When unit trusts are created, it is important to ensure that you have a supplement document called a Unitholder Agreement to manage the rights and responsibilities between the owners.

 

WHAT IS A UNITHOLDER AGREEMENT?

A unitholder agreement is a supplement legal document to a unit trust. A unitholder agreement will set out the rights and responsibilities of the unit holders. It is strongly recommended for all unit trusts to have a unitholder agreement, as it is this agreement that sets out how unit holders may exit the unit trust, how deadlocked parties are resolved, and prevents conflicts of interest, confidentiality and competition.

 

DOES MY UNIT TRUST NEED A UNITHOLDER AGREEMENT?

Even if your unit trust comprises of only your closest friends in the world, a unitholder agreement is a necessity for all unit trusts. A well-drafted unitholder agreement prevents disputes from getting ‘out of hand’ and reduces the delay, costs, and any interruptions to the unit trust business by clearly outlining how to deal with such disputes and unforeseeable events.

Unitholder agreements offer a level of certainty and security that are both often hard to come across in a volatile and unpredictable environment.

 

WHAT IS COMMONLY INCLUDED IN A UNITHOLDER AGREEMENT?

Depending on your unit trust and its circumstances, the provisions contained within your unitholder agreement will vary so it will be necessary to seek out advice from a lawyer to ensure that your unitholder agreement considers are contingencies relating to your unit trust.

Despite this, there are standard provisions that you will often come across in most unitholder agreements, these include the following:

DISPUTE RESOLUTION

As the unitholder agreement primarily deals with how disputes will be resolved, a dispute resolution clause is often necessary to enforce the use of alternative dispute resolution processes prior to relying on court litigation.

PRIMACY

The primacy provision is one where it states that the unitholder agreement will prevail over the company’s constitution if there is such a conflict between each.

RIGHT TO PRE-EMPTION

The right to pre-emption is a provision that restricts the transfer of units. It requires a unit holder to offer their units to other unit holders in the trust before offering them to an outside buyer.

MANDATORY SALE

This provision outlines what will cause the mandatory sale of a unit. A common circumstance is when a unit holder passes away.

UNIT VALUATION METHODS

It is necessary to obtain the value of a unit in a unit trust to be able to complete such things as a sale or a transfer. A unitholder agreement will often outline the preferred method of seeking and obtaining such valuation.

DRAG ALONG AND TAG ALONG RIGHTS

This provision is often included to balance the rights between a majority and minority unit holder. It permits a majority unit holder to require the minority unit holder to join a sale in their units under the tag-along with option. Under the tag-along option, minority unit holders are able to join a majority unit holder in the sale of their units.

DEADLOCK RESOLUTION

This provision will outline how unit holders are to deal with situations where unit holders cannot agree on something. There are different ways to draft a deadlock provision and a lawyer will assist you in selecting the most appropriate one for your unitholder agreement.

This list only comprises a few of the things that you will need to consider in drafting a unitholder agreement. There are often more contingencies that you will need to include depending on your relationship with the other unit holders and how big the unit trust is. Our lawyers at GLG Legal will be able to assist you in drafting a unitholder agreement that is appropriate for you, your business and its interests.

 

CONCLUSION

A unitholder agreement is fundamental to any unit trust but are often overlooked when a unit trust is created. We urge all unit trusts to create a unitholder agreement as, without one, your unit trust will have the inherent risk of not being able to resolve a disagreement between unit holders. It is important to have your unitholder agreement drafted in the early stages of your unit trust, so as to avoid expensive litigation should there be disagreements already that cannot be resolved.

Our lawyers at GLG Legal have extensive experience in reviewing and drafting unitholder agreements. We are aware that not every unit trust is the same and take the time to understand the purpose and needs of your unit trust when drafting your unitholder agreement.

If you are thinking about creating a unit trust or need legal advice on a unitholder agreement, contact our office today to have one of our expert lawyers guide you through the agreement to ensure that your interests are protected.