A unitholders agreement is a non-compulsory addition to a unit trust arrangement, but is highly recommended as best practice. A unitholders agreement can help establish rules and regulations of conduct, and provide assistance in the event of a dispute. Keep reading this Legal Kitz blog to learn more.
What are unitholders?
A unitholder is a party of a unitholders agreement, which is a contract containing agreed terms as to how a trust is to be managed which has been formed as a unit trust. This can include a range of matters such as funding, structure, management or conduct of a business, as well as the unitholders’ rights and obligations. The following issues can be covered:
- Composition of the trustee company’s board of directors, and how directors are appointed;
- Types of decisions requiring majority, special or unanimous approval;
- Who can be a unitholder;
- Meetings of unitholders;
- Voting rights of a unitholder;
- Minority unitholder protection;
- Special rules for the issue, transfer or disposal of units, or rights or options in relation to units;
- Unitholder exit strategies;
- Consequences of a unitholder defaulting; and/or
- The management, structure of business plan of the trust.
What is a unit trust?
A unit trust is a trust in which one or more beneficiaries hold ‘defined entitlements’ to capital and income from the trust, which are referred to as ‘units’. This enables the trust to be divided into fixed percentages which can be issued, redeemed and transferred. Those who hold these units are referred to as a unitholder.
Unit trusts are commonly used for people to make investments with others, such as for small scale property investments and developments. Most ‘retail’ investment funds are set up as unit trusts.
Individuals, companies, super funds and other trusts can hold units in a unit trust, though it is most common to hold it through a super fund or through a family discretionary trust. It is uncommon to hold units in an individual’s name, as units will be considered an ‘asset’ if the individual is sued. It is also uncommon to hold units in a company, as they do not qualify for the general 50% CGT discount on capital gains from selling the units, or capital gain which flows through the unitholders from the unit trust itself.
Before acquiring units into a super fund, it is important to know the rules and regulations found in the Superannuation Industry (Supervision) Act 1933.
How can a unit trust be set up?
A unit trust can be set up in two ways:
- If someone contributes an initial sum to another person or company, a trustee, who holds the sum on terms of a unit trust deed. After the initial establishment, other persons can subscribe for units in the trust.
- If one or more persons (an initial unitholder) subscribe for initial units in the trustee by paying a subscribed amount to the trustee. This can be the preferred method, to ensure there is no one has the settled money on the trust who is not also a unitholder.
It may be preferred that a company acts as a trustee, to provide better governance for the unit trust.
Purpose of a unitholders agreement
A unitholders agreement includes agreed conditions as to how the trust operates. This agreement creates the terms for engagement between unitholders, and addresses matters not thoroughly explained or referenced explicitly in the unit trust deed. This helps to reduce ambiguity, conflict or delay if there are varying opinions between the unitholders.
This agreement is also important where more than one unitholder is bound to a shared unit trust, regardless of if they are connected parties.
It is crucial to review whether the trust deed sufficiently addresses the items which unitholders are attempting to document through the additional agreement.
Unitholders agreement and the trust deed
The trust deed bind trustees by setting rules and regulations as to how they should manage the trust, as well as governing their relationship with the unitholder.
If there is any inconsistency between the trust deed and the unitholders agreement, the provisions within the unitholders agreement should prevail to the extent of the inconsistency. Some case law has confirmed that a unitholders agreement will prevail (for example, Arhanghelschi v Ussher (2013)). The same is applicable for inconsistencies between the unitholders agreement and the trustee company’s constitution.
However, where there is an inconsistency, it is better to amend the trust deed, as the trustee is required to operate according to the trust deed.
Unitholders agreement provisions
A unitholders agreement can address any matters which a unitholder seeks to govern regarding management or business interests of the trust, as listed above. Unitholders commonly retain discretion to appoint and remove trustees, and so it is critical that trustees ensure they understand agreed terms between them. Trustees and directors must also review the agreement’s provisions. Although the unit trust deed covers the important requirements for operating the trust, this may generate uncertainty as to how to proceed when there are disputes between unitholders.
Can a unitholders’ agreement be varied?
A unitholder agreement can only be varied by an agreement in writing, signed by all parties.
What if there are other unitholder agreements in place?
If there are other unitholder agreements in place, the new unitholders agreement may supersede prior agreements unless specified that it should remain in force.
What if there are new unitholders after the agreement is executed?
Once the unitholders agreement has already been executed, any person who then wants to become a new unitholder must deliver to the trustee a signed ‘Deed of Accession‘, agreeing the bound by the agreement. It is not until this deed is signed and delivered that the units may be units issued, transferred, transmitted or converted.
Why is a unitholder agreement important?
Unitholder agreements can set out the regulations of common circumstances, including a dispute between unitholders, a method of exiting the trust, and upholding the trust’s investment.
Dispute resolution framework
If there is a disagreement concerning a matter which generates a deadlock at a unitholder meeting, prompt and constructive dispute resolution can support the unit trust’s operation and reduce the party relations deteriorating. It is best to implement a dispute resolution framework within the unitholders agreement which encourages time-sensitive and cost-effective support to address disagreement.
Exiting the trust
Unitholder agreements will often include clauses which give existing unitholders priority in purchasing units from an existing holder, if they decide they would like to exit the trust. This is important, since each unit may hold voting rights, and the sale, transfer or amendment of a unit may impact other trust members.
The agreement may also contain ‘drag along clauses’ which mandate unitholders to sell units where a majority of unitholders intend to sell their units to a non-member party.
Upholding the trust’s investment
Certain parties may generally prioritise their personal interests ahead of the investment. Other unitholders can mitigate this risk by including non-compete, conflict of interest and confidentiality clauses within the agreement.
These clauses can be popular in commercial agreements as they disincentivise business parties from competing against the shared interest, which safeguards the interests and investment of parties while also offering accountability and compensation access upon a breach.
Legal advice
It can be difficult understanding obligations around a unitholder agreement. You don’t need to do it alone: Legal Kitz can help! Click here to book a FREE consultation, or contact us at [email protected]. If you would like to read more of our blogs, have a look at our Knowledge Centre!