Unitholder agreements – what are they and when do you need one?
What is a unitholder agreement?
A unitholder agreement is additional to the unit trust deed, and sets out the rights and responsibilities of the unitholders. It sets a procedure for how a unitholder may exit the trust, how to progress if a decision cannot be made during a meeting, and provides a mechanism for resolution of deadlocked parties. It also considers and prevents complications arising due to conflict of interest, confidentiality, and competition.
When do you need to have a unitholder agreement?
If you are a unitholder in a trust that holds assets such as a business (it may be your business), you should have a unitholder agreement. You are not legally required to have one, but it is advisable from a business perspective to execute your unitholder agreement when you are setting up your trust (before any disputes can occur!) Unitholder agreements are quick and simple to execute, cost-effective, and offer great protection, so there really is no reason not to have one.
How will a unitholders agreement protect me/my business/my investment
1. It will prevent misunderstandings ending in expensive litigation:
The agreement will clarify unitholders expectations of one another and avoid (potentially devastating) misunderstandings and disputes from occurring later on. Obtaining individual legal advice to explain the unitholder agreement prior to unitholders’ signing on further elucidates the governing rules contained in the agreement.
2. It will set a clear rules for unitholder voting rights, fixed claims to income, and unitholder ability to sell their units:
Having these rights clarified in a legal document means that there can be no misunderstanding or dispute later on.
In relation to selling units, as the exiting unitholder may have voting rights, most unitholder agreements include a clause ensuring the exiting unitholder gives other unitholders a chance to purchase their units (at a set or market price) prior to offering them for sale to outside parties.
Drag along/tag along clauses are usually included and require minority unitholders to agree if the majority unitholders want to sell to a third party purchaser.
3. It will include alternative dispute resolution clauses for unitholders and a framework for resolving disputes:
This is useful in case there is ever a deadlock between unitholders during a meeting, or an issue that has to be resolved immediately so as not to affect the operation of the trust and its’ holdings.
4. It will address the potential risk of one unitholder putting their personal interests ahead of the unit trusts’ investment:
Non-competition clauses prevent unitholders from commencing a competing business or development that has potential to reduce the unit trusts’ business/investment value.
The agreement will require unitholders to declare any conflicts of interests, and ensure confidentiality is maintained at all times – unitholders will be prohibited from disclosing details of the trusts’ activity to outsiders.
5. It will prescribe how units will be issued, valued and transferred; and
6. It will detail the circumstances when one owner may be forced out by the other owners:
Ensuring that process will be undertaken in a fair and legal way for all involved, and without the need for Court intervention.
If you are considering a unitholders agreement for your unit trust, or if you are currently dealing with a unitholder dispute, don’t hesitate to call Sinclair + May for a quick chat to see if we can be of any assistance.
This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation.
Published Sep 25, 2018
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