Integrating retail funds post-merger

Jon Ireland
— 1 minute read

Henry Davis York's Jon Ireland looks at the second stage of a funds management M&A deal: integrating the retail investment funds into the purchaser's business.

Jon Ireland

In a previous article for InvestorDaily Analysis we explored the range of issues to consider when structuring and executing a transaction involving a funds management business.

Among those issues, the question of how to successfully integrate retail investment funds into the purchaser's business will be a key aspect for those purchasers looking to take over as responsible entity.

This article looks at the key issues which arise in connection with completion of a funds management deal involving transition of the responsible entity role.

A number of these issues will also be relevant for investment managers who rely on an outsourced responsible entity and are looking to internalise that function.

What are the key issues for funds integration?

The following key issues need to be taken into account by the purchaser as the prospective incoming responsible entity for a fund.

For these purposes, we have addressed the transition of an unlisted managed investment scheme that is registered with ASIC.

While the issues are mainly considered from the purchaser/incoming responsible entity's perspective, many of the points will also be relevant to the vendor/outgoing responsible entity in that they will need to be dealt with to manage a successful transition.

Due diligence

Unless this has already been completed as part of a more general pre-transaction review, the incoming responsible entity should conduct due diligence on the fund, including the underlying assets and any sub-trust or inter-funding arrangements.

This will require due diligence documentation and processes which are in some respects similar to a corporate M&A review exercise, including confidentiality undertakings and data room access.

However, aspects of the fund's operation will need to be considered from a regulatory perspective, including breach reporting history, any regulatory actions and any investor complaints.

This type of review will extend to the purchaser conducting due diligence on the outgoing responsible entity and its governance (eg. record-keeping and board/compliance committee arrangements).

The outgoing responsible entity will also need to undertake a review to ensure that it can form the view that appointment of the incoming responsible entity is in the best interests of the members.

Key contracts

Consideration will need to be given to whether the fund constitution contains any terms which may impede the change of responsible entity.

The incoming and outgoing responsible entity should also review existing third-party agreements relating to the fund (including any relating to investment management) to determine whether they will automatically novate to the incoming responsible entity under the statutory process in the Corporations Act.

If not, a formal novation agreement may need to be entered into between the outgoing responsible entity, the incoming responsible entity and the relevant third party.

The incoming responsible entity will also need to review any umbrella supply arrangements relating to the fund to determine whether the change of responsible entity may create any separation or change in control issues.

There may also need to be transitional support formalised for any servicing which prior to the change was managed informally by the exiting group.

We would ordinarily expect a deed of retirement and appointment to be entered into to deal with these types of 'handover' matters and transitional arrangements, as well as warranties and indemnities, any change of the name of the fund and fees.

Financial services licensing

The initial broader transaction review should have already considered whether the incoming responsible entity has the requisite authorisations on its Australian financial services licence.

However, the licensing arrangements can also become relevant during the transition process where, for example, the incoming responsible entity is reliant on ASIC approving the addition of the fund to the licence as a named scheme.

In this case it will be necessary to coordinate with the relevant departments within ASIC for the updated licence to be issued at the same time that the change of responsible entity is recorded on ASIC's records.

Member approval

Unless ASIC relief can be obtained, the replacement of responsible entity needs to be approved by an extraordinary resolution of the members of the fund.

An extraordinary resolution means a resolution passed by at least 50 per cent of the total votes that may be cast by members entitled to vote on the resolution (including members who are not present in person or by proxy).

Accordingly, the outgoing responsible entity will need to prepare member meeting documentation and convene the meeting.

One concern with obtaining a sufficient level of support for the resolution is that the outgoing responsible entity and its associates (to the extent they hold any interests in the fund) may not be able to vote due to voting restrictions under the Corporations Act.

In addition, if substantial investments in the fund are held by investment platforms, the voting policies of those platforms may need to be taken into account in case they also limit the prospect of approval.

Assuming the members vote to change the responsible entity, the outgoing responsible entity must notify ASIC of the change within two business days of the meeting and the change occurs when ASIC updates its records.

It may be possible to obtain ASIC relief from the requirement to convene unitholder meetings to approve the appointment of a new responsible entity.

However, in practice this relief is only likely to be granted in limited circumstances, such as a change of responsible entity between two entities in the same corporate group.

Disclosure and investor communications

In connection with the change of responsible entity, the product disclosure statement (PDS) will need to be updated to take account of the change of issuer and also potentially a change of name of the fund.

At the same time as updating the PDS, the incoming responsible entity should also consider whether it is relevant to make any other changes to the contents.

Changes could include updates to reflect regulatory changes or other refinements to bring the PDS into line with any other disclosure documents currently issued by the incoming responsible entity.

While, as mentioned above, members would have been given details of the change of responsible entity in the notice of meeting, it may also be necessary to consider a broader communications plan as part of the exercise to seek member approval.

In particular, the incoming responsible entity may need to engage regarding any investments held via investment platforms to ensure that any questions or concerns raised by the platform operators are addressed.

Dealer groups may also need to be contacted to the extent that the fund is listed on their approved product lists.

Prohibited payments

In connection with taking over the responsible entity function, the purchaser may also be assuming a variety of commercial distribution arrangements in connection with the fund.

These could include taking on the obligation to pay intermediaries involved with the distribution of the fund to retail investors.

Parties to such arrangements could include platform operators and dealer groups / financial planning firms.

Where these arrangements involve potentially conflicted or prohibited remuneration payments under the Future of Financial Advice laws (FOFA) it will be necessary to review whether they are in fact prohibited and whether any available exemptions can be relied on under FOFA.

In addition, if any payment is to be made in connection with the transition, it will be necessary to consider whether it is permitted by the fund constitution or is prohibited as a corrupt payment or secret commission.

Certain types of payments made in connection with the appointment of a trustee are banned under the applicable state and territory Crimes Acts and Criminal Codes.


In addition to the above issues, other matters may arise either as part of the due diligence process or in connection with negotiating the commercial arrangements with the seller and/or outgoing responsible entity.

Given that the process involves multiple stakeholders (including ASIC), it is essential for businesses to obtain expert advice on the process and have appropriately experienced people to manage the day-to-day challenge of operating across numerous workstreams.

The key point will be to ensure that appropriate time, expertise and resourcing is made available for the transition phase to ensure a successful commercial outcome for all. 

Jon Ireland is a partner at commercial law firm Henry Davis York.


Integrating retail funds post-merger
Jon Ireland
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