlement company for trading purposes was regarded as a large partnership with transferable shares. The court in Smith v. Anderson must have impliedly made a distinction between unit trusts (using deeds of settlement as their constitutions) and deed of settlement companies themselves which later evolved into the registered company. That distinction could possibly be between the carrying on of investment activities by trustees and the carrying on of business by agents of shareholders. The court could of course have concluded that this distinction was unimportant but the issue was not addressed at all in Gra-ham.

Possibly related posts: (automatically generated)
The Relationship of Unitholders INTER SE